Global Markets Weekly Update

U.S.

Stocks rally on growth and tax hopes following election 

Most of the major benchmarks rose to record highs, as investors wagered that the Republicans’ capture of the White House and Senate, along with their expected retention of the House of Representatives—a so-called red sweep—would result in faster earnings growth, looser regulations, and lower corporate taxes. The small-cap Russell 2000 Index led the gains, surging 8.57% for the week, but was the sole benchmark to remain out of record territory—ending the week down 2.41% from its November 2021 record high. Meanwhile, the S&P 500 Index’s 4.66% gain was its best in almost exactly a year (the week ended November 3, 2023).

In a webinar the day following the election, T. Rowe Price Chief U.S. Economist Blerina Uruçi outlined her expectations for growth and Federal Reserve policy during another Trump presidency. In general, she acknowledges that Donald Trump’s plans to restrict immigration and increase tariffs carry inflationary implications, but she stresses that how—and how quickly—those measures are implemented are highly uncertain and will determine the final effect on the economy. In terms of growth, she notes that a strengthening U.S. dollar might offset some of the impact of tariffs on inflation, while lower taxes and some of the deregulatory initiatives that a Trump administration is likely to pursue should also support the economy.

Fed cuts rates and insists election won’t change policy

The election overshadowed much of the rest of the week’s economic and policy developments. Following its scheduled policy meeting concluding Thursday, the Federal Reserve announced a 25-basis-point (0.25 percentage points) cut in the federal funds rate, its first easing move since cutting rates by 50 basis points in mid-September. T. Rowe Price traders noted that there had been some speculation as to whether Fed Chair Jerome Powell would mention the future president’s fiscal policy and its potential impact on monetary policy, but Powell was resolute in stating that any changes would be evaluated as they were announced and that, “We don't guess, we don't speculate, and we don't assume.” When questioned, Powell also stated that he would not resign if asked to do so by the president.

In terms of economic data, the week’s biggest surprise arguably came in Tuesday’s release of the Institute for Supply Management’s gauge of October services sector activity, which came in at 56.0, well above expectations and the best reading since August 2022. (Readings above 50.0 indicate expansion.) Encouragingly, price pressures eased somewhat even as activity picked up, reversing a string of three monthly gains. According to the Institute’s chief researcher, surveyed companies reported only a minimal impact from recent severe weather, which seemed to have a larger impact on manufacturing firms.

Rate cut sends yields lower for the week

U.S. Treasuries generated positive returns heading into Friday, as yields largely ended lower than where they ended the previous week. Intermediate- and long-term yields ended slightly lower while some short-term yields increased slightly. (Bond prices and yields move in opposite directions.) Election results sent yields upward on Wednesday, though the expected rate cut from the Federal Reserve helped bring them back down by Thursday evening.

According to our traders, tax-exempt municipal bond issuance was very quiet over the week, as market participants awaited the results of the U.S. election and the Fed meeting. Municipal bond yields followed Treasury yields sharply higher on Wednesday, as the market digested the election results and their implications on fiscal policy. However, muni yields retraced across the yield curve on Thursday, gaining back about half of what was lost during Wednesday’s sell-off. 

Likewise, only one issuer had come to the investment-grade market as of Thursday evening, although spreads rallied postelection, closing notably tighter. According to our traders, the high yield market traded in line with broader market strength, although volumes were subdued early in the week with buyers generally more active than sellers. Lower-quality bonds outperformed following the election as volumes picked up.

Europe

In local currency terms, the pan-European STOXX Europe 600 Index ended 0.84% lower. Worries about the impact of U.S. President-elect Donald Trump’s trade policies on European economic growth and central bank policy weighed on sentiment. Major stock indexes weakened, with Italy’s FTSE MIB losing 2.48%, France’s CAC 40 Index declining 0.95%, and Germany’s DAX softening 0.21%. The UK’s FTSE 100 Index eased 1.28%.

BoE, Riksbank cut rates, but Norges Bank stands pat

The Bank of England’s (BoE’s) policy committee voted 8–1 to reduce the key Bank Rate a second time this year, by a quarter-point to 4.75%, as inflation continues to decelerate. BoE Governor Andrew Bailey said that “if the economy evolves as we expect, it’s likely interest rates will continue to fall gradually.”

Meanwhile, Sweden’s Riksbank lowered its key rate by half a percentage point to 2.75% in response to slowing inflation and a sluggish economy. Policymakers indicated they might cut again in December and in early 2025 if the outlook remains unchanged. In Norway, however, the central bank left its policy rate unchanged at 4.5% and signaled it would probably stand pat in December.

Eurozone PMI revised up, now points to stagnation

The HCOB eurozone composite purchasing managers’ index (PMI) was revised higher to 50 in October from an early estimate of 49.7, S&P Global said. The reading now indicates that overall business activity was unchanged. (PMI readings greater than 50 indicate an expansion in activity; readings less than 50 indicate contraction.) Manufacturing contracted at a slower pace than first estimated, while services sector output expanded at a slightly faster rate. However, business confidence fell to its lowest level so far this year.

German government collapses

In Germany, Chancellor Olaf Scholz called for a vote of confidence in January after his coalition government effectively ended when he fired Finance Minister Christian Lindner of the Free Democrats over disagreements on spending and economic reform. Opposition and business leaders called for a snap election to reduce uncertainty.

Japan

Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 3.8% and the broader TOPIX Index up 3.7%. Investor risk appetite was supported by the outcome of the U.S. presidential election and the Federal Reserve’s rate cut. These developments largely overshadowed the domestic corporate earnings season, where there were some downgrades to company guidance, and the adverse impact of yen strength on Japan’s export-heavy industries.

After initially selling off on the U.S. election result, the yen appreciated to around JPY 152 against the USD, from about JPY 153 at the end of the prior week. Japan’s chief currency official, Atsushi Mimura, pointed to sudden one-sided moves in the currency markets and said that the authorities will monitor markets with a very high level of urgency and are ready to take appropriate action against excess moves. Finance Minister Katsunobu Kato echoed these comments, adding that the authorities will closely monitor the impact of Donald Trump’s election victory on Japan’s economy and finances, which can be made through various channels given the close economic ties between the U.S. and Japan. 

Market views January rate hike as a possibility

The yield on the 10-year Japanese government bond rose to 1% from the previous week’s 0.95%. Market participants speculated that the Bank of Japan (BoJ) could next raise interest rates in January 2025. The minutes of the BoJ’s September monetary policy meeting released during the week reaffirmed the policy board members’ shared thinking that if the outlook for economic activity and prices was realized, the bank would accordingly continue to raise the policy rate. Members agreed that it was necessary to also monitor developments in overseas economies, particularly the U.S. economy. 

On the economic data front, Japan’s real (inflation-adjusted) wages fell 0.1% in September, following a revised decline of 0.8% in August. Nominal wages grew 2.8% in September, in line with expectations but lagging consumer inflation at 2.9%. Household spending declined by less than anticipated, falling 1.1% year on year in September, with consensus having estimated a 2.1% decline.

China

Chinese stocks surged as Beijing’s unveiling of fresh stimulus measures offset concerns about potential U.S. tariff hikes. The Shanghai Composite Index gained 5.51%, while the blue chip CSI 300 added 5.5%. In Hong Kong, the benchmark Hang Seng Index was up 1.08%, according to FactSet.

China's top legislative body, the standing committee of the National People's Congress, announced on Friday a RMB 10 trillion program to refinance local government debt, which Beijing has flagged as a key economic and financial risk for the country. Policymakers also raised the local government debt ceiling to RMB 35.52 trillion from RMB 29.52 trillion, marking the first time they raised the ceiling midyear since 2015. Finance Minister Lan Fo’an also pledged to take a “more forceful” fiscal policy in 2025 to support growth but did not provide details. 

On the trade front, exports rose an above-forecast 12.7% in October from a year earlier, up sharply from 2.4% in September, marking the fastest rate of growth since July 2022. The rise was largely driven by better weather and steep discounts. Imports fell 2.3%, down from the prior month's 0.3% growth. The overall trade surplus increased to USD 95.72 billion from USD 81.71 billion in September. While the growth in October’s exports signaled strong demand for Chinese goods—which has been a bright spot for the economy—analysts cautioned that China’s export outlook has grown more uncertain given the possibility of a trade war when Trump takes office in 2025.

Other Key Markets

Poland

Policymakers leave rates unchanged, anticipating rise in “elevated” inflation in early 2025

On Wednesday, the Polish central bank concluded its regularly scheduled two-day monetary policy meeting and—as expected—decided to keep its key interest rate, the reference rate, at 5.75%. Other interest rates controlled by the central bank were unchanged.

According to the post-meeting statement, policymakers maintained their view that “economic conditions in the environment of the Polish economy are still weakened.” They noted that growth in the eurozone was “moderate” but “negative” in its western neighbor Germany, and while U.S. economic activity growth “remained relatively high,” they observed that “uncertainty about the activity outlook in the largest economies persists.”

In Poland, central bank officials believe—based on incoming data—that annual gross domestic product growth in the third quarter “could have been somewhat lower” than it was in the second quarter. As for inflation, they noted that the annual consumer price index inflation rate in October was 5.0% versus 4.9% in September. As before, they attributed the recent rise in inflation to “increases in administered prices of energy carriers” and, to a lesser extent, “an increase in annual growth in prices of food and nonalcoholic beverages.” They also estimated that “growth in services prices probably remained elevated.”

Looking forward, policymakers believe that inflation will remain “elevated” in the next few quarters and will rise in early 2025 due to a “further unfreezing of prices of energy carriers for households.” Wage growth is also likely to put upward pressure on inflation. However, they also believe that “demand and cost pressures” in general “remain relatively low” and that previous appreciation of the zloty versus other currencies—which weighs on import prices—will help curb domestic inflation pressure. Nevertheless, policymakers decided to leave interest rates unchanged, as they felt that the current level of interest rates is “conducive” to meeting the central bank’s inflation target in the medium term.

Brazil

Central bank accelerates pace of rate increases

On Wednesday, Brazil’s central bank raised its key interest rate, the Selic rate, by 50 basis points (0.50%), from 10.75% to 11.25%. The decision among policymakers was unanimous. 

According to T. Rowe Price sovereign analyst Richard Hall, the post-meeting statement was very much like the one issued by central bank officials in mid-September, with minimal innovations. He finds that to be a little surprising considering that the central bank accelerated the pace of its rate increases from 25 basis points (0.25%) in September. However, he ultimately believes that policymakers were compelled to raise rates more aggressively due to recent depreciation of the currency. In addition, Hall notes that policymakers once again refrained from providing forward guidance beyond their observation that the total size of this new cycle of rate increases will depend on the outlook of inflation converging to the central bank’s 3.0% target, with a tolerance band ranging from 1.5% to 4.5%.