Week Ended July 2, 2015
Stocks fall as Greece reaches tipping point
U.S. stocks followed global markets lower and endured a second week of declines after the debt crisis in Greece reached a tipping point. Most of the damage occurred on Monday, when the S&P 500 endured its largest one-day pullback since last October. Smaller-cap shares, which are typically more volatile, fell more than larger-cap stocks, and the technology-heavy Nasdaq Composite also underperformed the blue chip benchmarks. The trading week ended on Thursday, in advance of the Independence Day holiday weekend.
Greece fails to make IMF debt payment
On Sunday, European officials stated that they would be offering no additional funds to Greece, signaling a final impasse in the recent round of negotiations. Greek officials responded by announcing a referendum on the European austerity demands, closing the nation's banks and stock market for at least a week, and instituting capital controls to prevent assets from leaving the country. Stocks fell sharply at the open of trading on Monday and continued their decline through much of the day. On Tuesday, Greece failed to make a scheduled payment to the International Monetary Fund, which raises the risk of missing a payment to the European Central Bank in about three weeks.
Market damage contained, but volatility rises
Given the worries that have long surrounded a Greek default, many observers were relieved that Monday's roughly 2% decline in the major indexes was not larger. However, T. Rowe Price traders note that the VIX index, a measure of market volatility, saw its biggest increase in two years. Trading volumes also surged, defying a recent pattern of relatively light activity.
Jobs increase but not earnings
Markets found their footing later in the week, despite the lack of any notable progress in the Greek situation. Favorable U.S. economic data on Wednesday appeared to boost sentiment, as measures of private payroll growth and manufacturing came in above expectations. The closely watched official monthly payrolls report on Thursday was somewhat less positive, however. While the economy added nearly as many jobs as expected in June, hourly earnings were unchanged. This was especially discouraging since a solid rise in May earnings had raised hopes that the tightening labor market was finally stimulating meaningful wage growth.
Job market still likely to support stronger consumer spending
Many observers also noted that the labor force participation rate reached nearly a four-decade low, suggesting that discouraged workers are continuing to give up on finding a job. T. Rowe Price Chief U.S. Economist Alan Levenson observed that this detail deserves even further qualification, however. An early employment survey probably missed many teen summer workers who will show up in the July count, and measures of underemployment, such as the number of part-time workers who would prefer a full-time job, actually improved. Generally, he believes the foundation remains intact for improved incomes and consumer spending.
|Index2||Thursday's Close||Week's Change||% Change
|S&P MidCap 400||1505.67||-27.18||3.66%|
1Source of data Reuters, obtained through Yahoo! Finance Closing data as of 4 p.m. ET.
2The Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index of blue chip stocks, the Standard & Poor's MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments by market capitalization of the U.S. equity markets. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock market and the National Market System.
Week Ended July 2, 2015
Greece announces referendum on austerity and imposes capital controls
Greek Prime Minister Alexis Tsipras announced that Greek citizens would vote in a July 5 referendum on whether or not to accept the austerity terms imposed by the country's lenders as a condition of receiving more funding. The Greek government also imposed capital controls, which included closing banks until after the referendum. On Tuesday, Greece missed a large payment due to the International Monetary Fund. Prices of safe-haven U.S. Treasuries and German government debt initially gained on the eurozone uncertainty. Treasuries lost ground later in the week amid some strong U.S. economic data, but yields finished lower. (Bond prices and yields move in opposite directions.) While the June nonfarm payrolls report showed 223,000 jobs added, the labor force participation rate fell.
Puerto Rico states that it can't repay its municipal debt obligations
The governor of Puerto Rico, which is a major issuer of municipal bonds, announced that the U.S. territory will not be able to repay its debt obligations (but Puerto Rico made its debt payments due on Wednesday). Although T. Rowe Price's municipal analysts had long expected this outcome, the Puerto Rican government had previously maintained that it could pay its debt when due despite the island's many financial troubles. Prices of Puerto Rico's municipal bonds dropped steeply following the announcement. However, the statement did not seem to faze the broader municipal market, which generated modest gains as a result of light issuance.
Risk aversion weighs on emerging markets bonds
The general risk aversion in the fixed income markets amid the situation in Greece weighed on emerging markets bonds and led to marginal losses for the sector. Last weekend, following a sharp sell-off in Chinese stocks, China's central bank cut interest rates by 25 basis points and lowered the amount of reserves that banks need to maintain. (A basis point is 0.01 percentage points.)
Investment-grade corporate bond issuance slows
New issuance in the investment-grade corporate bond market slowed considerably in the holiday-shortened week amid the international turbulence caused by the situation in Greece. However, T. Rowe Price traders noted that the market's tone was somewhat better than last week. High yield bond prices fell as investors shied away from riskier sectors.
|U.S. Treasury Yields1|
|Maturity||July 2, 2015||June 26, 2015|
This table is for illustrative purposes only. Past performance cannot guarantee future results.
Week Ended June 26, 2015
Foreign stock markets closed higher for the week ending June 26, 2015 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), gaining 0.91%.
|Region/Country||Week's Return||% Change Year-to-Date|
|AC Far East ex-Japan||0.64%||6.83%|
|EM Latin America||-0.63%||-5.22%|
|EM (Emerging Markets)||0.85%||3.78%|
International bond markets in developed countries were lower this week, with the J.P. Morgan Global Government Bond Less U.S. Index losing -1.7%.
|Region/Country||Week's Return||% Change Year-to-Date|
On the currency front, the U.S. dollar was stronger against the major currencies for the week.
Year-to-Date (U.S. $)
Sources: Foreign stock markets and currency sections are from Rimes Technologies, using MSCI data. International bond markets are from J.P. Morgan.
Note: All returns are in U.S. dollars. All bond indices are J.P. Morgan. All stock indices are Morgan Stanley Capital International (MSCI).
|EAFE:||MSCI Europe, Australasia, and Far East Index|
|Europe Ex-U.K.:||MSCI Europe ex-U.K. Index|
|Far East Ex-Japan:||MSCI AC Far East ex-Japan Index|
|Latin America:||MSCI Emerging Markets Latin America Index|
|Emerging Markets:||MSCI Emerging Markets Index|
|Developed Markets:||J.P. Morgan Global Government Bond Less U.S. Index|
|Emerging Markets:||J.P. Morgan Emerging Markets Bond Index Plus|
All charts are for illustrative purposes only and do not represent the performance of any specific security. Past performance cannot guarantee future results.