Afternoon Markets Brief 2-27-2020

Summary and Price Action Rundown

US equities fell precipitously and added to the steep losses on the week as investors confront the risk that the coronavirus outbreak develops into a global pandemic. The S&P 500 fell 4.4% as the first case of the coronavirus in the US raised investor’s fears to the potential fallout from the expanding epidemic. The index is now down 12.0% from last Wednesday’s record high. Overnight, equities in Asia were mostly down again, with the Shanghai Composite outperforming. European stocks closed 3.4% lower and are also now down more than 10% from recent highs. Treasuries are continuing their rally, driven by heightened safe-haven demand and a darkening economic outlook, with the 10-year yield trading at a record low of 1.26%. The dollar is continuing to fluctuate below recent multi-year highs. Brent crude prices fell below $52 per barrel on demand fears.

Coronavirus Fears Continue to Drive Market Volatility

News of the first likely case of community spread of the coronavirus in the US, alongside widening outbreaks in numerous other countries, are weighing further on market sentiment. The latest developments are forcing investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic, or even its expansion into a global pandemic. Goldman Sachs is now estimating that US companies will have zero earnings growth this year due to the coronavirus and Japan is closing schools nationwide (more below). CDC officials are counseling preparedness for a pandemic, meaning “community spread” of the coronavirus and a “significant disruption to our lives” in the US, but note that the trajectory of the outbreak remains “very uncertain.” Last evening, President Trump gave a press conference focusing on the coronavirus and placing Vice President Pence in charge of the response, who added National Economic Council Director Larry Kudlow and Treasury Secretary Steven Mnuchin to the team. Rising infection figures and expanding quarantines in Italy, Japan, South Korea, and other countries have dispelled prior optimism over the prospects for quick containment, which had lifted global equity markets over the past few weeks. News out of China, however, has taken a more positive tone, with various provinces reducing their threat levels and reports of increasing factory activity. Today, Starbucks announced it is reopening cafes across China after the virus forced widespread closures last month. Currently 85% of its 4,292 locations are open. Nationwide, total infections are reported to be 82,446 while fatalities have reached 2,808. Regarding the economic costs, rating agency Moody’s has noted that a worldwide recession is likely in the event of a pandemic and some prominent Wall Street strategists are calling for more downside for US equity markets in the near-term. Meanwhile, the list of companies downgrading their 2020 profit forecasts due the epidemic continues to grow. –MPP note: We are arranging a call for our clients with noted epidemiologist Dr. Christopher Mores on Tuesday next week. Please send any advance questions in a reply to john.fagan@marketspolicy.com and stand by for details of the call.

Investors Monitor Overseas Stimulus Efforts and Fed Easing Prospects

Recent Fed communications have conveyed a steady policy stance despite concerns about the impact of the outbreak, while markets see rate cuts restarting in the coming months as stimulus measures also ramp up overseas. Analysts are noting a Wall Street Journal op-ed this morning from former Fed Board Member Kevin Warsh advocating for front-loaded Fed easing in coordination with other major central banks to cushion the economic impact of the outbreak. However, Vice Chair Clarida’s remarks earlier this week gave little indication that the bias of the FOMC is shifting toward more easing in the coming weeks and months, noting that it is “too soon” to estimate the possible fallout. Several regional Fed Presidents have echoed that position this week. Price action in Treasury markets is aligned with Warsh’s viewpoint, reflecting a prompt return to easing by the Fed.

Today, Chicago Fed President Charles Evans said that the Fed may need to let inflation overshoot its 2% target in the future in order to ensure inflation is not so weak that policy rates get stuck near zero. The 10-year Treasury yield is now trading at 1.26% after yesterday breaking below the prior all-time intraday low of 1.32% registered during the global deflation scare of 2016. Treasury yield curves (the yield spread between Treasuries of differing maturities) remain flat, and in some cases inverted, which is considered a warning of impending recession.

Meanwhile, futures markets are pricing in more than two Fed rate cuts by June and nearly 90% odds that the Fed starts lowering rates again at the March 18 meeting. Overseas, stimulus measures are being marshalled but the responses remain disparate. Germany is set to loosen its self-imposed fiscal straightjacket, China’s central bank is adding accommodation, and Hong Kong’s government is giving cash directly to its citizens in an attempt to cushion the economic impact of the virus. However, the Bank of Korea held rates steady overnight at 1.25% and a European Central Bank official stated that “more clarity” is needed before policymakers can confront “hard to understand implications” of the outbreak. – MPP view: We expect the Fed to be responsive to the yield curve, deploying cuts to counter a 2/10 inversion, as well as to futures markets that demand rate cuts, but there may be a critical lag in their response due to general policy inertia and specific concerns about making major monetary policy moves in an election year.

Additional Themes

Japan Cancels School to Fight Coronavirus – Japanese PM Shinzo Abe announced that the entire Japanese school system will be asked to close from Monday until spring break in late March to help contain the coronavirus outbreak. The number of cases in Japan rose to more than 200 as 15 new cases were identified on the northern island of Hokkaido.

 

US Economic Data in Focus – The second estimate of US GDP showed the economy grew 2.1% in Q419, the same as in Q3 and matching consensus expectations. The contribution from net trade was revised higher and the drag from inventories was smaller, while PCE rose less than initially estimated and nonresidential investment shrank faster. For full year 2019, the economy grew 2.3%, the least since 2016 and below the Trump administration’s 3% target.

January Durable Goods Orders dropped 0.2% month-on-month (m/m) in January, following a 2.9% advance in December, but well above market expectations of a 1.5% fall. Demand for transport equipment shrank 2.2% due to decreases in orders for motor vehicles and parts and defense aircraft and parts. Demand for civilian aircraft jumped 346.2%, reversing a 66.7% fall in December.

January Pending Home Sales jumped 5.2% m/m, rebounding from a 4.3% drop in December and beating forecasts of a 2.2% gain. Only the West region reported a drop in monthly sales, while the Northeast, Midwest and South all saw pending home sales growth. Exceptionally low mortgage rates are helping support the housing market, but the existing home market is struggling with a record low supply of homes for sale, currently the lowest since 1999. MPP View-With the spread of the Coronavirus spreading across the globe, all data pre-virus will be overlooked, and all data post will be blamed on the virus, lessening the usual market significance. However, the virus is raising the odds of preemptive Fed rate cuts but the bar is still high in an election year.  

Looking Ahead – When the Going Gets Tough…

In times like these, as the saying goes, the tough get going. In financial markets, though, when the going gets tough, the Fed gets going, with rate cuts, accommodative forward policy guidance, even asset purchases (aka quantitative easing or QE). This is what market participants have come to depend on over the years, with the post-global financial crisis years cementing this concept of the “Fed put,” because the Fed has given them every reason to expect support in times of market volatility.

Looking ahead to next week, the calendar features US nonfarm payroll data, global purchasing managers’ indexes (PMIs), and central bank meetings in Australia and Canada.

Morning Markets Brief 2-28-2020

Summary and Price Action Rundown

Global risk assets remain under pressure this morning as investors continue to grapple with fears of a global pandemic and the potentially severe economic fallout thereof. S&P 500 futures indicate a 0.9% lower open to extend its four-session loss of 10.8% this week, which has put the index 12.0% below last Wednesday’s latest record high. The first suspected case of “community spread” coronavirus in California, alongside rapidly expanding outbreaks around the world, principally in South Korea, Japan, Italy, and Iran, have raised the risk that the virus will significantly hamper economic activity worldwide. Overnight, equities in Asia again fell sharply, with the Shanghai Composite joining the rout. Treasuries are extending their historical rally, driven by heightened safe haven demand and a darkening economic outlook, with the 10-year yield trading near a record low at 1.19%. The dollar, however, is continuing to hover below recent multi-year highs. Brent crude prices are falling toward $51 per barrel.

Coronavirus Fears Continue to Roil Global Markets

News of the first likely case of community spread of the coronavirus in the US, alongside widening outbreaks in numerous other countries, have greatly darkened market sentiment this week. The latest developments are forcing investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic, or even its expansion into a global pandemic. CDC officials are counseling preparedness for a pandemic, meaning “community spread” of the coronavirus and a “significant disruption to our lives” in the US, but note that the trajectory of the outbreak remains “very uncertain.” The first case of suspected “community spread” near San Francisco is raising concerns, alongside the increasing numbers of individuals being monitored for the disease in California, New York, and Boston. Rising infection figures and expanding quarantines in Italy, Germany, Japan, South Korea, and other countries have dispelled prior optimism over the prospects for quick containment, which had lifted global equity markets over the past few weeks. Analysts are noting that the northern Japanese island of Hokkaido has declared a state of emergency and Nigeria has identified its first case. Now, total infections are reported to be 83,704 while fatalities have reached 2,859. Regarding the economic costs, rating agency Moody’s has noted that a worldwide recession is likely in the event of a pandemic, prominent economists are slashing their growth figures for the coming quarters, and the list of companies downgrading their 2020 profit forecasts due the epidemic continues to grow. – MPP note: We are arranging a call for our clients with noted epidemiologist Dr. Christopher Mores on Tuesday next week. Please send any advance questions in a reply to john.fagan@marketspolicy.com and stand by for details of the call.

 

Global Equities Fall Sharply but Remain Orderly

Heavy losses for stock prices worldwide this week are realigning those markets with the grim outlook that had already been reflected in tumbling Treasury yields and depressed commodity prices, though there are currently no serious indications of systemic stress or market malfunctioning. Investors are pondering what will stem the ongoing rout in global equities, which is reportedly the fastest “correction” in history and the steepest losses for US equities since 2008. For context, a “correction” is traditionally considered to be a stock market loss of over 10% from recent highs, a threshold the S&P 500 crossed in yesterday’s trading, while a “bear market” is generally associated with sustained losses of 20%. Though the selloff has been significant, there have been no reports of difficulties in trading or “flash crash” conditions, which might suggest any systemic malfunctioning. Meanwhile, the VIX, a US equity volatility gauge, is reflecting turbulence on par with the 2015 global deflation scare but still less acute than the EU debt crisis phase of 2011. Although some analysts are suggesting that the stock market selloff has gone too far, too fast this week, it may be particularly challenging for a meaningful rebound to materialize on a Friday. Generally, global equities have struggled to post gains on Fridays during the duration of this outbreak as investors are particularly wary of adding risk to their portfolios going into the weekend on concerns that adverse developments when markets are closed could lead to unavoidable losses on Monday.

Additional Themes

Futures Reflect More/Faster Fed Rate Cuts – The 10-year Treasury yield is now trading at 1.19% after earlier this week breaking below the prior all-time intraday low of 1.32% registered during the global deflation scare of 2016. Treasury yield curves (the yield spread between Treasuries of differing maturities) remain flat, and in some cases inverted, which is considered a warning of impending recession. Meanwhile, futures markets are pricing in nearly two full Fed rate cuts by April and 100% odds that the Fed starts lowering rates again at the March 18 meeting.

US Economic Figures Due – Although data for January is stale, investors will parse personal income, spending, and inflation data to gauge US economic vitality ahead of the epidemic.

Morning Markets Brief 2-27-2020

Summary and Price Action Rundown

Global risk assets are retreating again this morning after yesterday’s brief pause as investors continue to grapple with concerns that the coronavirus is developing into a global pandemic. S&P 500 futures point to a 1.0% lower open to extend its three-session loss of 6.6% this week, which has put the index 8.0% below last Wednesday’s latest record high. Rapidly expanding outbreaks outside of China, principally in South Korea, Japan, Italy, and Iran, have raised the risk that the virus will significantly hamper economic activity worldwide. Overnight, equities in Asia were mostly down again, with the Shanghai Composite outperforming. Treasuries are continuing their rally, driven by heightened safe haven demand and a darkening economic outlook, with the 10-year yield trading near a record low at 1.29%. The dollar is continuing to fluctuate below recent multi-year highs. Brent crude prices are falling toward $52 per barrel.

Coronavirus Fears Continue to Drive Market Volatility

News of the first likely case of community spread of the coronavirus in the US, alongside widening outbreaks in numerous other countries, are weighing further on market sentiment. The latest developments are forcing investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic, or even its expansion into a global pandemic. CDC officials are counseling preparedness for a pandemic, meaning “community spread” of the coronavirus and a “significant disruption to our lives” in the US, but note that the trajectory of the outbreak remains “very uncertain.” Last evening, President Trump gave a press conference focusing on the coronavirus and placing Vice President Pence in charge of the response. Rising infection figures and expanding quarantines in Italy, Japan, South Korea, and other countries have dispelled prior optimism over the prospects for quick containment, which had lifted global equity markets over the past few weeks. News out of China, however, has taken a more positive tone, with various provinces reducing their threat levels and reports of increasing factory activity. Now, total infections are reported to be 82,446 while fatalities have reached 2,808. Regarding the economic costs, rating agency Moody’s has noted that a worldwide recession is likely in the event of a pandemic and some prominent Wall Street strategists are calling for more downside for US equity markets in the near-term. Meanwhile, the list of companies downgrading their 2020 profit forecasts due the epidemic continues to grow.

 

Investors Monitor Overseas Stimulus Efforts and Fed Easing Prospects

Recent Fed communications have conveyed a steady policy stance despite concerns about the impact of the outbreak, while markets see rate cuts restarting in the coming months as stimulus measures also ramp up overseas. Analysts are noting a Wall Street Journal op-ed this morning from former Fed Board Member Kevin Warsh advocating for front-loaded Fed easing in coordination with other major central banks to cushion the economic impact of the outbreak. However, Vice Chair Clarida’s remarks earlier this week gave little indication that the bias of the FOMC is shifting toward more easing in the coming weeks and months, noting that it is “too soon” to estimate the possible fallout. A number of regional Fed Presidents have echoed that position this week. Price action in Treasury markets is aligned with Warsh’s viewpoint, reflecting a prompt return to easing by the Fed. The 10-year Treasury yield is now trading at 1.29% after yesterday breaking below the prior all-time intraday low of 1.32% registered during the global deflation scare of 2016. Treasury yield curves (the yield spread between Treasuries of differing maturities) remain flat, and in some cases inverted, which is considered a warning of impending recession. Meanwhile, futures markets are pricing in more than two Fed rate cuts by July and nearly 50% odds that the Fed starts lowering rates again at the March 18 meeting. Overseas, stimulus measures are being marshalled but the responses remain disparate. Germany is set to loosen its self-imposed fiscal straightjacket, China’s central bank is adding accommodation, and Hong Kong’s government is giving cash directly to its citizens in an attempt to cushion the economic impact of the virus. However, the Bank of Korea held rates steady overnight at 1.25% and a European Central Bank official stated that “more clarity” is needed before policymakers can confront “hard to understand implications” of the outbreak.

Additional Themes

UK Government Ups Ante with EU on Trade – The pound is slightly weaker versus the dollar this morning following news that Prime Minister Johnson’s government is demanding that EU negotiators demonstrate a path to a post-Brexit trade deal by June or the UK will suspend negotiations. Previously, Johnson has stated that year-end is the hard deadline for a UK-EU trade deal, with EU officials and many analysts characterizing the timetable as wildly ambitious.

 

US Economic Data in Focus – The second revision of fourth quarter (Q4) GDP will be released this morning after the initial estimate showed that the US economy grew 2.1% to close out the year, the same as in Q3 and in-line with forecasts. January’s durable goods orders are also due.

 

Morning Markets Brief 2-26-2020

Summary and Price Action Rundown

Global risk assets are attempting to find their footing this morning as investors continue to grapple with concerns that the coronavirus is developing into a global pandemic. S&P 500 futures indicate a 0.1% higher open after a two-day plunge of 6.3% to start this week that has put the index 7.6% below last Wednesday’s latest record high. Rapidly expanding outbreaks outside of China, principally in South Korea, Japan, Italy, and Iran, have raised the risk that the virus will significantly hamper economic activity worldwide. Overnight, equities in Asia were broadly lower again, though losses were more moderate, while EU stocks are down less than 1%. Treasuries are steadying after their rally, driven by heightened safe haven demand and a darkening economic outlook, with the 10-year yield trading at 1.37% after briefly touching a record low yesterday. The dollar is resuming its uptrend, with a closely-followed dollar index turning back toward multi-year highs. Crude oil is down again, with Brent below $54 per barrel.

Investors Grapple with Rising Pandemic Risks

Health official predictions of an outbreak in the US deepened investor concerns yesterday, alongside rising infection totals in Italy, Japan, South Korea, Iran, and elsewhere. The latest developments are forcing investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic, or even its expansion into a global pandemic. Rating agency Moody’s noted that a worldwide recession is likely in the event of a pandemic. Yesterday, the warning by the CDC that Americans should prepare for possible “community spread” of the coronavirus and the possibility of a “significant disruption to our lives” raised fears among investors, as did an apparently rising fatality rate among the infected outside China. Expanding quarantines and travel restricts for Italy, Japan, South Korea, and other countries have dispelled prior optimism over the prospects for quick containment, which had lifted global equity markets over the past few weeks. News out of China, however, has taken a more positive tone, with various provinces reducing their threat levels and reports of increasing manufacturing activity. Now, total infections are reported to be 81,172 while fatalities have reached 2,765.

 

Fed Messaging Remains Steady Though Markets Forecast Easing

Recent Fed communications have conveyed a steady policy stance but also registered concerns about the impact of the outbreak, while markets see rate cuts restarting in the coming months. Vice Chair Clarida’s remarks yesterday gave little indication that the bias of the FOMC is shifting toward more easing in the coming weeks and months, noting that it is “too soon” to estimate the possible fallout. Last night, Dallas Fed President Kaplan also suggested that it “pays to be patient” amid a high degree of uncertainty over the epidemic’s potential impact on growth. On Monday, Minneapolis Fed President Kashkari and Cleveland Fed President Mester both flagged economic risks associated with the outbreak but suggested that the FOMC should be patient with its policy response. Nevertheless, price action in Treasury markets is consistent with a dismal economic outlook and reflects a prompt return to easing by the Fed. The 10-year Treasury yield is now trading at 1.37% after yesterday briefly falling below the prior all-time intraday low of 1.32% registered during the global deflation scare of 2016. Treasury yield curves (the yield spread between Treasuries of differing maturities) remain flat, and in some cases inverted, which is considered a warning of impending recession. Meanwhile, futures markets are pricing in more than two Fed rate cuts over the coming year and nearly 70% odds that the Fed starts lowering rates again by the April meeting.

Additional Themes

Overseas Stimulus to Support Growth – Germany is loosening its self-imposed fiscal straightjacket, China’s central bank is adding accommodation, and Hong Kong’s government is giving cash directly to its citizens in an attempt to cushion the economic impact of the virus.

 Investors Ponder US Political Uncertainty – Against the disquieting backdrop of coronavirus outbreak news, US politics remains in focus. Some politically-minded market contacts have suggested that the recent sell-off in US equities may have an undertone of concern over the rise of Senator Sanders in the polls, given his relatively less market-friendly stance. However, shares of companies that have displayed political sensitivity in the past, such as managed care giant UnitedHealth Group, are not evidencing notably outsized losses in the most recent sell-off, suggesting that coronavirus concerns are the predominant downside catalyst this week.

US Housing Market Data Expected to Remain Robust – January new home sales figures, as well the last week’s mortgage applications data, are due today with both expected to reflect continued strength. This follows yesterday’s upside surprise in December home price gains. Analysts are citing the lack of supply on the market for rising prices and industry figures are blaming the lack of qualified workers as a bottleneck for homebuilding.

Morning Markets Brief 2-25-2020

Summary and Price Action Rundown

Global risk assets are attempting to stabilize this morning as investors continue to grapple with concerns over the outbreak after the rapid spread of coronavirus cases outside China undermined hopes of swift containment. S&P 500 futures point to a 0.2% gain at the open after yesterday’s 3.4% plunge, which was the sharpest one-day loss in two years. Still, the index remains within 5% of last Wednesday’s latest record high. Apparently slowing infection rates around Wuhan had fueled optimism over the past few weeks but outbreaks beyond China, principally in South Korea, Japan, Italy, and Iran, have raised the risk that the virus becomes a pandemic and significantly hampers economic activity worldwide. Overnight, equities in Asia were mostly lower, with Japan posting catch-up losses after yesterday’s holiday, while EU stocks are moderately lower. Treasuries are sustaining their rally amid heightened demand for safe havens, with the 10-year yield near a record low at 1.37%. Meanwhile, the dollar is pausing its uptrend, with a closely-followed dollar index near multi-year highs. Crude oil prices are under pressure amid fears of declining demand, with Brent trading near $56 per barrel.

Coronavirus Spread Outside China Continues to Impact Investor Sentiment

Swelling outbreak figures in Italy, Japan, South Korea, Iran, and other countries are forcing investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic. Italian equities are 0.6% lower this morning after yesterday’s -5.4% swoon, and its sovereign bonds are continuing to underperform as the rising number of reported coronavirus cases in northern Italy and a spread to southern Italy keep pressure on local assets, while also impacting investor sentiment more broadly. Similar outbreaks in Japan, South Korea, and Iran, as well as reports of the spread to other countries, are dispelling optimism over the prospects for quick containment, which had lifted global equity markets over the past few weeks. Global public health officials are flagging the risk that the virus becomes a pandemic, with a spread to multiple continents that exerts a significant impact on society. More flight restrictions are being enacted, Hong Kong schools will remain closed for another month, and President Trump has requested a $2.5 billion budget from Congress to combat the epidemic. Now, total infections are reported to be 80,289 while fatalities have reached 2,704. Meanwhile, the list of corporates reporting a significant impact on their business continues to grow (more below).

 

Markets Reflect Varying Degrees of Anticipated Fallout from the Outbreak

Yesterday’s sharp losses for global equities moved stock markets into closer alignment with the more worrisome outlook that Treasuries, currencies, and commodities markets have been reflecting. Investors are pondering whether yesterday’s sharp losses in global equities mark a decisive breakdown of the prevailing resilience of stock markets in the face of heightened coronavirus concerns. However, major US equity indexes are only around 5% below record highs from earlier this month, levels that are consistent with a relatively upbeat containment scenario, and are set to rebound moderately this morning. Equity benchmarks in the EU, UK, and Japan are also barely below multi-year highs. For context, a standard equity market “correction” is loosely defined as a 10% decline from a recent peak, while a “bear market” is associated with sustained losses of over 20%. Meanwhile, the VIX gauge of US equity volatility is elevated at 23 but remains well shy of its most recent peaks in February and December of 2018, which topped 35. Still, equity investors are increasingly attuned to the worrisome signals from the Treasury market (more below) and are warily monitoring the increasing number of corporate profit warnings. Mastercard and United Airlines are among the most recent companies to downgrade their profit and/or sales forecasts.

Additional Themes

Treasury Market Calls for Fed Easing – The 10-year Treasury yield is now trading at 1.37%, nearing the prior all-time intraday low of 1.32% registered during the global deflation scare of 2016. Treasury yield curves (the yield spread between Treasuries of differing maturities) are also flattening, and in some cases inverted, which is considered a warning of impending recession. Meanwhile, futures markets are pricing in more than two Fed rate cuts over the coming year and over 50% odds that the Fed starts lowering rates again by the April meeting. Yesterday, Minneapolis Fed President Kashkari and Cleveland Fed President Mester both noted economic risks associated with the outbreak but suggested that the FOMC should be patient with its policy response. Analysts will monitor Vice Chair Clarida’s remarks today for any signals that the bias is shifting toward more easing in the coming months.

 

Home Depot Earnings Highlight Tight US Housing Market – The home improvement giant topped earnings and revenue projections for last quarter and its key metric of same-store sales outpaced estimates at 5.2%. Management has suggested that a constrained supply of new homes benefits Home Depot as homeowners opt to make improvements rather than buy new.

Five Minute Macro 2-24-2020

With infection rates accelerating, the Coronavirus Outbreak remains front and center along with Global Growth as the biggest driver of markets this week. The Federal Reserve and Global Central Banks expectations for further easing remains third. Safe Haven Status Fueling Dollar Appreciation enters the top five for the first time and US Political Uncertainty falls to fifth.

Morning Markets Brief 2-24-2020

Summary and Price Action Rundown

Global risk assets were sharply lower overnight as the rapid spread of coronavirus cases outside China doused hopes of swift containment and spurred meaningful market volatility. S&P 500 futures indicate a 2.2% plunge at the open, which would extend the losses from the past two sessions but still keep the index within 5% of last Wednesday’s latest record high. Apparently slowing infection rates in China had fueled optimism over the past few weeks that the impact of the epidemic would be shallow and fleeting. However, news of widening outbreaks in other countries, questions about China’s diagnostic data, warnings from corporates over the growing impact, and early signs of the economic toll have led to re-intensification of risk aversion in global stock markets. Overnight, equities in Asia were mostly lower, though mainland Chinese markets again outperformed, while EU stocks have plummeted over 3%. Treasuries are rallying amid a rush for safe havens, with the 10-year yield near a record low at 1.39%. The dollar is also gaining, with a closely-followed dollar index near multi-year highs. Crude oil prices are retreating, with Brent trading near $56 per barrel.

Coronavirus Spread Outside China Roils Markets

Swelling outbreak figures in Italy, Iran, South Korea and other countries are forcing investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic. Italian equities are nearly 5% lower this morning and its sovereign bonds are underperforming as the rising number of reported coronavirus cases in northern Italy hit local assets, while also impacting investor sentiment more broadly. Similar outbreaks in Iran and South Korea, as well as reports of the spread to other countries, are dispelling optimism over the prospects for containment, which had lifted global equity markets over the past few weeks. This latest phase of the epidemic began last week as market participants started warily monitoring reports of an expanding outbreak in South Korea, as well as new fatalities in Japan. Meanwhile, analysts continue to question the credibility of the outbreak data in China as officials in Hubei province, the epicenter of the outbreak, have shifted the diagnosis guidelines twice over the past two weeks and issued conflicting statements on the quarantine of the city of Wuhan. Now, total infections are reported to be 79,524 while fatalities have reached 2,626. Meanwhile, the list of corporates reporting a significant impact on their business continues to grow, with Goldman Sachs suggesting that the likely impact on earnings has been broadly underestimated.

 

Global Economic Data Suggests Unfolding Outbreak Impact

Preliminary readings of February’s manufacturing and service sector purchasing managers’ indexes (PMIs) showed a regional divergence suggestive of intensifying virus-related headwinds in Asia alongside unexpected weakness in the US. For context, PMI readings above 50 denote expansion in the sector. The IHS Markit Manufacturing PMI for the US fell to 50.8 in February from 51.5 in January, missing forecasts of 51.5. This is the lowest level since August as output growth slowed and firms noted that weak demand conditions and delays in deliveries following the outbreak of the coronavirus in China had dented production. More troubling for the US economy, however, was the drop in the Services PMI to 49.4 from 53.4 the previous month, which dramatically undershot estimates of 53.0. This was the first contraction in the US service sector PMI since February 2016. Overseas, Australian PMIs showed contraction across the board, with the composite reading at 48.3. Japan posted similarly downbeat figures, as the composite PMI registering a steep retrenchment at 47.0 versus 50.1 the prior month. Meanwhile, the UK’s February PMIs surprised to the upside as a better-than-expected 53.3 composite PMI matched January’s pace. EU PMIs were subdued, with the composite at 51.6, but all three gauges moderately outpaced consensus estimates and January’s readings. Still, the economic impact is expected to be more acute in Asia, the EU, and emerging markets than in the US, fueling a surge of demand for Treasuries and the dollar that has sent Treasury yields toward record lows and the dollar to a multi-year high.

Additional Themes

Treasury Markets Reflect Deepening Concerns – The 10-year Treasury yield is now trading at 1.39%, nearing the prior all-time intraday low of 1.32% registered during the global deflation scare of 2016. Treasury yield curves (the yield spread between Treasuries of differing maturities) are also flattening, and in some cases inverted, which is considered a harbinger of impending recession. The most closely-watched portion of the yield curve, the 2-year/10-year segment, is only 11 basis points above inversion. Meanwhile, futures markets are pricing in more than two Fed rate cuts over the coming year.

 

President Trump in India – Analysts are noting the announcement of $3 billion in military sales to India as well as the President’s references to a broader trade deal, although the virus-related global selloff is muffling any observable price response in US defense stocks or Indian assets.

Looking Ahead – Trigger Warnings

Skeptics assert that the ability of the S&P 500 to register a series of record highs in recent weeks despite the ongoing coronavirus outbreak is proof that a mix of investor complacency, programmatic trading, passive investing, and permissive central bank liquidity is preventing rational price discovery in equity markets. Although we do not dismiss this viewpoint, there is an alternate explanation rooted in fundamentals – assuming reasonably timely success of containment efforts, lost output will be paid back with interest in a ü-shaped rather than not V-shaped recovery, Beijing will be engaged in vigorous stimulus efforts, and global central banks will have eased policy to an even more accommodative level then before the epidemic…Sign up for Markets Policy Pro to read the full piece.

Looking ahead to next week, the calendar features some key US economic data.

  • US Economic Data
  • US Housing Data
  • EU Economic Data

Morning Markets Brief 2-21-2020

Summary and Price Action Rundown

Global risk assets were mostly lower overnight as spreading coronavirus cases outside China weighed on sentiment, while investors monitor key growth data for signs of an impact from the outbreak. S&P 500 futures indicate a 0.3% decline at the open, which would extend the index’s modest losses yesterday but remain within 1% of Wednesday’s latest record high. Apparently slowing infection rates in China had fueled optimism over the past few weeks that the impact of the epidemic will be shallow and fleeting. However, this week’s news of widening outbreaks in neighboring countries, questions about China’s diagnostic data, warnings from corporates over the growing impact, and early signs of the economic toll have rekindled a degree of risk aversion in global stock markets. Overnight, equities in Asia were mostly lower, though the Shanghai Composite again outperformed, while EU stocks are also posting modest downside. Treasuries are extending their recent rally amid elevated safe haven demand and a cloudy economic outlook, with the 10-year yield at 1.49%, its lowest level since September. The dollar is steady, holding its year-to-date gains, with a closely-followed dollar index at its highest level since September. Crude oil prices are relapsing, with Brent trading near $58 per barrel.

Coronavirus Spread Outside China Puts Investors on Edge

Swelling outbreak figures in South Korea and other neighboring countries are rekindling worries of a lengthier and deeper impact of the epidemic. Market participants are warily monitoring reports of an expanding outbreak in Beijing and South Korea, as well as new fatalities in Japan. Specifically, news from the South Korean city of Daegu indicates a jump in recorded infections, with identified cases in the country quadrupling in two days, and reports yesterday indicated a rapid spread of the virus through a Beijing hospital. Meanwhile, analysts are again raising questions about the credibility of the outbreak data in China after officials in Hubei province, the epicenter of the outbreak, shifted the diagnosis guidelines for a second time over the past two weeks yesterday, this time dramatically reducing the reported cases. Now, total infections are reported to be 76,775 while fatalities have reached 2,247. Meanwhile, the list of corporates reporting a significant impact on their business continues to grow, with Goldman Sachs suggesting that the likely impact on earnings has been broadly underestimated.

 Global Economic Data Suggests Unfolding Outbreak Impact

Preliminary readings of February’s manufacturing and service sector purchasing managers’ indexes (PMIs) showed a regional divergence suggestive of intensifying virus-related headwinds in Asia but steadiness for now in Europe and the UK. For context, PMI readings above 50 denote expansion in the sector. Australian PMIs showed contraction across the board, with manufacturing at 49.8, services at 48.4, and the composite reading at 48.3 versus January prints of 49.6, 50.6, and 50.2, respectively. Japan posted similarly downbeat figures, with manufacturing slowing from 48.8 to 47.6, services dropping from 51.0 to 46.7, and the composite PMI registering a steep contraction at 47.0 versus 50.1 the prior month. Meanwhile, the UK’s February PMIs surprised to the upside in factory activity, which posted 51.9, topping the estimate of 49.7 and January’s 50.0. UK services came in roughly as forecast at 53.3, which rendered a better-than-expected 53.3 composite PMI, matching January’s pace. EU PMIs were more subdued, with manufacturing at 49.1, services at 52.8, and the composite at 51.6, but all three gauges moderately outpaced consensus estimates and January’s readings. At a country level, Germany’s manufacturing PMI posted the most encouraging result, improving to 47.8 versus a projection of 44.8 and the prior reading of 45.3. These figures have helped pause the dollar rally for the moment, as the yen, euro, and pound stabilize after recent declines. Preliminary February PMIs for the US are due later this morning.

Additional Themes

Treasury Markets Reflect Economic Concerns – Analysts are monitoring price action in Treasuries, as declining yields reflect surging safe haven demand and concerns over the economic outlook. The 10-year yield is now trading below 1.50%, barely above the all-time low of 1.47% registered during the global deflation scare of early 2016. Treasury yield curves (the yield spread between Treasuries of differing maturities) are also flattening, and in some cases inverted, which is considered a harbinger of impending recession. The most closely-watched portion of the yield curve, the 2-year/10-year segment, is only 12 basis points above inversion.

Looking Ahead – Next week’s calendar features some key economic data in the US, including January’s income and spending data, as well as the Fed’s preferred measure of inflation, the core personal consumption expenditure price index (core PCE). The Fed targets 2% year-on-year (y/y) for core PCE and the December reading remained barely above multi-month lows at 1.6%. Estimates are for a slight increase to 1.7% y/y. The second revision of fourth quarter US GDP is also due, with expectations of a slight upward tick to 2.2% from the initial 2.1% print.