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Week Ended October 12, 2012

Stocks fall on third-quarter earnings worries

Stocks retreated for the week as investors worried that poor global economic data would be reflected in third-quarter corporate earnings. The technology-focused Nasdaq Composite Index fell a bit more than the other major indexes.

IMF lowers global growth forecast

Stocks suffered their biggest decline on Tuesday, following a negative outlook for global economic growth from the International Monetary Fund. The IMF lowered its growth forecast for both 2012 and 2013, noting that weakness in developing economies appeared to be deepening.

Slowing growth in China surfaces in corporate outlooks

Initial third-quarter earnings reports appeared to confirm the IMF's view. Aluminum giant Alcoa announced a small gain in profits for the quarter but predicted that global demand for aluminum would fall primarily because of weaker Chinese demand. China's monetary authorities added liquidity to the banking system late in the week, boosting markets in the region, but growth in the export-driven economy has slowed substantially in recent months.

Europe remains troubled

Europe remains another weak spot. German Chancellor Angela Merkel received a rocky welcome on a visit to Greece, where austerity measures demanded by Germany in exchange for European Union and IMF economic assistance have proved deeply unpopular. On Wednesday, investors were also disconcerted when Standard & Poor's lowered its credit rating on Spanish sovereign debt by two notches. T. Rowe Price's London-based sovereign credit analyst believes that Spain has roughly two years to turn around its economy, given the finite patience of European leaders and the limited appetite for austerity in Spain.

U.S. healthy, but caution prevails

The U.S. economy remains healthier, but the week's sparse economic data did little to boost investor optimism. Job openings fell in August, throwing into question some recent indications of greater strength in the labor market. T. Rowe Price economists believe employers are cautious about hiring in the face of the global slowdown, as well as worried about the upcoming "fiscal cliff" of automatic federal spending cuts and tax increases if U.S. policymakers fail to agree on deficit reduction measures.

Positive long-term outlook but near-term uncertainties

T. Rowe Price managers believe the longer-term outlook for equities is positive given appealing valuations, healthy corporate balance sheets, and favorable comparisons relative to bonds. Indeed, global profits are still growing despite the economic environment. However, the durability of profit growth is being increasingly questioned due to the global slowdown.

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	13328.77	-281.38	9.10%
S&P 500	1428.59	-32.34	13.60%
NASDAQ Composite	3044.11	-92.08	16.85%
S&P MidCap 400	975.38	-21.25	10.91%
Russell 2000	823.15	-19.98	11.13%

This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

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.

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U.S. Bond Market

Week Ended October 12, 2012

High yield bonds somewhat stretched; municipals remain attractive compared with Treasuries

The strong, ongoing rally in high yield bonds has pushed valuations to a somewhat stretched level, which limits their upside potential. However, merger and acquisition speculation boosted returns in the high yield wireless communications sector. Municipal issuance picked up, with $7 billion coming to market in a holiday-shortened week (Columbus Day was a bond market holiday). Demand is strong, and these new deals were well received. Tax-free yields remain attractive compared with comparable Treasury yields, which fell as concerns about global growth and third-quarter corporate earnings overshadowed last Friday's stronger-than-expected U.S. jobs report. Treasury Inflation Protected Securities have performed well since the Fed's latest stimulus announcement but saw little investor interest this week.

Emerging markets bond issuance elevated

New bond issuance in emerging markets remained a bit elevated during the week. Venezuelan and Argentine bonds were volatile due to developments within the countries. In Venezuela, investors were surprised at the size of incumbent president Hugo Chavez's win in last Sunday's presidential election. In Argentina, the market grew concerned after a local province forced the conversion of select U.S. dollar-denominated debts into Argentine pesos. In another surprise move, Brazil's central bank cut interest rates by 0.25%, reflecting concerns about weak domestic growth.

Higher energy costs drive inflation

Gasoline prices rose for the second straight month, pushing wholesale prices up 1.1% in September following a 1.7% jump the month before—the largest one-month gain in three years, according to the Labor Department. Core prices, however, which exclude energy and food, were unchanged in September. Core inflation rose 2.3% during the 12 months ended September 31, low enough for the Federal Reserve to maintain its loose monetary policy. With the global economy slowing and the U.S. economy limping along at a sluggish pace, the Fed is unlikely to change its course until signs of escalating inflation become apparent.

U.S. Treasury Yields¹
Maturity	October 12, 2012	October 5, 2012
2-Year	0.26%	0.26%
10-Year	1.66%	1.73%
30-Year	2.83%	2.96%

This table is for illustrative purposes only. Past performance cannot guarantee future results.

¹Source of data: Bloomberg.com, as of 4 p.m. ET Friday, October 12, 2012.

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International Market

Week Ended October 5, 2012

International Stocks

Foreign stock markets closed higher for the week ending October 05, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), gaining 2.27%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	2.27%	13.11%
Europe ex-U.K.	4.19%	17.52%
Denmark	4.31%	33.13%
France	4.43%	15.61%
Germany	4.12%	26.75%
Italy	6.27%	10.29%
Netherlands	4.92%	16.16%
Spain	4.95%	0.01%
Sweden	1.69%	19.46%
Switzerland	3.97%	16.90%
United Kingdom	2.51%	13.45%
Japan	-1.02%	1.39%
AC Far East ex-Japan	0.59%	15.89%
Hong Kong	0.76%	22.32%
Korea	-0.10%	15.80%
Malaysia	1.61%	11.95%
Singapore	0.80%	27.97%
Taiwan	-0.20%	15.63%
Thailand	0.45%	28.04%
EM Latin America	1.55%	5.96%
Brazil	0.73%	-2.42%
Mexico	3.86%	26.75%
Argentina	1.92%	-44.75%
EM (Emerging Markets)	0.67%	13.08%
Hungary	5.71%	31.78%
India	2.48%	28.47%
Israel	3.26%	3.19%
Russia	2.08%	13.90%
Turkey	1.88%	41.84%

International Bond Markets

International bond markets in developed countries were higher this week, with the J.P. Morgan Global Government Bond Less U.S. Index gaining 0.02%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	0.02%	3.70%
Europe
Denmark	0.80%	1.85%
France	1.52%	8.00%
Germany	0.94%	3.35%
Italy	2.40%	16.93%
Spain	3.18%	2.72%
Sweden	-0.67%	5.73%
United Kingdom	-0.32%	6.72%
Japan	-1.20%	-0.47%
Emerging Markets	1.04%	15.52%
Argentina	3.61%	18.24%
Brazil	0.86%	11.29%
Bulgaria	0.27%	8.27%
Russia	0.79%	14.14%

International Currency Markets

On the currency front, the U.S. dollar was weaker against the major currencies for the week.


Currency	Close (October 5, 2012)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	78.695	1.14%	2.23%
Euro	1.306¹	-1.52%	-0.60%
British pound	1.6193¹	-0.28%	-4.20%

¹U.S. dollars per national currency unit.

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).

Equity Indices
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

Bond Indices
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.