Afternoon Markets Brief 1-31-2020

Summary and Price Action Rundown

The S&P 500 retreated sharply as investor caution over the coronavirus outbreak spurred a meaningful reduction of risk asset exposure ahead of the weekend. For the second straight week, US equities tanked into Friday’s close amid concerns of further adverse Wuhan virus developments over the weekend. The S&P 500 closed 3.1% below its mid-month record highs. Overnight, equities in Asia were mixed, but EU indexes suffered more losses. Mainland Chinese remained closed for Lunar New Year and are set to open with major losses on Monday. Treasuries rallied strongly amid the rising safe haven demand, with the 10-year yield sinking to a new four-month low at 1.59%, while the dollar lost 0.3%. Crude oil extended its steep downtrend amid a darkening demand outlook, with Brent sinking below $57 per barrel.

Coronavirus Fears Spur Pre-Weekend De-Risking

Although sentiment steadied yesterday following measured statements from the World Health Organization (WHO), selling pressure reemerged today as the debate among investors over the potential trajectory and fallout from the Wuhan virus outbreak continues to play out in financial markets. Headlines overnight once again darkened the market mood leading into the US trading session, and like last Friday, investors sold equities and other risk asset positions ahead of the weekend on fears of adverse developments while markets are closed on Saturday and Sunday. Yesterday, the WHO declared the Wuhan virus a global emergency, after withholding that designation last week, but declined to recommend limiting trade and movement, buoying hopes for a limited economic impact of the outbreak. However, Goldman Sachs estimated today that the virus will shave 0.4 percentage points off first quarter 2020 US GDP and reports indicate that roughly two-thirds of China’s economy will remain shuttered next week. For context, prior to today’s swoon, the S&P 500 had been alternating between gains and losses this week, as uncertainty over the impact of the virus offsets generally upbeat earnings results (more below). Total reported cases continue to climb, along with fatalities, with these tallies now reaching 9,925 and 213, respectively. More countries are tightening travel restrictions to China, with the US State Department issuing a “do not travel” recommendation, while Italy declared a state of emergency, although officials called it “precautionary.”. – MPP view: We continue to expect global risk assets to be broadly resilient to virus-related fears, but it was not surprising that stocks mirrored the pre-weekend selloff that occurred last Friday on concerns of unfavorable developments while markets are closed on Saturday and Sunday. This dynamic reflects prudent risk management, while a rally into the weekend would have suggested undue investor bravado.     

 Upbeat Earnings Fail to Overbalance Virus Fears

Although fourth quarter (4Q19) corporate reports generally continued to impress today, coronavirus-related risk aversion depressed stocks. Amazon returned to the $1 tril market club, which includes Apple Google and Microsoft, after 4Q earnings of $6.47 per share smashed expectations of $4.03. Shares rose 7.4% after revenue grew 21% to $87.44 bil versus expectations of $86.02 bil. The company also gave upbeat guidance for 1Q20, saying it expects to report revenue between $69 billion and $73 billion.

Shares of IBM jumped 5.1% after the computer software company announced CEO Ginni Rometty will step down in April. Rometty, who has served at the helm of the company since 2012, will be replaced by Arvind Krishna. Shares of IBM are down more than 22% since Rometty became CEO, so the market is excited for a new vision at the helm.

Shares of Word Wrestling Entertainment plunged 251.3% after the company announced that co-Presidents George Barrios and Michelle Wilson will immediately leave the company and vacate their board seats. Additionally, WWE lowered its full year 2019 forecast to the bottom of the range of its previous guidance, which is below consensus estimates.

Shares of Colgate-Palmolive rose 6.2% after 4Q19 sales beat consensus expectations and in-line earnings of 73 cents per share. Meanwhile, Caterpillar’s stock fell 3.0% after 4Q earnings of revenue fell 8% from a year earlier and missed analyst’s expectations. The company also provided a guarded outlook due to “global economic uncertainty.” – MPP view: Although 4Q earnings season so far has featured a few high-profile disappointments, the overall tone is still positive and the downside surprises have not implicated broader macro concerns. 

Additional Themes

US Growth Remains Mixed – Personal Income rose 0.2% month-on-month (m/m) in December, missing market expectations of 0.3%. Increases in employee compensation and personal interest income were partially offset by a decline in farm proprietors’ income. Personal Spending rose 0.3% m/m, in line with market expectations, and mainly boosted by spending on health care. Nondurables goods jumped 0.9% and services advanced 0.3%, while spending on durable goods dropped 0.8%. Spending on prescription drugs was the most significant, while services were driven by health care. For all of 2019, households spending grew by 4%, the least since 2016.

The Personal Consumption Expenditure (PCE) Price Index rose 0.3% m/m in December 2019, following a 0.1% rise in November. Year-on-year, the PCE price index went up 1.6%, following a downwardly revised 1.4% advance. The Core PCE Price Index, which excludes prices of food and energy, increased 0.2%, following a 0.1% rise in November and above market expectations of 0.1%. Core PCE is the Fed’s preferred measure of inflation and the bank targets it at 2%. Year-on-year, the core index went up 1.6%, following a 1.5% increase in November and matching market estimates.

The MNI Chicago Business Barometer unexpectedly plunged 5.3 points to 42.9 in January, widely missing market expectations of 48.8. This is the lowest reading since December of 2015 as new orders fell and production dipped 3.8 points to 42.7, the lowest level since July 2019. Furthermore, order backlogs slumped to a four-year low while inventories slumped by 5.8 points to 40.2, the lowest level since May 2016. Employment barely unchanged while supplier deliveries continued to expand. – MPP view: With virus-related growth concerns now rampant and the Treasury market increasingly reflecting a downbeat economic outlook, next week’s nonfarm payroll data could provide key support for sentiment if it remains robust, but downside surprises could be magnified by the current challenging macro backdrop.

Looking Ahead – Next week, January’s US nonfarm payrolls data is due, with consensus at 160k after last month’s slightly disappointing 145k. Also, US gauges of manufacturing and service activity are set for release, alongside the final major set of 4Q19 corporate earnings.