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Market in a Minute: Feb 3-7, 2020

Sunday, February 9, 2020

By Rich and Sheila Jamison

Executive Summary

Until Friday, equities traded sharply higher, again reaching new highs. The S&P 500, Dow Jones Industrials, Nasdaq Composite and Europe's Stoxx 600 all set records. Fears of the coronavirus crippling global economic growth apparently evaporated … temporarily … bringing back ‘buy-the-dip.’

That increased risk appetite spurred a rebound for the US 10-year Treasury yield, which end the week at 1.58% from 1.52% a week ago.

Crude oil fell further. WTI closed at $50.35/barrel. Prices have declined more than 20% from recent peaks, with Chinese oil demand expected to drop 25% because of the coronavirus. This prompted an OPEC+ discussion of a further 600,000-barrel/day production cut.

Riding the ‘up’ part of the week, volatility (the CBOE Volatility Index, VIX) fell to 14.6 from 18.8 a week ago.

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Details

Coronavirus

Chinese government statistics indicated the pace of new infections had slowed outside the outbreak’s epicenter. That news came amid reports of progress toward creating a preventative vaccine and that a combination of two drugs may treat it. Chinese economic stimulus – government injected liquidity and lowered tariffs on US goods – added optimism. Meanwhile, our upbeat economic data suggest our economy is doing well. Thus, the week began with a prevalent attitude that any negative impact from coronavirus will be minimal.

That view dissipated quickly on Friday, however, when newly diagnosed cases in China reaccelerated and all the fears seemed to return.

A significant portion of China’s industrial production is already shut down. In addition to companies forecasting lower expectations in China (e.g., Disney, Starbucks) directly from closed/reduced operations, ripple effects are being felt by global supply chains. For example, Hyundai shut down automobile production in South Korea due to a lack of parts usually sourced from China.

In an effort to offset the economic drag, China's central bank injected record amounts of liquidity into local money markets and cut repo rates. Cuts to the benchmark loan prime rate and the reserve requirement ratio are expected later in February. China appears to be readying stimulus to cushion any economic slowdown.

Now, Some Good News

Economy

The January ISM Manufacturing Index returned into expansion territory after five straight months of contraction. The January ISM Non-Manufacturing Index accelerated for the second straight month.

The January jobs report showed 225,000 new jobs, hammering expectations for 161,000. Labor market participation rose, slightly raising unemployment to 3.6%. Wages rose 3.1%, vs. 3% in December. The major surprise was a jump in construction hiring because of a warmer-than-expected January.

Politics

No surprise here, the Senate acquitted President Trump of abuse of power and obstruction of Congress charges, ending the impeachment process.

Calling the Iowa caucuses’ problem a “glitch” would like calling a Tsunami a “poor beach day.” We still don’t have final numbers as of this writing.   

Earnings

Before earnings season began, analysts expected a 2% drop in EPS in 2019’s Q4. With 2/3 of S&P 500 companies’ results in, they are trending stronger than expected. Earnings growth is running at a plus 0.7% year-over-year pace. Revenues are rising 3.4%.

Trade

Presidents Xi Jinping and Trump reiterated their commitment to a ‘phase one’ trade deal in a Friday phone call. China announced it would slash tariffs on $75 billion of imports from the US by 50% beginning on February 14. At the same time, the US will reduce tariffs on imports from China.

Globally

January PMIs rebounded after US/China trade war and Brexit headwinds abated. The global manufacturing PMI rose to 50.4, the highest level in nine months. The Institute for Supply Management's manufacturing measure rose into expansion territory, hitting 50.9. A post-Brexit bounce in business sentiment continued in the UK as the manufacturing purchasing managers' index rose to 50 in January and the service-sector measure rose to 53.9, the highest level since September 2018. Germany's measure continued to contract, but reached an 11-month high of 47.9. Keep in mind that these were determined largely before the impact of the coronavirus.

The UK and the EU have laid out sharply divergent opening positions in setting the stage for trade agreement negotiations. Prime Minister Boris Johnson said there is no need for accept EU product standards while the EU says it wants a level playing field, as well as access to UK fishing waters. Now that the UK has left the EU, a transition period is underway until the end of 2020. During this period, Britain will remain in the EU single market and customs union.

Chinese industrial profits fell 3.3% in 2019, with state-owned manufacturers creating a significant drag on profitability.


Sources:
Bloomberg News; Briefing.com; BusinessWeek.com; CNBC’s Power Lunch & Squawk Box; Crain’s New York Business; Dol.gov; Dorsey-Wright Associates; MarketWatch.com; Markit.com; MFS research; Morningstar.com; NASDAQ; NYMEX.com; NYSE; Reuters.com; Standardandpoors.com; Streetinsider.com; The Associated Press; The Financial Times.com; The New York Times; The Wall Street Journal Online; Thomsonreuters.com
 
The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities, whenever mentioned, are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.

 

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