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Summary and Price Action Rundown
Global risk assets tumbled overnight, reversing a two-day rally, as investor hopes for a limited impact of the Wuhan virus dim amid the continued outbreak, while earnings turn more mixed. S&P 500 futures indicate a 0.7% loss at the open, which would deepen the index’s 1.7% downside from its record high earlier this month. Over the prior two sessions, investors had been attempting to look past the economic impact of the viral outbreak emanating from central China but concerning reports of its spread are pushing volatility levels higher again (more below). Overnight, equities in Asia posted significant losses, with Taiwan’s benchmark equity index plunging 5.8% upon reopening from its holiday closure. Meanwhile, mainland Chinese markets remain closed for the Lunar New Year holiday, with the reopening delayed until Monday at the earliest. EU equities are also down more than 1%. The re-intensifying risk aversion is lending further support to Treasuries, with the 10-year yield sinking to new three-month lows at 1.56%, while the dollar is once again little changed. Crude oil is resuming its steep downtrend amid a darkening demand outlook, with Brent falling toward $58 per barrel.
Relapse into Risk Aversion as Wuhan Virus Outbreak Expands
Investor fears over the human and economic costs of the virus intensified overnight amid rising reported infections and fatalities despite significant efforts to slow the spread. With reported cases climbing to 7,783 and deaths increasing to 170, investors are continuing to monitor the expanding contagion while debating whether the coronavirus should be roughly analogous to SARS, which had a limited impact on growth and equity markets over the medium term. Official Chinese statements on the situation remain cautious, with Premier Li yesterday calling the outbreak “grim and complex” while Russia is taking steps today to close its massive land border with China in an attempt to halt transmission. On the market front, Asian assets are unsurprisingly suffering the heaviest losses, and mainland markets are set to post steep declines when (or if) they reopen next week. While the official renminbi is not trading, the offshore version briefly depreciated past the closely-watched 7 per dollar level and losses since January 20th are nearing 2%. Meanwhile, a US-listed ETF of Chinese equities is trading 8.7% lower over that period.
Corporate Earnings Turn More Mixed
Amid a busy calendar of fourth quarter (4Q19) corporate reports, Facebook’s disappointing results are dampening sentiment, but overall trends remain upbeat. Facebook shares are down 7.3% in pre-market trading after the social media giant issued downbeat 4Q results following yesterday’s closing bell. Share of Apple, however, rose 2.1% yesterday after 4Q earnings easily beat analyst expectations. Boeing lost $636 million in 2019, which was the company’s first annual loss in 20 years, due to the drag from the grounded 737 Max. Still, its shares rose 1.7% on optimism that the FAA could approve the revamped 737 by mid-year. McDonald’s rallied 1.9% and GE jumped 10.3% as both companies topped estimates. While AMD 4Q earnings narrowly beat expectations, shares of the semiconductor maker plunged 6.0% after the company offered weak 1Q20 revenue guidance. Of the 182 S&P 500 companies that have reported 4Q19 results, 73% have topped earnings expectations and 66% have beaten sales estimates. The rest of the week features Amazon, UPS, Coca-Cola, Caterpillar, ExxonMobil, UPS, and Honeywell.
Accommodative Fed Tone – The Federal Reserve held steady yesterday and Chair Powell gave a balanced assessment of the outlook at the press conference, but futures markets continue to price in more cuts over the coming year, which is not consistent with an upbeat economic outlook. The Fed also said that overnight repo operations will continue at least through April 2020 to ensure that there is an ample supply of reserves throughout the financial system. However, the interest on excess reserves rate (IOER) was raised by 5 basis points (bps) to 1.6%, aiming to keep the federal funds rate within the FOMC’s target range, as IOER works a guardrail for the funds rate.
Bank of England (BoE) Holds Rates – With futures reflecting 50% odds of a cut, the BoE retained its rate settings in Governor Carney’s last meeting in a 7-2 vote. The pound gained 0.5% versus the dollar but remains modestly below its strongest level in around a year. This comes after a recent string of mostly downbeat UK data, although the orderly Brexit which will occur at month-end avoided the worst case scenario of a “no deal” departure.
US GDP Data Due – Later this morning, analysts will note the preliminary reading of 4Q US GDP, which is forecast to slip to 2.0% from 2.1% the prior quarter, although some estimates, including the Atlanta Fed’s GDP tracker figure of 1.7%, are moderately lower.
Summary and Price Action Rundown
Global risk assets are rebounding for a second straight session as investors hope for a limited impact of the Wuhan virus and focus on key US corporate earnings reports. S&P 500 futures point to a 0.4% gain at the open as the index continues to rebound from Monday’s steep loss of 1.6%, with the downside from its record high earlier this month at 1.6%. Investors are attempting to look past the probably short-lived economic impact of the viral outbreak emanating from central China though reports of its spread are keeping volatility relatively elevated (more below). Overnight, equities in Asia rebounded in tandem with the S&P 500 but gains were only modest, while mainland Chinese and other regional stock markets remain closed for the Lunar New Year holiday. In the EU, stocks are also moderately higher. Elevated uncertainty remains supportive of Treasuries, with the 10-year yield hovering just above three-month lows at 1.63%, while the dollar is once again little changed. Crude oil is retracing a portion of its steep downtrend, with Brent regaining $60 per barrel.
Market Sentiment Stabilizes Despite Spreading Wuhan Virus
Global market resilience is on display again today though investors continue to monitor increases of reported infections and fatalities and note the apparently lengthy incubation period, difficulty in detection, and high contagiousness. With reported cases rising to 6,057 and deaths increasing to 132, investors are continuing to monitor the expanding contagion, but investor concerns have eased as the most recent news, while troubling, suggests that the coronavirus should be roughly analogous to SARS, which had a limited impact on growth and equity markets over the medium term. Though price action is reflective of building investor optimism, official Chinese statements on the situation remain cautious, with Premier Li overnight calling the outbreak “grim and complex.” Market participants also note that Hong Kong officials are now blocking travel to and from the mainland. Over the weekend, analysts focused on reports detailing the highly contagious nature of the virus, which unlike SARS can spread during an asymptomatic gestation period that is estimated to last as long as ten days in some cases. Meanwhile, mainland markets, which closed starting last Friday for the Lunar New Year holiday, are set to remain shut beyond their scheduled reopening on Friday to the following Monday, at the earliest, although reports indicate that other business are preparing to stay closed for longer. Cases outside of China remain limited thus far.
Corporate Earnings Continue to Support Equities
Amid a busy calendar of fourth quarter (4Q19) corporate reports, some disappointments have occurred this week, but they remain the exception to broadly upbeat results. Apple reported a strong set of figures after yesterday’s closing bell, centered around strong iPhone sales, sending its stock 2.1% higher in pre-market trading. Starbucks also topped estimates but the impact of the virus on its sales in China are clouding the outlook, with its shares 1.6% lower ahead of the market open. Yesterday, shares of 3M plunged 5.7% after reporting disappointing quarterly earnings and revenue and announcing 1,500 job cuts across the company. Drugmaker Pfizer posted a similar downside surprise, with its stock closing down 5.1% and Harley-Davidson fell 3.0% after the company reported a continuing decline in its US sales, citing demographics headwinds. In other corporate news, Boeing secured more than $12 billion in financing to help fund its efforts to fix the 737 Max. Today’s reports include McDonalds, Microsoft, Facebook, Boeing, and Tesla. Of the 122 S&P 500 companies that have reported 4Q19 results, 73% have topped earnings expectations and 66% have beaten sales estimates. The rest of the week features Amazon, UPS, Coca-Cola, Caterpillar, ExxonMobil, UPS, and Honeywell.
Fed Decision Due – Ahead of today’s meeting of Federal Reserve, futures markets are pricing in no chance of a rate cut and negligible odds of a hike, as Fed officials have continued to signal a pause in their monetary easing cycle that included three consecutive rate cuts and a restart of asset purchases to expand the balance sheet in the second half of last year. Expectations are for a continued dovish tone, and futures reflect the restart of rate cuts later this year. Recently, various current and former Fed officials have made public statements seeking to dispel the relatively widespread perception among market participants that the renewed asset purchases and other efforts to inject liquidity into short-term funding markets, are a stealthy form of quantitative easing (or QE) and are fueling the ongoing rise in US equity prices. For context, the timing of this new asset buying program neatly coincides with a steep 15% gain in the S&P 500.
Mixed US Economic Data – December’s core durable goods orders fell 0.9% on the month, while the market was expecting no change. Home prices were strong, however, as the S&P CoreLogic Case-Shiller National Home Price Index Nationally, home prices rose 3.5% annually in November, up from 3.2% in October, after seeing decreases for much of 2019.
Will trade/tariff fights reemerge as a major risk in 2020?
Looking ahead to next week, more 4Q earnings are due alongside US and Chinese economic data and meetings for the Federal Reserve and the Bank of England.
• Corporate Earnings
• US Economic Data
• US Housing Data
• Federal Reserve
• Bank of England
• EU Economic Data
• China Economic Data
Summary and Price Action Rundown
Global risk assets are steadying this morning after yesterday’s sharp selloff despite ongoing fears over the expanding outbreak of the SARS-like virus in China and overseas, as investors attempt to focus on incoming corporate earnings reports. S&P 500 futures indicate a 0.4% gain at the open as the index attempts to rebound from yesterday’s 1.6% decline, which put the loss from its record high earlier this month at 2.6%. Investors continue to ponder the ramifications of the viral outbreak emanating from central China as reports of its spread cloud global growth expectations and market sentiment generally (more below). Overnight, equities in Asia again posted losses of around 1-3%, though mainland Chinese and other regional stock markets remain closed for the Lunar New Year holiday. In the EU, however, stocks are slightly higher but trading with a cautious tone. Elevated safe haven demand alongside a cloudier global growth outlook are supporting Treasuries, with the 10-year yield hovering around 1.60%, a three-month low, while the dollar is flat. Crude oil remains in a steep downtrend, with Brent at its lowest level since October, below $59 per barrel, despite signals yesterday that OPEC is already discussing options for further output cuts to support prices.
Uncertainties Over the Spread of the Wuhan Virus Keep Markets on Edge
Investors are bracing for further increases of reported infections and fatalities given the apparently lengthy incubation period, difficulty in detection, and high contagiousness. With reported cases jumping to 4,474 and deaths increasing to 107, investors are nervously continuing to monitor the expanding contagion. Last evening, Chinese President Xi addressed the issue in cautious public comments and market participants noted that Hong Kong officials are now restricting travel to and from the mainland as efforts to stem the outbreak continue to expand. Over the weekend, analysts focused on reports detailing the highly contagious nature of the virus, which unlike SARS can spread during an asymptomatic gestation period that is estimated to last an average of ten days and as long as fourteen days in some cases. This concerning revelation, combined with reports that five million people departed the Wuhan area in the days before travel restrictions were imposed, has intensified already heightened uncertainty about the scope of the outbreak. Meanwhile, mainland markets, which closed starting last Friday for the Lunar New Year holiday, are set to remain shut beyond their scheduled reopening on Friday to the following Monday, at the earliest, although reports indicate that other business are preparing to stay closed for longer. Cases outside of China remain limited thus far, with isolated infections in the US and elsewhere.
Corporate Earnings Season Enters Key Period
Analysts continue to expect this week’s calendar of fourth quarter (4Q19) corporate reports to provide support for equities, but the stakes are higher as disappointments will be magnified in the currently cautious market mood. Today features reports by Apple, 3M, Starbucks, Pfizer, LVHM, and Lockheed Martin, as the busiest week of earnings season picks up momentum today. Yesterday’s relatively short list of reporting companies kicked off this potentially pivotal week of corporate reports on a mixed note. Homebuilder DR Horton topped both earnings and sales estimates, sending its shares up 2.0% to dramatically outperform broader markets yesterday, even as December data on US new home sales surprised to the downside. Sprint, however, posted uneven results, undershooting on sales despite bettering earnings forecasts, and its shares sank 4.1% to a multi-year low. Whirlpool, which reported after the closing bell, also had a mixed 4Q, similarly missing on sales but exceeding earnings estimates, and its shares are down 1.3% in pre-market trading. Beyond today’s reports, the rest of the week features more major industry leaders, including Microsoft, Facebook, Amazon, McDonalds, Boeing, UPS, Coca-Cola, Caterpillar, ExxonMobil, Tesla, UPS, and Honeywell.
Economic Data Due – As investors continue to speculate over the potential global growth fallout from the coronavirus, US durable goods orders for December will be in focus today. In November, new orders unexpectedly fell 2.1% month-on-month (m/m) while the market was expecting a 1.5% rise. This also followed a weak October where orders only grew 0.2% m/m. US 4Q GDP is due on Thursday and Friday brings December income, spending and price data.
Investors Monitor US Political Developments – Although the impeachment process has had scant apparent impact on financial markets, given no clear erosion of Republican support for President Trump in the Senate, details from former National Security Council Director John Bolton’s upcoming book have added an incremental degree of intrigue to the proceedings. The strong assumption remains that the Senate will vote to keep President Trump in office. Meanwhile, analysts are also monitoring Senator Sanders’ surge in Iowa but, like impeachment, US political dynamics are likely to remain a backburner issue for investors until later this year.
Virus fears remain ahead of what has been a strong corporate earnings season thus far. The Fed and BoE move up a spot with meetings this week, while global growth and US political uncertainty round out the top five.
Summary and Price Action Rundown
Global risk assets retreated sharply overnight as investor concerns over the expanding outbreak of the SARS-like virus in China and overseas deepened following a weekend of disquieting developments. S&P 500 futures point to a 1.4% lower open to start the week after Friday’s cautious decline of 0.9%, which would put the index about 2.5% below its record high from earlier this month. Investors continue to ponder the ramifications of the viral outbreak emanating from central China as reports of its spread cloud global growth expectations and market sentiment generally (more below). Overnight, equities in Asia posted losses of 1-3%, though mainland Chinese and other regional stock markets remain closed for the Lunar New Year holiday. In the EU, stocks are posting declines of similar magnitude. The rising risk aversion is driving demand for safe havens like Treasuries, with the 10-year yield down 6 basis points to 1.63%, a three-month low, while the dollar is edging higher. Crude oil is continuing its downtrend, with Brent at its lowest level since October, below $59 per barrel, and OPEC is already discussing options for further output cuts to support prices.
Continued Spread of Wuhan Virus Dispels Market Calm
As numbers of reported infections and fatalities continue to rise, alongside indications of severe contagiousness, investors are increasingly doubtful that tight travel controls around the epicenter of the virus in Wuhan and other official measures in China will succeed in stemming the spread. With reported cases rising to 2,794 and deaths increasing to 80, investors are nervously continuing to monitor the expanding contagion. Over the weekend, analysts focused on reports detailing the highly contagious nature of the virus, which unlike SARS can spread during an asymptomatic gestation period that is estimated to last an average of ten days and as long as fourteen days in some cases. This concerning revelation, combined with reports that five million people departed the Wuhan area in the days before travel restrictions were imposed, has intensified already heightened uncertainty about the scope of the outbreak. Outside of Asia, where the infections and equity losses have been concentrated, risk appetite had remained generally resilient until last Friday’s sobering reports that sixteen Chinese cities and roughly 46 million people were under varying degrees of travel restrictions. Meanwhile, mainland markets, which closed starting last Friday for the Lunar New Year holiday, will stay shut beyond their scheduled reopening on Friday. Cases outside of China remain limited thus far, with isolated infections in the US, Canada, France, Japan, Thailand, Singapore, South Korea, Taiwan, Hong Kong, Vietnam, Malaysia, and Macau.
Corporate Earnings Season Enters Key Period
Analysts continue to expect this week’s calendar of fourth quarter (4Q19) corporate reports to provide support for equities, but the stakes are higher as disappointments will be magnified in the current climate of rising risk aversion. Last week’s array of earnings was broadly upbeat but featured some uneven results. On Friday, shares of chip giant Intel soared 8.1% after 4Q19 earnings and revenue handily beat consensus expectations. More importantly, Intel management forecast better-than-expected results for 1Q20. Meanwhile, shares of American Express rose 2.8% after reporting 4Q19 earnings which beat expectations with a “well-balanced mix” of fee, spending and lending revenues. However, results were not so rosy at competitor Discover Financial whose shares plummeted as much as 10% before recovering in late trading after the credit card company reported the total net charge-off rate in their loan book rose to 3.19%. Also, consumer lender Synchrony Financial fell 9.9% after missing revenue projections. Of the 86 S&P 500 companies that have reported 4Q19 results, 73% have topped earnings expectations and 66% have beaten sales estimates. The busiest segment of earnings season still lies ahead, with Apple, Microsoft, Facebook, Amazon, McDonalds, Boeing, UPS, Coca-Cola, Caterpillar, ExxonMobil, Starbucks, Lockheed Martin, Tesla, Whirlpool, UPS, Pfizer, 3M, and Honeywell among the key reports due this week.
Setback for Italian Populists Supports Local Bonds – Yesterday, a regional election in Emilia-Romagna proved to be a bulwark for the Democratic Party as a challenge from the right-wing populist Lega party fell short. With the fragile national ruling coalition of the Democratic Party and Five Star on increasingly shaky ground following the resignation of the Five Star leader earlier this month, analysts had speculated that a Lega win in traditionally left-leaning Emilia-Romagna could spark early elections. Italian bonds are posting a strong rally today, retracing much of their recent sell-off relative to German bunds.
Disappointing German Economic Data – The Ifo Institute’s survey of Germany’s business climate relapsed with a downside surprise for January, further clouding analysts’ nascent EU economic optimism that had already been dented by virus fears.
Looking Ahead – Tariff Man or Davos Man?
The new year has gotten off to a disquieting and dispiriting start in many ways, although through the lens of financial markets, the view is considerably rosier. Investors have remained quite calm in the face of a potential US-Iran war and now a deadly virus outbreak from China, with the quiet interim between these two worrisome developments featuring big equity gains.
The array of upside catalysts for US equities are well understood: easing global trade tensions, the positive tone of fourth quarter earnings reports, some encouraging global economic readings in recent days, and ultra-easy monetary conditions in the US and abroad.
On the last point, some Fed officials have recently sought to refute the idea that their massive asset purchases, which restarted in October and coincide with a ruler-straight uptrend in the S&P 500 since their inception, are anything but a technical tweak to lubricate front-end funding and bank reserve dynamics. But it seems that most market participants roundly disagree with this hair-splitting and see Fed liquidity operations as a key factor in fueling asset price upside.
Given ongoing uncertainty over funding market issues and prevailing belief that the Fed is effectively engaged in quantitative easing (QE4), we believe it is highly unlikely that the Fed will cease or even taper its balance sheet expansion as the program extends into 2Q and beyond. It is inauspicious for the Fed to make consequential policy decisions too close to an election, and that is all the more true now, as the Fed already blundered by overtightening in 2018 and has had President Trump on their case ever since, regularly lambasting them on Twitter.
While President Trump is sure to keep up rhetorical pressure on the Fed, his performance this week in Davos was considerably more balanced than some of his prior appearances. Attendees have told us that his speech was viewed as more of a campaign event than a real statement of global leadership on specific issues, but it was relatively restrained on the subjects of trade and geopolitics. He even put his hand up to join the Trillion Tree initiative.
However, Tariff Man was not entirely sublimated to Davos Man, as President Trump reiterated his threat to slap 25% tariffs on EU auto imports absent a trade deal. But he and French President Macron agreed to a tariff truce until year-end, past the US election, over digital taxes that US officials say unfairly single out US tech companies. And with the EU in a scramble to negotiate a post-Brexit trade deal with the UK, it is not clear that the negotiations with the US can be prioritized despite the US auto tariff threat.
Given the amorphous timeline for negotiating an EU trade deal and the lingering uncertainties over the executive authority to impose those particular auto tariffs, a full-blown US-EU trade fight seems unlikely to metastasize into a major market-mover this year, unlike the US-China tariff brawl from 2018 through last December. But that certainly does not mean that this week’s declines in shares of BMW or Daimler represent a great buying opportunity. EU auto stocks are undoubtedly suffering in part from fears that the virus in China will weaken demand in that key market for their vehicles, along with stocks of luxury goods companies and airlines. The evolution of the coronavirus outbreak trumps tariff considerations, and most other global macro factors, for the foreseeable future.
Looking ahead to next week, more 4Q earnings are due alongside US and Chinese economic data and meetings for the Federal Reserve and the Bank of England.
- Corporate Earnings
- US Economic Data
- US Housing Data
- Federal Reserve
- Bank of England
- EU Economic Data
- China Economic Data
Corporate Earnings Reporting: Packed calendar
Peak Earnings Season moves into its third week on Monday beginning with D.R Horton and Whirlpool. Tuesday will focus on Apple, AMD, eBay, Harley Davidson, 3M, Pfizer and Starbucks. Wednesday is one of the busiest reporting days of the season with ADP, Boeing, Facebook, General Dynamics, GE, Hess, Mastercard, McDonald’s, Mondelez, Microsoft, Nasdaq, PayPal, AT&T, T. Row Price and Wynn Resorts. Thursday brings Amgen, Amazon, Biogen, DuPont, MSCI, Northrop Grumman, Raytheon, Sherwin-Williams, UPS, Visa and Verizon. Friday closes out the week with Caterpillar, Colgate-Palmolive, Chevron, Honeywell and Exxon Mobil.
Of the 86 S&P 500 companies that have reported 4Q19 results, 73% have topped earnings expectations and 66% have beaten sales estimates.
US Economic Data: Big figures
Tuesday will revolve around US Durable Goods Orders for December. In November new orders unexpectedly fell 2% month-on-month (m/m) while the market was expecting a 1.5% rise. This also followed a weak October where orders only grew 0.2%. Demand for transportation equipment led the fall, while declines were also seen in orders for machinery and primary metals.
With the signing of the Phase 1 trade deal with China last week, the US Trade Deficit has become a little less market-moving, but still important. In November the deficit narrowed to $43.1 bil from $46.9 bil. The trade gap shrank for the third straight month to the lowest since October 2016. Imports dropped 1% to the lowest level in 2 years due to falling purchases of aircraft, computers and cell phones. Exports increased 0.7% to $209 bil, boosted by sales of drilling and oilfield equipment, jewelry, autos and aircraft engines. The goods trade deficit with China narrowed 15.7% to $26.4 bil, with imports dropping 9.2% and exports jumping 13.7%. Year-to-date, the total deficit has narrowed $3.9 bil.
On Thursday in the US we will get the first estimate of US 4th Quarter 2019 GDP. In 3Q19 the US economy grew by an annualized rate of 2.1%, following a 2% expansion in 2Q19. The increase reflected positive contributions from PCE, federal government spending, residential investment, exports, and state and local government spending that were partly offset by negative contributions from nonresidential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased. Consensus estimates are looking for GDP growth of 2.1%.
Friday’s focus will be on US Personal Income and Spending for December. In November Personal Income rose 0.5% m/m, following a 0.1% advance in October. Consumer Spending rose 0.4% m/m, following a 0.3% rise, as purchases of motor vehicles increased, as well as spending on healthcare. The Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index, is also included in the same report. November PCE rose 0.2% m/m, the same pace as in October. Services prices advanced 0.2%, while goods prices were flat, after rising 0.3% in the prior month. Prices slowed for non-durable goods along with fell for durable goods. Year-on-year, the PCE price index advanced 1.5%, above the 1.4% rise in October. Core PCE, which excludes prices of food and energy, increased 0.1% m/m, the same pace as in October. Core PCE is the Fed’s preferred measure of inflation and they target a 2% level. Year-on-year, Core PCE went up 1.6%, easing from a 1.7% increase.
The week closes with the MNI Chicago Business Barometer. In December the PMI rose to 48.9 from 46.3 in November. The index remained in contraction territory for the fourth straight month. Production, new orders, order backlogs, employment and inventories indexes continued in negative territory. Supplier delivery times was the only component among the main five remaining above the 50-mark, which denoted expansion. Prices at the factory gate jumped 9.2% to 58.4, hitting the highest level since August. Business sentiment dropped by 1.2 points to 46.2 in the fourth quarter, marking the lowest quarterly reading since 2Q09.
US Housing Data: Safe as houses
New Home Sales for December will be released on Monday. In November sales rose 1.3% m/m to a seasonally adjusted annual rate (SAAR) of 719K, recovering from a 2.7% drop in October and handily beating market expectations of a 0.3% fall. Analysts are crediting low mortgage rates supporting the housing market.
Wednesday will see Pending Home Sales for December. November sales climbed 7.4% year-on-year (y/y), the largest annual increase in pending home sales since June 2015. Contracts rose in all 4 regions, with the West up 14.0%, the South 7.7%, the Midwest 5.0% and the Northeast 2.6%. On a monthly basis, pending home sales rose 1.2%, rebounding from a 1.3% fall in October.
Federal Reserve: How easy is too easy?
Wednesday’s focus will be on the Federal Reserve’s first Interest Rate Meeting of the new year. At its meeting in December the FOMC left the target range for the federal funds rate unchanged at 1.5-1.75%, as was widely expected and following a 25bps cut at the October meeting. Policymakers consider the current stance of monetary policy appropriate to support sustained growth, strong labor market conditions, and inflation near the 2% target. They also kept their growth forecasts unchanged for this year at 2.2%; 2% for 2020; 1.9% for 2021 and 1.8% for 2022. Inflation is projected at 1.5% in 2019; 1.9% in 2020; 2% in 2021 and 2% in 2022, same as the September projection. Regarding the future path of the fed funds rate, most participants expect no changes in 2020, although a hike is still seen in 2021, while the market is currently pricing in one cut in the back half of 2020. At next week’s meeting the market is pricing in 86% odds that the Fed keeps rates at the current levels and 14% chance that they hike 25bps. Investors will be attuned to any discussion by Chair Powell of financial conditions or, more specifically, asset price inflation. Expressions of concern on either of these points are unlikely but would have a material impact on investor sentiment.
Bank of England: Coin flip
On Thursday the Bank of England (BoE) holds their own Policy Meeting. At their December meeting the BoE’s Monetary Policy Committee (MPC) voted by a majority of 7-2 to hold the Bank Rate at 0.75%, as policymakers took a wait-and-see approach following Prime Minister Boris Johnson’s election victory and its possible implications on Brexit. Two members voted for a second month in a row for a rate cut amid concerns about the job market. With the House of Lords dropping their opposition to Prime Minister Johnson’s bill this week and the Queen signing it into law, the UK is now set to formally leave the EU at the end of the month. However, the agreement needs to be formally ratified by the European Parliament on Jan. 29, following which Britain will enter a transition period, scheduled to last until the end of the year, during which it will continue to be bound by EU laws until it negotiates a new trade deal with the remaining 27 member states. On the back of these recent developments the market is pricing in 46% odds that the MPC votes to cut rates by 25bps next week and 54% odds they hold steady.
EU Economic Data: Winter thaw?
On Monday in Germany the focus will be on the Ifo Business Climate Index. December rose to 96.3 from 95.1 in November and easily beating market expectations of 95.5. This is the highest reading since June and was boosted by an improvement in companies’ assessment of the current situation, as well as their expectations of the future. Across sectors, sentiment improved among manufacturers and service providers, but deteriorated among traders and constructors.
Wednesday brings a glimpse into the state of the German Consumer with the GfK Consumer Sentiment Indicator. January edged down to 9.6, which is the lowest level since November 2016. Economic expectations dropped 6.1 points to -4.4, far below the long-term average of 0, as Germans were less optimistic about the growth outlook. Furthermore, income expectations fell 10.5 points to 35.0, the lowest since October 2013, amid fears of more job cuts in some industrial sectors, mainly in the car industry and its suppliers. However, the willingness to buy went up 2.2 points to 52.2.
Thursday will show how the European business sector is feeling about the economy with the Business Climate Indicator for the Euro area for January. December fell by 0.04 points to -0.25, the lowest level since August 2013, as managers’ assessments of past production and stocks of finished products declined sharply. Also, their assessments of overall order books and export order books deteriorated, while production expectations improved firmly.
Chinese Economic Data: Pre-outbreak reading
Also, on Thursday is the Official NBS Manufacturing PMI in China. In December the PMI was unchanged at 50.2. The latest reading pointed to the second straight month of expansion in factory activity, supported by government stimulus measures and optimism surrounding a trade war truce with the US. Output growth accelerated and new orders continued to rise, boosted by a rebound in exports. However, employment fell further. Future expectations softened slightly from November’s seven-month high. January’s readings are expected to settle slightly lower and manufacturing is forecast to barely avoid dipping back into contraction.
Summary and Price Action Rundown
Global risk assets steadied overnight as investors remain wary and reactive to news of the expanding outbreak of the SARS-like virus in China while parsing US corporate earnings and some key global economic data this morning. S&P 500 futures indicate a 0.2% higher open after another directionless session yesterday, which would put the index back to its record high from Friday. Investors continue to ponder the ramifications of the viral outbreak emanating from central China as reports of its spread cloud global growth expectations and market sentiment generally. Overnight, equities in were mostly higher, but mainland Chinese stock markets have begun a week-long closure for the Lunar New Year holiday. In the EU, stocks are outperforming amid upbeat corporate news. Treasuries are ceding some gains from their recent rally though investor demand for safe havens remains elevated, while the dollar is edging up as central bank easing expectations depress the pound and the euro (more below). Crude oil remains under pressure, with Brent at its lowest level in over a month, below $62 per barrel, as analysts continue focus on worsening demand risks and ample US shale oil supply.
Investor Sentiment Holds Up Despite Ongoing Virus Outbreak
Numbers of reported infections and fatalities continue to rise, but investors are hopeful that mandatory screening and tight travel controls around the epicenter of the virus in Wuhan will stem the spread. With reported cases rising to 881 and deaths increasing to 26, investors are warily continuing to monitor the expanding contagion. Outside of Asia, where the infections and equity losses have been concentrated, risk appetite remains generally resilient as analysts assess the effectiveness of China’s intensifying efforts to contain the spread. Reports this morning indicate that ten Chinese cities and roughly 40 million people are under varying degrees of travel restrictions and many public and private venues are cancelling events. Meanwhile, mainland markets will be closed for a week starting today for the Lunar New Year holiday. Cases outside of China remain limited thus far, with isolated infections in the US (Washington state), Japan, Thailand, Singapore, South Korea, Taiwan, Hong Kong, and Macau.
Corporate Earnings Remain Broadly Supportive of Stocks
The second week of fourth quarter (4Q19) corporate reporting season is closing out on a generally upbeat note as investors look ahead to key releases next week. Shares of Intel are 6.0% higher in pre-market trading, heading for a new 20-year high, after the chip giant handily topped both earnings and revenue forecasts for 4Q19 and management conveyed a positive outlook for this year. Results for last quarter were also supportive for shares of US pipeline operator Kinder Morgan yesterday, as well as for US railroad operator Union Pacific. There was some unevenness to yesterday’s results, however, as insurance giant Travelers, investment bank Raymond James, consumer bellwether Procter & Gamble, and mining giant Freeport MacMoRan posted varying degrees of disappointments for investors. Of the 79 S&P 500 companies that have reported 4Q19 results, 73% have topped earnings expectations and 67% have beaten sales estimates. American Express reports this morning to close the week. The busiest segment of earnings season still lies ahead, with Apple, Microsoft, Facebook, Amazon, McDonalds, Boeing, UPS, Coca-Cola, Caterpillar, ExxonMobil, Starbucks, Lockheed Martin, Tesla, Whirlpool, UPS, Pfizer, 3M, and Honeywell among the key reports due next week.
Mixed EU Economic Data – January’s preliminary composite purchasing managers’ index (PMI) for the EU undershot estimates, printing 50.9 to match the prior month’s reading versus a consensus forecast of improvement to 51.2. For context, PMI readings above 50 denote expansion. The underlying details were somewhat more encouraging than the headline figure, however, as the manufacturing PMI, which has been the main source of weakness in the region, improved to 47.8, beating estimates of 46.8 and December’s 46.3. Services PMI dipped to 52.2 versus expectations for this gauge to remain steady at 52.8. Importantly, Germany’s manufacturing and services PMI readings both posted upside surprises, although the former remained in contractionary territory at 45.2. This follows yesterday’s decision by the European Central Bank (ECB) to keep policy settings on hold. This morning, however, President Lagarde indicated that ECB policy is not on “autopilot,” which sent the euro lower, as most analysts expect that any additional moves would be further accommodation.
Better UK Economic Data – The UK’s January PMI readings beat projections on both the manufacturing and service segments, which dampened expectations for a rate cut by the Bank of England (BoE) next week, though futures still see 48% odds of a move from 0.75% to 0.5%.
Next Week – In addition to earnings and the BoE and Fed meetings, analysts will be attuned to US 4Q GDP, December’s US income, spending, and price data, and China’s December PMI.
Summary and Price Action Rundown
Global risk assets were mostly lower overnight as investors continue to monitor China’s efforts to contain the outbreak of a SARS-like virus while awaiting more US corporate earnings and a European Central Bank meeting this morning. S&P 500 futures point to a flat open after yesterday’s choppy session, which would hold the index just below its record high from Friday. Investors continue to ponder the ramifications of the viral outbreak emanating from central China as reports of its spread dampen global growth expectations and market sentiment generally. Overnight, equities in Asia turned lower again, with mainland Chinese stocks leading to the downside before a week-long closure for the Lunar New Year holiday. Meanwhile, EU stocks are dipping ahead of the European Central Bank decision. Treasuries are extending their recent rally as investors seek safe havens, while the dollar remains flat. Crude is continuing to slide as analysts focus on demand risks and ample US shale oil supply.
Concerns Over the Virus Outbreak Keep Global Equities in Check
While numbers of reported infections and fatalities continue to rise, investors are hopeful that newly implemented mandatory screening and tight travel controls around the epicenter of the virus in Wuhan will stem the spread. With reported cases rising to 555 and deaths increasing to 17, alongside the first infection in Hong Kong, investors are wary of expanding contagion. Outside of Asia, where the infections and equity losses have been concentrated, risk appetite remains generally resilient as analysts assess the effectiveness of China’s intensifying efforts to contain the spread. Reports over the last day have focused on tightened travel restrictions around the epicenter of the outbreak in Wuhan and the surrounding cities, as well as mandatory screening. The Shanghai Composite sank 2.8% overnight to put losses at 3.9% since the first reports of the outbreak. Meanwhile, the renminbi continued its slide below its recent five-month highs versus the dollar, losing 0.4% overnight for a three-day decline of 1.0%. For context, mainland markets will be closed for a week starting tomorrow for the Lunar New Year holiday. Experts note that the holiday poses a substantial risk of dramatically widening the outbreak given that tens of millions of Chinese travel home or to a vacation destination for the holiday week. Cases outside of China remain limited thus far, with isolated infections in the US (Washington state), Japan, Thailand, South Korea, Taiwan, Hong Kong, and Macau.
Corporate Earnings Remain Broadly Upbeat Despite Some Uneven Results
Yesterday’s fourth quarter (4Q19) corporate reports again featured a number of high-profile upside earnings surprises, although some disappointments were in the mix. Shares of Capital One jumped 4.5% after the bank reported 4Q earnings of $2.49 a share, which topped analyst’s estimates of $2.37. The beat was driven by higher loan and deposits along with strength in the credit card business. However, shares of regional bank Zions fell 4.1% after reporting a fourth straight quarter of declining loan balances. Northern Trust also saw its share price fall, losing 3.3% in trading yesterday as earnings per share of $1.70 came in below expectations of $1.77 along with rising expenses that were above analyst’s estimates. After Tuesday’s closing bell, Netflix issued nuanced results, with earnings beating estimates but new subscribers coming in lower than expected, sending its shares down 3.6% yesterday. Meanwhile, IBM impressed analysts, beating both sales and profit projections on strong cloud computing business, lifting its shares 3.4%. Of the 64 S&P 500 companies that have reported 4Q19 results, 71% have topped earnings expectations and 67% have beaten sales estimates. Intel, Comcast, Proctor & Gamble, American Airlines, Discover, Southwest, and Freeport McMoRan all issue earnings today, while American Express reports tomorrow to close the week.
European Central Bank (ECB) in the Spotlight – In her second meeting as head of the ECB, President Lagarde is set to detail the upcoming strategic policy review that she is spearheading, which is due to be published in about a year. She has indicated that the focus of the review will be on the ECB’s approach price stability, while tackling climate change will be a key consideration. Otherwise, policy settings are expected to remain fixed at today’s meeting. This comes after the Bank of Canada (BoC) left its benchmark interest rate unchanged at 1.75% yesterday but shifted to a more accommodative tone, sending the Canadian dollar 0.7% lower versus the US dollar since the meeting. Next week, the Bank of England meets, with futures markets pricing in 58% odds of a cut in the policy rate from 0.75% to 0.5%.
Crosstalk on EU Car Tariffs – Although the tone from the World Economic Forum in Davos has been generally constructive, analysts are parsing mixed signals from the Trump administration on the possibility of imposing tariffs on EU autos. While President Trump stated yesterday that he would be “very surprised” if he had to implement tariffs on European cars, he and other administration officials have reiterated to threat to do so in the absence of a trade deal.