Category: Morning Markets Brief

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.

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.

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.

Summary and Price Action Rundown

Global risk assets were mixed overnight despite more stimulus measures in China as investors monitor the ongoing coronavirus epidemic, divergent central bank policies, and dollar appreciation. S&P 500 futures point to a 0.2% decline at the open, which would take the index slightly below yesterday’s latest record high. Apparently slowing infection rates in China have fueled optimism that the impact of the epidemic will be shallow and fleeting, though questions about the diagnostic data persist and analysts are bracing for worsening readings of economic and corporate activity. Overnight, equities in Asia were mixed, as the Shanghai Composite outperformed on further monetary easing, while EU stocks are posting moderate downside. Treasuries are building on their recent gains amid elevated safe haven demand and a cloudy economic outlook, with the 10-year at 1.54%. The dollar is up 0.4%, extending its year-to-date rally, with a closely-followed dollar index at its highest level since September (more below). Crude oil prices are holding up this morning, with Brent trading above $59 per barrel.

China’s Central Bank Cuts Rates While Fed Communications Remain Steady

The People’s Bank of China (PBoC) reduced its prime loan rates overnight, as expected, while the minutes of the Fed’s January meeting conveyed a stable outlook, lifting the dollar versus the renminbi. A broad dollar index compiled by Bloomberg is near its highest level in a year and the renminbi depreciated another 0.4% overnight, passing the closely-watched 7 to the dollar level, as investors focus on the disproportionate economic impact of, and divergent policy responses to, the coronavirus outbreak. The US is currently less effected, spurring inflows into US equities, Treasuries, and the dollar. Overnight, the PBoC unveiled another set of easing measures, cutting the one-year and five-year prime loan rates to 4.05% and 4.75%, respectively, from 4.15% and 4.8%. Though the reductions were modest, analysts expect that more cuts will soon be enacted, and the Shanghai Composite reacted favorably, rising 1.8%, while the renminbi slid to its weakest level versus the dollar since early December. Other global central banks may also be restarting their easing cycles, and today’s release of the European Central Bank’s minutes from its late January meeting may provide insights on possible new accommodation strategies. Contrastingly, the Federal Reserve’s minutes of their January meeting, at which they voted to leave the policy rate in a range between 1.5%-1.75%, stated that the “current stance of monetary policy was appropriate” and that holding rates at current levels “would give the Committee time for a fuller assessment of the ongoing effects on economic activity of last year’s shift to a more accommodative policy stance.” Nevertheless, futures continue to reflect around 50% odds that the Fed cuts rates by the June meeting.

 

Solid US Data Adds Further Support for the Dollar

Yesterday’s robust gain in producer prices and better-than-expected housing data continued the string of outperforming US growth readings, while analysts await key global manufacturing data next week. The US producer prices index (PPI) jumped 0.5% month-on-month (m/m) in January, well above consensus expectations of a 0.1% rise. This is the largest monthly gain since October of 2018. Core PPI also rose 0.5% m/m, versus an expected 0.1% rise. Year-on-year, the PPI rose 2.1%, the swiftest advance since May 2019. Meanwhile, housing starts fell 3.6% m/m in January to a seasonally adjusted annual rate (SAAR) of 1.567 million units in January but still came in above market expectations of 1.425 million, as December starts were revised up to 1.626 million, the highest overall level since December of 2006. Later today, preliminary February manufacturing purchasing managers’ indexes (PMIs) for Japan are due, with the EU and US readings to follow tomorrow morning. If US PMI readings outperform to a greater degree than expected, the dollar could receive a further boost versus the yen and euro. For context, the yen and euro have weakened 3.0% and 3.7%, respectively, year-to-date versus the dollar, with the yen at a ten-month low and the euro at a nearly three-year low.

Additional Themes

Virus Concerns Linger – Analysts are again noting questions about the credibility of the outbreak data in China after officials in Hubei province, the epicenter of the outbreak, again shifted the diagnosis guidelines, this time dramatically reducing the reported cases. Now, total infections are reported to be 75,751 while fatalities have reached 2,130. Meanwhile, the list of corporates reporting a significant impact on their business continues to grow.

Emerging Market (EM) Central Banks Easing – Brazil’s central bank reduced the reserve requirements for banks’ time deposits from 31% to 25% amid downgrades to its economic outlook. Bank Indonesia also eased policy, cutting its key rate 25 basis points to 4.75%. The Brazilian real has weakened sharply versus the dollar to a record low this year, while the Indonesian rupiah has outperformed its EM peers. A popular index of EM currencies compiled by JPMorgan is at its weakest level since inception.

Summary and Price Action Rundown

Global risk assets generally rallied overnight as many investors remain determined to look past the near-term economic and corporate fallout from the coronavirus outbreak, through Treasury markets remain consistent with a more downbeat outlook. S&P 500 futures indicate a 0.3% gain at the open, which would retrace yesterday’s modest downside and bring the index back to Friday’s latest record high. Apparently slowing infection rates in China have fueled optimism that the impact of the epidemic will be shallow and fleeting, though analysts are bracing for worsening economic data and more corporate outlook downgrades, like yesterday’s warning from Apple. Overnight, equities in Asia were broadly higher, though the Shanghai Composite remains out of step with its peers and posted a moderate loss, while EU stocks are retracing yesterday’s decline. Meanwhile, Treasuries are holding their recent gains amid elevated safe haven demand and a cloudy economic outlook, with the 10-year at 1.56%. The dollar is edging stronger to extend its year-to-date rally, with a closely-followed dollar index at its highest level since October (more below). Crude oil prices are turning upward again this morning, with Brent advancing above $58 per barrel.

Covid-19 Concerns Linger but Investors Bet on Containment and Stimulus

Although Monday’s revenue outlook downgrade by Apple briefly shook investor faith that the economic impact from the virus will be brief and modest, nerves have steadied overnight. Once again, the source of optimism appears to be the decline in reported cases in Hubei province, the epicenter of the outbreak, where yesterday’s tally of infections was the lowest since authorities revised their diagnosis guidelines last week. Now, total infections are reported to be 75,201 while fatalities have reached 2,012. Meanwhile, the list of corporates reporting a significant impact on their business continues to grow. Sportswear giant Adidas indicated that its sales in China are down around 85% in recent weeks and competitor Puma noted that half of its outlets in China remain closed. And Chinese oil refineries are said to be running at a rate 25% below this time last year. Amid this growing catalog of corporate concerns, however, only Apple’s warning on Monday that it will not meet revenue targets this quarter due to the effects of the Covid-19 outbreak seemed to have a broader impact on market sentiment, and only briefly. Apple shares largely recouped early losses in yesterday’s trading and are up again in the pre-market. In general, corporate earnings revisions currently reflect little evidence of a drag from the virus, although that could change if containment efforts take longer than anticipated.

 Fed Communications in Focus

Following last week’s balanced Congressional testimony by Chair Powell, investors will monitor today’s release of the minutes of January’s FOMC meeting and remarks from an array of Fed speakers. This afternoon, the Fed will release its minutes from the January meeting, at which the FOMC left the target range for its federal funds rate unchanged at 1.5-1.75%, as was widely expected. The accompanying statement noted that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Fed’s 2% objective. While this suggests that no changes in the funds rate should be expected during this year, in line with FOMC projections made in December, analysts will parse the minutes for any suggestion of an increasing bias toward easing. Futures markets reflect nearly 50% odds that the Fed will restart rate cuts by the June meeting, and one full 25 basis point rate cut and meaningful likelihood of a second are being priced in before March 2021. Fed Chair Powell’s expressions of concern over the potential impact of the outbreak in his testimony last week emphasized the downside risk to policy rates over the coming months. Additionally, any further details on the Fed’s plans for its ongoing balance sheet expansion program will be in focus. For context, many market participants view the program as stealth stimulus measure rather than a technical adjustment, as Fed officials have characterized it. Also today, regional Fed presidents from Atlanta, Minnesota, Dallas, Richmond, and Cleveland all deliver remarks.

          Additional Themes

Traders Noting Euro Weakness – Amid a series of disappointing EU economic figures over recent weeks and expectations that the Covid-19 outbreak will hit the bloc harder than the US, the euro has retreated sharply versus the dollar, falling 3.7% year-to-date to register its weakest level since spring 2017. Market odds are rising for more European Central Bank easing.

US Politics in Focus as Democrat Field Shifts – Investors are noting the rise of Mike Bloomberg and Senator Klobuchar in recent polls, as well as Bloomberg’s proposals for a financial transaction tax, tighter bank oversight, and enhanced consumer protections for investors. Bloomberg will join tonight’s debate, with analysts focused on how he will handle the jabs from the more seasoned candidates and contend with current front-runner Senator Sanders.

Summary and Price Action Rundown

Global risk asset prices turned mostly lower overnight as Apple’s downgraded revenue outlook due to the coronavirus outbreak has dampened hopes of a shallow and fleeting impact of the epidemic. S&P 500 futures point to a 0.5% loss at the open, which would bring the index just below Friday’s latest record high. Investor optimism over apparently slowing infection rates and renewed production and other economic activity in China had helped spur US and global equities higher over the past week, but the ongoing spread of the virus and the impact reported by Apple has reintroduced a degree of caution. Overnight, equities in Asia were mostly lower, though the Shanghai Composite closed flat, while EU stocks are posting losses of 0.6%. Treasuries are rallying amid the rising concerns over the economic impact of the virus, sending yields back toward recent lows, with the 10-year at 1.54%. The dollar, meanwhile, is continuing to hold steady after its year-to-date rally. Crude oil prices are retracing a portion of last week’s rebound, with Brent crude falling below $57 per barrel.

Apple Revenue Downgrade Spurs Concerns Over the Impact of the Outbreak

Many market participants had been betting on a brief and modest hit to economic activity from the virus (now named Covid-19), but yesterday’s warning from tech giant Apple has undermined the upbeat assumptions. Last evening, reports indicated that Apple is downgrading its projections, warning that it will not meet revenue targets this quarter due to the effects of the Covid-19 outbreak. Specifically, iPhone supplies are set to be “temporarily constrained” and demand in China is taking a hit amid a “slower return to normal conditions that we had anticipated.” Shares of Apple are 3.2% lower in pre-market trading, after registering an all-time high last Wednesday. Meanwhile, reports also indicate that some customers in Russia, Turkey, and elsewhere are no longer accepting metals and other goods from China for fear of the contagion. For context, many investors had been pinning hopes of only a fleeting impact of the outbreak on declining numbers of new infections in Hubei province, the epicenter of the epidemic, although questions about the credibility of China’s data were raised last week following a dramatic upward revision in the official cases due to revised diagnosis guidelines. Now, total infections are reported to be 73,336 while fatalities have reached 1,874. The Shanghai Composite was flat overnight after a 2.3% rally on Monday, spurred by easing measures from the People’s Bank of China (more below), with year-to-date losses at a mere 2.1%. The renminbi, however, slid 0.3% overnight, dipping back below the closely-followed 7 to the dollar level.

 Officials Assessing the Economic Impact of Covid-19

Economic data is beginning to reflect the effects of the epidemic as officials from various countries cite the emerging drag on growth. Germany’s influential ZEW economic survey index undershot estimates for February, as its compilers cited rising concerns among respondents about the outbreak. The expectations component fell to its weakest level since November at 8.7, missing estimates of 21.5 and the prior month’s 26.7, while the current situation gauge slid to -15.7 versus a forecast of -10.0 and January’s -9.5. Also this morning, EU finance ministers, importantly including potential holdout German Finance Minister Scholz, issued a joint statement advocating a fiscal response in the event of a downturn in the regional economy. Meanwhile, overnight, the Reserve Bank of Australia characterized the outbreak as a “material near-term risk to the economic outlook” and South Korean President Moon stated that the growth fallout was “worse than expectations” and called for extraordinary stimulus measures to support local corporates. This comes after the People’s Bank of China over the weekend cut one of its medium-term funding rates (the 1-year loan facility) by 10 basis points to 3.15% and injected liquidity of 100 billion renminbi, while officials also pledged to cut corporate taxes and other fees to boost economic activity amid the mass quarantines. Beijing is also in the process of offering tariff exemptions on 696 US products as part of its commitments to the Phase One trade deal, which is also supportive of growth.

          Additional Themes

Key Data Due This Week – This week, global manufacturing purchasing managers’ indexes (PMIs) are expected to show continued softness even before the full impact of the Covid-19 outbreak, although analysts note that risks are skewed significantly to the downside. Amid growth fears, futures markets reflect around 50% odds of a return to Fed rate cuts by June.

Walmart Earnings Disappoint – Shares of the mega-retailer are down 1.2% in pre-market trading after management reported lower-than-expected earnings for the key fourth quarter holiday shopping season and posted disappointing sales metrics. Its outlook for the coming quarters was also downbeat, even without any estimated impact from the Covid-19 outbreak factored in, although management continues to monitor the situation.

Summary and Price Action Rundown

Global risk asset prices were mixed overnight as investors ponder shifting Covid-19 infection and mortality figures out of China while awaiting key economic data. S&P 500 futures indicate a 0.2% gain at the open, which would bring the index back to Wednesday’s latest record high. Investor optimism over apparently slowing infection rates and renewed production and other economic activity in China has helped spur US and global equities higher over the past week, but China’s revised outbreak data has rekindled a degree of uncertainty. Overnight, equities in Asia posted disparate performance and EU stocks are little changed. Ahead of today’s US economic data, Treasuries remain bid, with investor caution over the virus helping send yields back toward recent lows as the 10-year dips to 1.59%. The dollar, meanwhile, is continuing to hold steady after its year-to-date rally. Crude oil prices are extending yesterday’s rebound, with Brent crude rallying above $57 per barrel.

Coronavirus Worries Cede to Hopes for Containment

Market sentiment has steadied since yesterday morning as investors are taking China’s dramatic upward revision in confirmed cases of the virus (now named Covid-19) as a one-off, although credibility of the data remains an issue. Optimism for containment of Covid-19 is again in ascendance in equity markets, although virus-related risk aversion has tended to be more acute on Fridays, given investor wariness over the potential for adverse headlines over the weekend when markets are closed. The past three Fridays have all featured US stock market declines. For now, at least, S&P 500 futures are in the green as investors monitor more changes in China’s data on the outbreak, with the Chinese National Health Commission reducing the number of infected and the death toll by 1000 and 100, respectively, citing “double counting.” For context, Chinese authorities announced overnight on Wednesday that the official number of cases of Covid-19 in Hubei province had increased by nearly 15,000 due to new diagnosis guidelines. Specifically, the World Health Organization indicates that Chinese officials have widened the definition of a confirmed case to include clinically diagnosed patients, whereas only lab-confirmed cases had been tallied in the past. Investors were not only concerned by the jump in contagion figures but also the correspondingly diminished credibility of official data. Now, total infections are reported to be 64,447 while fatalities have reached 1,384. The Shanghai Composite regained its footing after yesterday’s 0.7% decline, rallying 0.4% to pare year-to-date losses to 4.4%. The renminbi, however, slid 0.2% versus the dollar overnight, continuing to edge lower from its strongest level of the month.

 Global Economic Data Remains Mixed

Analysts are awaiting US retail sales and industrial production figures for January, which are expected to convey a picture of uneven growth, while EU GDP disappointed. US retail sales for January will be the most closely-followed of this week’s data points, given that the strength of the consumer has been the dependable engine of US economic growth. In December, retail sales increased 0.3% month-on-month (m/m), following 0.3% gains in both October and November, and January estimates are for a fourth straight month of this pace. Core retail sales, which exclude autos, gasoline, building materials and food services, jumped 0.5% m/m in December after falling 0.1% in November. Year-on-year, December retail sales grew 5.8%, topping November’s 3.3% and representing the largest increase since August of 2018. For the full year of 2019, retail sales rose 3.6%, after a 5.0% percent gain in 2018, which was the fastest in six years and reflected a boost from tax cuts. Following that will come industrial production (IP) for January. Year-over-year, IP fell 1.0% in December, marking the fourth consecutive annualized monthly decrease. Meanwhile, the preliminary reading of EU fourth quarter GDP undershot estimates, registering a 0.9% expansion versus 1.0% expected. The euro, which is already at its weakest level versus the dollar since spring 2017, is holding steady this morning.

          Additional Themes

Fed in Focus – After Wednesday’s conclusion of Fed Chair Powell’s balanced Congressional testimony, investors monitored yesterday’s hearings for President Trump’s Fed board nominees, Judy Shelton and Christopher Waller. The focus was primarily on Shelton and after lengthy questioning regarding her views on Fed independence, the gold standard, and extraordinary easing, headlines later in the evening indicated that President Trump may withdraw her nomination. Lastly, analysts were attuned to news that the New York Fed is paring some of its liquidity provision programs to short-term funding markets, which suggests growing confidence among Fed officials that the stresses have been addressed.

Looking Ahead – Next week, global manufacturing purchasing managers’ indexes (PMIs) are expected to show continued softness even before the full impact of the Covid-19 outbreak. The minutes of the Fed’s January meeting are also due and China’s central bank will decide on rates.

 

Summary and Price Action Rundown

Global risk asset prices reversed lower overnight as Chinese officials significantly raised their official infection totals for the coronavirus outbreak. S&P 500 futures point to a 0.7% loss at the open, which would bring the index below yesterday’s new record high. Investor optimism over apparently slowing infection rates and renewed production and other economic activity in China had helped spur US and global equities higher over the past week, but China’s revised figures have reintroduced a degree of concern. Overnight, equities in Asia and the EU also retreated. The renewed risk aversion is rallying safe-haven Treasuries, with yields turning back toward recent lows and the 10-year yield at 1.59%. The dollar, however, is holding steady against its peers. Crude oil prices are also relapsing, with Brent crude falling back toward $55.

Coronavirus Concerns Re-intensify

Investor sentiment turned more cautious overnight as China’s new classification methodology resulted in a dramatic upward revision in confirmed cases of the virus (now named Covid-19). Last evening, Chinese authorities announced that the official number of cases of Covid-19 in Hubei province had increased by nearly 15,000 due to new diagnosis guidelines. Specifically, the World Health Organization indicates that Chinese officials have widened the definition of a confirmed case to include clinically diagnosed patients, whereas only lab-confirmed cases had been tallied in the past. Investors are not only concerned by the jump in contagion figures but also the correspondingly diminished credibility of official data. Now, total infections are reported to be 60,349 while fatalities have reached 1,369. Also, IT component maker Foxconn refuted news about its resumption of production. For context, investors had been encouraged by reports earlier this week that Foxconn, which has over one million employees in China, is incrementally restarting a number of its previously closed mainland facilities and expects to reach 50% of production capacity by month-end. The Shanghai Composite broke a streak of seven straight sessions of gains, falling 0.7% to increase post-Lunar New Year losses to 2.4%, with year-to-date downside of 4.7%. The renminbi dipped versus the dollar overnight, retreating from its strongest level of the month.

 Fed Chair Powell Outlines Easing Options

In yesterday’s second half of the semiannual Humphrey-Hawkins testimony in front of Congress, Chair Powell maintained an optimistic outlook on the US economy, acknowledged the potential for a global slowdown due to the outbreak in China, and focused on the Fed’s approach to accommodation in a low rate environment. Echoing his remarks from Wednesday’s first round of testimony, Chair Powell highlighted the potential for a global spillover from Chinese economic disruption related to the outbreak but maintained an optimistic outlook on the US domestic front. Otherwise, analysts focused on Chair Powell’s statements on potential easing options given the limited scope for interest rate cuts from current already-low levels. Specifically, he noted that the Fed would “aggressively” pursue large-scale asset purchases (or quantitative easing, aka QE) in case of an economic downturn given “less room to cut.” He also characterized low interest rates as “not really a choice anymore, they are a fact of reality” that requires the Fed to search for “every scrap of policy space… to be able to support the economy.” For context, futures markets reflect around 50% odds that the Fed will restart rate cuts by the July meeting, and one full 25 basis point rate cut is being priced in before March 2021. Additionally, President Trump’s Fed Board candidates, Judy Shelton and Christopher Waller, will appear before the Senate Banking Committee today.

          Additional Themes

US Inflation Figures Due – Analysts are awaiting US Consumer Price Index (CPI) inflation data for January this morning, with expectations for a continued trend of relatively subdued pressures. For context, December CPI climbed to 2.3% year-on-year (y/y) from 2.1% in November. This was the highest rate since October 2018, boosted by a sharp rebound in energy costs, while food inflation eased to 1.8% from 2.0%. January’s reading is projected to edge higher to 2.4% y/y. Core CPI, which excludes the more volatile components of food and energy, was unchanged at 2.3% y/y last month and is expected to dip to 2.2%. These tame numbers are not expected to elicit a meaningful market reaction or alter the outlook for Fed policy.

IEA Cuts Oil Demand Estimate – The International Energy Agency has slashed its oil demand figures for the first quarter (1Q) of this year owing to the impact of Covid-19 epidemic. Specifically, the IEA is now calling for oil demand to contract by 435k barrels per day in 1Q, with a less severe downgrade for 2Q, and an upward revision for its 3Q demand estimate due to an assumed snapback in activity as the outbreak ebbs. This comes a day after OPEC published figures reflecting a 440k barrels per day decline in oil demand this quarter due to the impact of the coronavirus. Crude prices are stabilizing above their lowest level in over a year.

Summary and Price Action Rundown

Global risk asset prices continued to run higher overnight as investors further downplay the potential impact of the coronavirus outbreak and monitor testimony by Fed Chair Powell. S&P 500 futures indicate a 0.4% gain at the open, which would send the index to another record high. Last Friday’s moderate selloff has proven to be a temporary lull in the rally, which is being fueled by optimism on apparently slowing infection rates and renewed production and other economic activity in China. Overnight, equities in Asia and the EU also extended their uptrend. Treasury yields are edging higher from recent lows as risk appetite rises, with the 10-year yield at 1.61%, while Fed Chair Powell’s ongoing Congressional testimony is having little impact on the policy outlook. The dollar remains in a holding pattern. Crude oil prices are extending their rebound as virus-related growth fears ebb, with Brent crude back above $55.

Fed Chair Powell to Continue Balanced Testimony Today

In yesterday’s first half of the semiannual Humphrey-Hawkins testimony in front of Congress, Chair Powell maintained an optimistic outlook on the US economy but acknowledged the potential for a global slowdown emanating from the outbreak in China. The Fed’s written statement preceding the testimony had identified the coronavirus outbreak as a “new risk” and Chair Powell highlighted the potential for a global spillover from Chinese economic disruption related to the outbreak. Still, he struck a generally positive note on the domestic front, stating that he sees no reason why the US expansion cannot continue. For context, futures markets reflect over 50% odds that the Fed will restart rate cuts by the July meeting, and one full 25 basis point rate cut, and a meaningful likelihood of a second, are being priced in before March 2021. Those speculative bets on further easing have ebbed slightly over the past few days amid broadening optimism over coronavirus containment (more below). Regarding short-term funding market stress, Chair Powell claimed success in the Fed’s efforts to ease liquidity pressures, which emerged suddenly last fall, and gave no further details on how long the Fed would continue to grow its balance sheet at a pace of $60 billion per month. Following yesterday’s testimony, two of the most dovish FOMC members, Minneapolis Fed President Kashkari and St. Louis Fed President Bullard, both highlighted that the Fed will remain ready to respond to virus-related economic disruptions. Meanwhile, President Trump continued his criticism of the Fed on Twitter, calling for easier monetary policy.

 Heightened Optimism for Coronavirus Containment

Investors continue to discount the risks and economic fallout from the contagion amid declining numbers of recorded infections in China and President Xi’s pledge to meet growth targets. Although investors are continuing to monitor news on the ongoing outbreak of the Wuhan coronavirus (now named Covid-19), positive developments are in focus and optimism is running high. Specifically, analysts are attuned to the declining numbers of new reported cases in Hubei Province, the epicenter of the outbreak. Overall daily increases in infections have declined over the past week, according to official figures, with the total rising to 45,204 while fatalities have reached 1,116. News overnight that IT component maker Foxconn, which is incrementally restarting a number of its previously closed mainland facilities, expects to reach 50% of production capacity by month-end is also being taken as a positive sign. With over one million employees in China, Foxconn has been viewed as a bellwether for the private sector response to the outbreak. Meanwhile, Chinese President Xi stated overnight that the China would “defeat the epidemic” and also meet its economic and social goals, supporting investor assumptions that further stimulus measures will soon be forthcoming from Beijing. The Shanghai Composite rallied for a seventh straight session, advancing 0.9% to further reduce post-Lunar New Year losses to 1.7%. Official and unofficial state support is being credited with helping the index rebound. The renminbi remained steady versus the dollar overnight near its strongest level of the month. Equities in Hong Kong also rallied for a second straight session, gaining 0.9%, as did copper futures, suggesting broadening investor optimism.

          Additional Themes

EU Industrial Weakness – December’s industrial production in the EU was even weaker than the downbeat forecasts, registering -4.1% year-on-year (y/y) versus an expectation of -2.5%, following a downwardly revised -1.7% y/y the prior month. Reports earlier this week suggested that the European Central Bank may be mulling additional easing if growth remains poor, but with the policy rate at -0.5%, futures reflect less than 50% odds of another cut over the coming year. EU growth doubts have pressured the euro, which is hovering near a multi-year low.

OPEC Cuts Oil Demand Estimate – The cartel has published figures reflecting a 440k barrels per day decline in oil demand this quarter due to the impact of the coronavirus. Crude prices are stabilizing above their lowest level in over a year.

 

Summary and Price Action Rundown

Global risk assets were broadly positive overnight as investors continue to discount the potential impact of the coronavirus outbreak and await testimony by Fed Chair Powell. S&P 500 futures point to a 0.2% gain at the open, which would send the index to another record high. Friday’s moderate selloff has proven to be a temporary lull in the rally, which has been fueled over the past week by optimism on apparently slowing infection rates and renewed production and other economic activity in China. Overnight, equities in Asia and the EU moved broadly higher. Treasuries are paring their recent gains as risk appetite builds, although moves are modest ahead of Chair Powell’s remarks today, with the 10-year yield at 1.59%, barely above multi-month lows. The dollar is pausing its recent uptrend. Crude oil prices are rebounding as virus-related growth fears ebb, with Brent crude back above $54 per barrel.

Fed Policy in Focus Ahead of Powell Testimony

Chair Powell is likely to sound incrementally more dovish when he testifies in front of both houses of Congress today and tomorrow for his semiannual Humphrey-Hawkins report. The Fed’s written statement preceding the testimony identified the coronavirus outbreak as a “new risk” and Chair Powell is likely to face extensive questioning on his assessment of the potential impact and the Fed’s expected policy response. For context, futures markets reflect over 50% odds that the Fed will restart rate cuts by the July meeting, and one full 25 basis point rate cut and meaningful likelihood of a second are being priced in before March 2021. Another line of inquiry will surely be the unsettled situation in short duration funding markets and the Fed’s choice of balance sheet expansion at a pace of $60 billion per month as a primary means of addressing this issue. These renewed asset purchases, which the Fed characterizes as a technical adjustment, are being taken by many in financial markets as a stealth easing program akin to quantitative easing (or QE). Chair Powell has warned that the asset purchases will not continue indefinitely but analysts question the Fed’s ability to taper the program without conveying the impression that they are tightening monetary policy. Meanwhile, overseas, European Central Bank President Lagarde and Bank of England Governor Carney are also speaking today, with the emphasis expected to be on downside risks due to the outbreak.

 Coronavirus Concerns Ebb

Optimism for containment and limited economic fallout is on the upswing again amid reopening of various factories and declining numbers of recorded infections in China. To better understand the key risk factors of the coronavirus, please listen to the podcast we produced in conjunction with our friends at RenMac, featuring virologist Dr. Christopher Mores.

Click here for RenMac Off-Script: Coronavirus Thru Dr. Chris Mores’ Eyes:

 Analysts are attuned to the phased resumption of production at key IT component maker Foxconn, which is incrementally restarting a number of its previously closed mainland facilities. With over one million employees in China, Foxconn has been viewed as a bellwether for the private sector response to the outbreak. This comes amid reports that President Xi criticized the heavy-handedness of the initial government response to the outbreak, and is pushing for a more balanced approach to lessen the economic impact. Also, the arrival in China of a Western-led medical team from the World Health Organization has been taken as an indication of progress and Chinese confidence, and projections of a partial reopening of GM plants and Apple stores by February 15^th is also encouraging. Daily increases in infections have declined over the past week, according to official figures, with the total rising to 43,138 while fatalities have reached 1,018. A top Chinese medical advisor was quoted overnight indicating that the outbreak is set to peak mid-month and level off thereafter. The Shanghai Composite rallied for a sixth straight session, advancing 0.4% to further reduce post-Lunar New Year losses to 2.5%. Official and unofficial state support is being credited with helping the index rebound from last Monday’s plunge of nearly 8% upon reopening from the extended holiday closure. The renminbi also gained versus the dollar overnight. Equities in Hong Kong also rallied, gaining 1.3%, and copper futures jumped 1.2%, suggesting broadening investor optimism.

          Additional Themes

UK GDP Stalls – The pound is steady and UK bond yields are higher as investors discount the importance of fourth quarter GDP growth stagnating to zero. Analysts are projecting a post-election/post-Brexit rebound in activity in the first quarter, but evidence remains spotty.

T-Mobile/Sprint Deal Set for Approval – Reports indicate that the judge in the state-led antitrust case will approve the $26.5 billion takeover, which will put T-Mobile at a comparable level of subscribers as rivals AT&T and Verizon. Shares of Sprint are up 66.3% in pre-market trading while T-Mobile stock is up 8.9%.