Global markets weekly update t. rowe price f gas regulations


The week was perhaps most notable for the plunge in oil prices and energy shares. On Monday, oil prices reached their highest level since late 2014 on speculation that the U.S. would impose new sanctions on Venezuela after the country’s leadership solidified its control in allegedly corrupt elections over the weekend. Venezuela has the largest proven oil reserves in the world, although its production has been constrained by the country’s economic collapse.

Oil prices reversed course abruptly on Tuesday afternoon, however, following reports that OPEC was planning to increase production as early as June in order to prevent further price increases from destroying demand. Ironically, the threat of U.S. sanctions appeared to be partly at work in this case as well, with some speculating that OPEC was seeking to compensate for the loss of Iranian and Venezuelan supply. Supply fears gained further traction on Friday, when Russian Energy Minister Alexander Novak stated that “the moment is coming” to end a deal among major exporters to cut back on production that had been in place since the start of 2017. By the close of trading Friday, the price of a barrel of domestic West Texas Intermediate oil had declined by nearly 7% from its Tuesday morning high.

The week had a number of other major geopolitical developments, but most seemed to have had only a temporary impact on the broader market. Treasury Secretary Steven Mnuchin provided a boost to sentiment to start the week by remarking that the trade war with China was “on hold” after progress in talks over the weekend. On Tuesday, stocks got another brief lift after China announced a reduction in tariffs on auto imports, but trade sentiment turned sour again on Wednesday after the Commerce Department announced that it was investigating whether auto imports were posing a threat to the U.S. industry. In an interview on Bloomberg TV, T. Rowe Price’s head of global multi-asset investing, Sebastien Page, observed that the primary issue in U.S.-China talks has become U.S. access to the Chinese market, but how far China is willing to go in granting it—much less how far the U.S. trade deficit with China will shrink—is far from certain.

President Trump’s decision to cancel the upcoming summit with North Korea sent stocks sharply lower in early trading Thursday, although the market later regained its footing. Worries over the fiscal policies of the incoming Italian government and the worsening debt problems in Turkey (see below) also periodically weighed on sentiment, according to T. Rowe Price traders.

Conversely, stocks appeared to get a brief lift from the release Wednesday afternoon of the minutes from the Federal Reserve’s policy meeting early in the month. Policymakers emphasized the “symmetric objective” of their 2% inflation target, suggesting that a slightly higher rate of inflation would be acceptable. Investors also seemed to be encouraged that Fed officials appeared uncertain about how tight the link had become between a tightening labor market and higher inflation—a crucial question for Fed policy with the unemployment rate now at a nearly 18-year low of 3.9%.

Politics in Italy, the third-largest economy in the eurozone, continued to weigh on the markets as the country’s key index, the FTSE MIB, tumbled around 5%. Italy’s populist Five Star Movement and far-right League party moved to form a coalition government during the week, and investors appeared rattled by expectations that the new government’s policies would be anti-establishment or “euroskeptic.” T. Rowe Price credit analyst Ivan Morozov’s view is that the markets may be overreacting to the proposed policies, but he cautions that the Italian markets are likely to be volatile in the near term as the coalition is unstable. He points out that the main risk is likely to be increased fiscal spending. Meanwhile, political uncertainty has also bubbled to the surface in Spain. On Friday, the country’s biggest opposition party, the Spanish Socialist Workers’ Party, filed a no-confidence motion against Prime Minister Mariano Rajoy after his former aides were convicted of running a multimillion-euro corruption scheme. Spain’s key index IBEX 35 ended the week lower as the prospects for a snap election increased.

China’s benchmark stock indexes posted their biggest weekly drops in a month, capping a week marked by geopolitical volatility after President Trump pulled out of the summit with North Korea’s leader and Sino-U.S. trade tensions remained on low boil. By Friday’s close in Shanghai, the blue chip CSI300 Index and the Shanghai Composite Index had given up 2.2% and 1.6%, respectively, marking the worst weekly decline for each since late April. T. Rowe Price traders in Asia said that market sentiment was cautious on Friday, a day after Trump canceled his highly anticipated meeting with Kim Jong-un and renewed talk of military action against the country.

The same day, China’s official news agency stated that U.S. Commerce Secretary Wilbur Ross will visit China in early June for more trade talks. News of Ross’s visit comes as the U.S. and China continued to exchange threats and concessions about trade. T. Rowe Price investment managers believe that the likelihood of a trade war with China is low but that reaching an agreement regarding China’s industrial policy aiming to promote domestic high-tech industries is a bigger obstacle over the long term.

This Turkish lira lost another 5% during the week despite the central bank’s emergency 300-basis-point (three percentage points) rate increase and other efforts to stop the currency’s decline. The lira has fallen about 25% this year amid myriad internal and external pressures. President Recep Tayyip Erdogan is preparing for snap June presidential and parliamentary elections, in which he is expected to consolidate power and subsequently pressure the central bank to cut interest rates to boost growth. The rise in U.S. interest rates and strengthening U.S. dollar have added to the pressure and taken an even heavier toll on Turkey and other emerging markets that are burdened by large current account deficits and rely heavily on short-term capital flows.

T. Rowe Price sovereign analyst Peter Botoucharov believes the recent central bank moves are temporary fixes and do not address the underlying cause of the lira’s weakness, which, among other things, is a double-digit inflation rate. The central bank does not have enough foreign exchange reserves to prop up the lira without changing monetary policy. The half-measures may support the lira until the election, but then Turkey will need to further increase interest rates to align with underlying inflation. If it does not, Botoucharov believes, the central bank will be forced to implement some unorthodox measures to limit the lira’s decline.