Category: Briefings

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%.

Summary and Price Action Rundown

Global risk assets were mixed overnight as ongoing coronavirus outbreak concerns keep investors on edge ahead of this week’s key economic data and testimony by Fed Chair Powell. S&P 500 futures indicate a flat open, which would keep the index slightly below last Thursday’s record high. Friday’s moderate selloff followed a burst of optimism earlier in the week amid some encouraging news on slowing infection rates and potential treatment options, and volatility remains elevated. Overnight, equities in Asia were mostly lower, though mainland Chinese stocks extended their rebound, while EU stocks are posting modest losses. The cautious tone is supportive of Treasuries, which are holding recent gains with the 10-year yield at 1.57%, barely above multi-month lows after starting the year at 1.92%. The dollar is pausing its recent uptrend. Crude oil prices remain under pressure, with Brent crude sinking toward $54 per barrel as dissent from Russia is reportedly blocking OPEC efforts to further cut output.

Coronavirus Concerns Remain in Focus for Investors

The lack of clarity on containment is continuing to dampen last week’s nascent optimism that the worst of the outbreak might be over. 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:

 Reports over the weekend highlighted continued increases in infections and fatalities, with the totals rising to 40,573 and 910, respectively. Analysts noted that Chinese President Xi made a public appearance in Beijing for the first time since the start of the outbreak, with state media featuring a picture of him wearing a mask and having his temperature taken. Continued closures of many Chinese factories are also being monitored for impact on supply chains. The Shanghai Composite rallied for a fifth straight session, though, advancing 0.5% to further reduce post-Lunar New Year losses to 2.9%. 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, remaining on the strong side of the pivotal 7 to the dollar level.

 Uncertain Virus Impact Clouds Economic Outlook

Strong US jobs data for January extended the trend of labor market strength, and this week’s retail sales and industrial production are expected to be steady, but virus-related growth concerns are dulling the market reaction. Friday’s release showed that nonfarm payrolls jumped by 225K in January, handily outpacing consensus expectations of 160K. Notable job gains occurred in construction due to unseasonably warm weather. November and December were revised up, putting the 2019 average at 175K jobs a month. The unemployment rate rose to 3.6%, slightly above expectations of 3.5%, and above last month’s 50-year low, but this was due to new entrants into the labor force. Average hourly earnings (AHE) for all employees on private nonfarm payrolls rose by 0.2% month-on-month (m/m) to $28.44 but missed market expectations of a 0.3%. Year-on-year, AHE have risen by 3.1%, following an upwardly revised 3.0% gain in December. The market reaction to these robust figures on Friday was negligible, however, as Treasuries rallied and stocks sold off due to rekindled coronavirus fears. US consumer inflation data, industrial production, and retail sales for January are all due this week, but the resulting price reaction could be similarly muted given expectations that incoming data points will increasingly feature downside risk due to the outbreak.

          Additional Themes

Fed Testimony in Focus – Chair Powell will testify in front of both houses of Congress on Tuesday and Wednesday this week for his semiannual Humphrey-Hawkins testimony. 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 nearly 50% odds that the Fed will restart rate cuts by the June meeting. Another line of inquiry will surely be the unsettled situation in short duration funding markets and the Fed’s choice of balance sheet expansion 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).

German Assets Steady Despite Political Upheaval – The German benchmark equity index is performing in-line with regional peers, bunds are rallying moderately, and the euro is little-changed as analysts note that Chancellor Merkel’s presumptive successor, Annegret Kramp-Karrenbauer, has stepped down from the leadership of the Christian Democratic Union.

Summary and Price Action Rundown

Global risk assets are pausing their sharp four-day rebound as recent reports on the ongoing coronavirus outbreak rekindle a degree of investor caution ahead of the weekend. S&P 500 futures indicate a 0.4% decline at the open, which would bring the index slightly below yesterday’s new record high. After two weeks of cautious trading, risk appetite had come roaring back in recent days amid some encouraging news on slowing infection rates and potential treatment options, but volatility remains elevated. Overnight, equities in Asia were mixed, while EU stocks are modestly lower. Safe haven demand is helping support Treasuries this morning, with the 10-year yield at 1.61%, barely above multi-month lows after starting the year at 1.92%. The dollar is also rallying after the renminbi relapsed to the downside last night. Crude oil prices are again turning lower, with Brent crude sinking below $55 per barrel.

Confidence in Virus Containment Wavers Ahead of the Weekend

Headlines overnight are dampening this week’s prevailing investor optimism that the worst is over for the outbreak, and virology experts still see much uncertainty. 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:

 Reports last evening that China’s key industrial city of Shenzhen may be unofficially locked down to prevent spread of the coronavirus rekindled investor concerns, which had eased this week amid a focus on the slower growth of reported cases and efforts to develop drug therapeutics. News that the Chinese doctor who initially alerted the public to the outbreak has died of the disease also darkened the mood. For context, the last two Fridays have featured some of the heaviest virus-related equity downside, as investors are wary of the potential for adverse developments over the weekend when markets are closed. Total reported infections have risen to 31,519 and fatalities to 638. The Shanghai Composite rallied for a fourth straight day, edging 0.3% higher to further reduce this week’s losses to 3.4%. Official and unofficial state support is being credited with helping the index rebound from Monday’s post-holiday plunge of nearly 8%. However, the renminbi turned lower versus the dollar overnight, re-approaching the pivotal 7 to the dollar level.

 Corporate Earnings Remain Upbeat as Reporting Winds Down

As peak reporting season draws to a close, the overall tone of fourth quarter (4Q19) corporate results remains broadly supportive of equities. Yesterday, online mattress retailer Casper shares traded for the first time after pricing their IPO at $12 per share, closing the day up 11.7% from that initial IPO price. Twitter surged 15.1% after reporting 4Q19 revenue that came in above expectations and showed 152 million Monetizable Daily Active Users compared to 147.5 million expected. Shares had been under pressure since the company’s unexpected decision to eliminate political ads altogether, a more sweeping approach than other digital ad providers. Of the 316 S&P 500 companies that have reported 4Q19 results, 76% have topped earnings expectations and 66% have beaten sales estimates. Peak reporting is now unofficially over, and the degree of upside surprises and positive guidance rendered 4Q19 a very solid earnings season. In other corporate news, Attorney General Barr, in response to the UK decision to allow Chinese technology infrastructure firm Huawei to participate in its 5G network, said the US and its allies should consider investing in the companies to compete with Huawei on 5G. This resulted in shares of Finnish telecommunications company Nokia rising 4.5%, as it would be the main beneficiary of this investment, while the Trump administration maintains its intention to exclude Huawei from the US 5G network.

          Additional Themes

US Jobs Data in Focus – This morning’s January nonfarm payroll number is forecast to be a robust 163k after last month’s slightly lighter-than-expected 145k, with Wall Street analysts generally expecting an upside surprise after strong jobs data earlier this week. Specifically, the ADP Employment number released on Wednesday estimated that private businesses in the US hired 291k workers in January, the most since May 2015, handily beating market expectations of 156k. Also, initial jobless claims fell by 15k to 202k last week, bettering market expectations of 215k and well below the previous week’s level of 217k. This is the lowest level of jobless claims since mid-April 2019. The dollar and Treasuries are rallying this morning, in contrast to their usual tranquility ahead of nonfarm payrolls, extending their year-to-date trends.

Looking Ahead – Next week features January’s US retail sales, industrial production, and consumer inflation data. UK and EU 4Q GDP numbers are also due. For context, January’s global data will be the last clean readings before virus-related distortions start to skew the numbers.

 

Summary and Price Action Rundown

Global risk assets are maintaining this week’s steep uptrend as investors look past the ongoing outbreak to focus on China’s announced tariff cut, generally upbeat corporate earnings, ongoing monetary stimulus from global central banks, and other supportive factors. S&P 500 futures point to a 0.4% gain at the open, which would bring the index above yesterday’s new record high. After two weeks of cautious trading, risk appetite has come roaring back in recent days amid some encouraging reports on slowing infection rates and potential treatment options, which investors have taken to mean that the worst is over for the coronavirus. Overnight, equities in Asia continued to surge for a third straight session, while EU stocks are posting more moderate gains. Though safe haven demand had ebbed over recent days, sending yields slightly higher, Treasuries are steady this morning, with the 10-year yield barely above multi-month lows at 1.64%, after starting the year at 1.92%. The dollar is flat and currency market volatility has remained generally subdued. Crude oil prices staged a rebound yesterday but are struggling to make further headway amid reports that Russia is not on board with proposed OPEC supply cuts, with Brent crude fluctuating above $55 per barrel.

Rising Hopes of Virus Containment Extend the Rally

With price action this week suggesting that investors believe the worst may be over for the outbreak, virology experts still see much uncertainty.

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:

 Investors are noting that Chinese Premier Li is advising a cautious return to normal economic activity and the reopening of schools on a case-by-case basis. Correspondingly, Taiwanese chipmaker Foxconn has indicated that its mainland production is expected to be fully back online by the end of February. Total reported infections have risen to 28,344 and fatalities to 565. The Shanghai Composite rallied for a third straight day, gaining 1.7% to further retrace Monday’s sharp 7.7% loss. Official and unofficial state support is being credited with helping the index bounce back. The renminbi remained steady after appreciating past the closely-watched 7 to the dollar level earlier this week.

 Corporate Earnings Retain a Positive Tone Despite Some Uneven Results

Apart from a few high-profile disappointments, fourth quarter (4Q19) corporate reports remain broadly positive, while shares of Tesla reversed a portion of their dizzying uptrend. GM reported a 4Q loss due to the autoworkers’ strike but otherwise had a solid quarter, driving shares 1.9% higher yesterday. However, its competitor Ford fell 9.5% after management provided a disappointing profit forecast for 2020. The lower projections are due to higher spending on their self-driving and electric car fleets in order to keep pace with competitor Tesla, whose shares fell 17.2% after announcing plans to delay the delivery of its Model 3 to China due to the coronavirus. However, Tesla is still up 12.9% on the week and 77.1% year-to-date. Disney declined modestly after patchy results while social media company Snap fell 14.7% after reporting disappointing sales and usage figures. Chipmaker Qualcomm is down 2.3% in pre-market trading after management indicated that the outbreak in China threatens some mobile phone supply lines. Of the 283 S&P 500 companies that have reported 4Q19 results, 75% have topped earnings expectations and 65% have beaten sales estimates. This final week of peak earnings season concludes with Twitter, Kellogg, T-Mobile, and Tyson Foods.

          Additional Themes

China Tariff Cuts – In accordance with the Phase One US-China trade deal, which was signed last month, Beijing indicated today that it would be cutting import tariffs on $75 billion of US goods from 10% to 5% as of February 14^th. Regarding China’s commitment to increase purchases of US agricultural and other products, which was the centerpiece of the Phase One deal, National Economic Council Director Kudlow yesterday registered the administration’s understanding that the outbreak might delay the increased buying. For context, analysts have been skeptical that China can hit its US goods purchase targets within the two-year timeframe.

Solid US Economic Data / Soft German Factory Figures – The US ADP Employment number estimated that private businesses in the US hired 291K workers in January, the most since May 2015, handily beating market expectations of 156K. Friday’s nonfarm payroll number is forecast to be a robust 163k. Also, the ISM Non-Manufacturing Purchasing Managers’ Index (PMI) rose to 55.5 in January from 54.9 in December, reaching its highest level since August. German factory orders for December, however, undershot estimates, plunging 8.7% year-on-year. Nevertheless, the euro is holding steady near multi-month lows at the key 1.10 level.