Market Reports

Summary and Price Action Rundown

Global risk assets are continuing this week’s sharp rebound as investors shake off outbreak fears amid reports of progress toward a treatment and data suggesting a slower spread. S&P 500 futures indicate a 0.8% gain at the open, which would bring the index nearly level with its record high from mid-January. Investors have seized upon a few encouraging developments this week in the ongoing efforts to combat the coronavirus, allowing the focus to shift back to supportive earnings and other positive factors, but the general mood remains cautious with volatility levels elevated. Overnight, equities in Asia followed the Shanghai Composite higher for a second straight session, while EU equities overcame early losses as analysts focused on reports of progress toward a vaccine for the coronavirus. As risk appetite continues to improve, Treasury yields are edging further above their recent three-month trough, but remain at very low levels, with the 10-year yield at 1.63% after starting the year at 1.92%. The dollar is flat and currency market volatility has remained generally subdued. Crude oil prices are rebounding this morning as an OPEC technical committee conference stretches to a second day, with the potential for a full cartel meeting as early as next week to consider emergency cuts.

Hopes for Coronavirus Containment Fuel the Risk Asset Rebound

Investor sentiment is improving for a third straight session this week, levitating risk asset prices worldwide, amid hopes that the worst may be over for the outbreak. Reports overnight that UK scientists have made progress toward a vaccine, which some reports are calling a “breakthrough,” provided a further boost to already surging investor optimism over ongoing efforts to counter the coronavirus. Encouraging news over the past few days about the effectiveness of a drug produced by Gilead Sciences was underscored by efforts to secure a local patent for the drug in China. Headlines are also touting a possible slowdown in the infection rate, with 3,971 new reported cases yesterday versus 5,072 on Monday. Total reported infections have risen to 24,604 and fatalities to 494. The Shanghai Composite rallied for a second straight day, adding 1.3% 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 also continued to gain, appreciating 0.3% further past the closely-watched 7 to the dollar level.

 Corporate Earnings Retain a Positive Tone Despite Some Uneven Results

Despite a few high-profile disappointments, fourth quarter (4Q19) corporate reports mostly continue to impress, while shares of Tesla extended their dizzying uptrend. Shares of Google fell 2.6% yesterday after the IT giant reported lower-than-expected revenue, with some key business components underperforming. Ford’s report after yesterday’s closing bell also missed estimates, sending its stock price 8.2% lower in pre-market trading. Disney’s results beat forecasts, but are still down 0.5% ahead of the opening bell. Of the 264 S&P 500 companies that have reported 4Q19 results, 75% have topped earnings expectations and 65% have beaten sales estimates. Today features GM, MetLife, and Qualcomm and the remainder of this final week of peak earnings reporting season brings results from Kellogg, Philip Morris, T-Mobile, Tyson Foods, and Twitter. Meanwhile, Tesla’s stock price surged another 13.7% yesterday after rallying 19.9% on Monday, putting the market capitalization of the electric car maker above $900 billion, with gains of over 110% so far this year. Tesla is one of the most heavily shorted stocks in the S&P 500, meaning that many speculators had bet that Tesla shares were overvalued and should trade lower, only to be forced to cover positions by buying back the carmaker’s stock at ever higher prices over the past month.

          Additional Themes

Encouraging Pre-Virus Global Growth Data – The UK service sector purchasing managers’ index (PMI) for January registered a solid 53.9, rising from a preliminary estimate of 52.9. This put the final composite of both manufacturing and service PMIs for last month at 53.3, well above the earlier projection of 52.4 and at the gauge’s highest level since late 2018. For context, PMI readings above 50 denote expansion in the sector. In the EU, the service sector PMI for January matched its preliminary estimate at 52.5, rendering a composite January PMI reading of 51.3, extending the gradual improvement from last September’s multi-year low of 50.1. EU December retail sales data, however, undershot estimates, slowing to 1.3% year-on-year from 2.3% the prior month. Later today, analysts will note two separate readings of US service sector PMI, as well as a private sector jobs number, which is a prelude to Friday’s January nonfarm payroll data. These will be among the final economic data points before the impact of the coronavirus begins to distort global growth figures over the coming months.

Global Central Banks – The trend of ever easier monetary policy around the world continues apace today, with the Bank of Thailand unexpectedly reducing its policy rate by 25 basis points to a record low 1.0%, while Brazil’s central bank is set to cut rates at its meeting later today.

Summary and Price Action Rundown

Global risk assets are extending yesterday’s rebound this morning as stabilization of mainland Chinese markets overnight lifts sentiment, as investors weigh concerns over the coronavirus outbreak against broadly supportive corporate earnings. S&P 500 futures point to a 1.2% gain at the open, which would halve the index’s current 2.4% downside from its record high earlier this month. As witnessed last week, investors are attempting to look past the impact of the viral outbreak emanating from central China but the general mood is cautious and volatility levels remain elevated. Overnight, equities in Asia took their cue from the recovery of the Shanghai Composite, which overcame early losses to gain 1.3% on the day (more below), and EU equities are posting similar upside. Treasuries are continuing to retrace a modest portion of their recent rally, which has been driven by safe haven demand, with the 10-year yield edging further above three-month lows at 1.57%. The dollar is flat as the renminbi steadied. Even beleaguered crude oil markets are posting some upside, though Brent remain near multi-month lows below $55 per barrel despite some indications of additional OPEC efforts to support prices.

Coronavirus Risk Remains in Focus

As investors continue to monitor the pace of the outbreak, risk asset upside is being fueled by hopes of responsiveness to antiviral drugs and last night’s rebound in mainland Chinese markets. The Shanghai Composite recovered from early losses after losing 7.7% yesterday in a volatile reopening after being closed for more than a week on an extended Lunar New Year holiday break. Official and unofficial state support is being credited with helping the index bounce back. Specifically, the People’s Bank of China injected liquidity for a second straight session after providing 1.2 trillion renminbi to domestic banks on Monday, alongside modest cuts of certain policy rates, a ban on short-selling stocks, and reports of major equity purchases by large state-owned insurance companies. The renminbi also retraced yesterday’s losses, appreciating past the closely-watched 7 to the dollar level. Still, virus-related headlines are keeping investors on edge, with reported infections rising to 20,679 and fatalities to 427, as more governments around the world impose travel restrictions on mainland China.

 Isolated Disappointments Amid Broadly Upbeat Corporate Earnings

Although fourth quarter (4Q19) corporate reports generally continue to impress, Google joined Facebook in registering a rare downside surprise. Google topped earnings estimates but fell short of projected revenues in its 4Q report that followed yesterday’s closing bell, sending the IT giant’s stock price 3.8% lower in pre-market trading. Of the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google), which together have accounted for a disproportionate amount of S&P 500 upside in recent years, results from both Facebook and Google for last quarter left analysts underwhelmed, while the others topped estimates. Meanwhile, ahead of its earnings report today, shares of Gilead Sciences rose 5.0% yesterday on news that the company is offering an experimental drug to treat the new coronavirus. The drug, called Remdesivir, is not licensed or approved in any country but is being used as emergency treatment in some cases. The company is working closely with the Chinese government to treat patients. Today also features reports from Ford, Disney, and ConocoPhillips. Of the 233 S&P 500 companies that have reported 4Q19 results, 75% have topped earnings expectations and 63% have beaten sales estimates. The rest of this final week of peak earnings reporting season includes reports from Aflac, Allstate, Prudential, Clorox, Chipotle, GM, MetLife, Qualcomm, Kellogg, Philip Morris, T-Mobile, Tyson Foods, and Twitter.

          Additional Themes

Traders Note Commerce Department Currency Rule – Yesterday, the US Commerce Department published a rule first proposed last spring that will allow the agency to apply tariffs to counteract the impact of undervalued currencies in response to complaints brought by individual US companies. There has been no immediate market reaction, and global currency volatility remains exceptionally subdued. Analysts are comparing this policy with the Treasury Department’s biannual foreign exchange report, which designates which countries are manipulating or on watch for manipulation of their currencies based on a mix of fixed criteria and official judgement, but provides little in the way of enforcement mechanisms. For context, China was designated a currency manipulator by the Treasury Department last August at the height of the US-China trade fight, but the designation was lifted in advance of the Phase One agreement signing and was never included in the official Treasury foreign exchange report.

US Politics Remain a Backburner Issue for Markets – Analysts are noting the ongoing confusion over the results of yesterday’s Democratic caucus in Iowa and will monitor tonight’s State of the Union address, but no discernable market reactions are expected. US politics are unlikely to be a significant driver of price action until closer to the election in November.

Summary and Price Action Rundown

Global risk assets are attempting to stabilize this morning after Friday’s sharp decline and severe losses for newly reopened mainland Chinese markets overnight, as investors weigh concerns over the coronavirus outbreak against broadly supportive corporate earnings. S&P 500 futures indicate a 0.4% gain at the open, which would pare the index’s 3.1% downside from its record high earlier this month. Last week, investors had been attempting to look past the impact of the viral outbreak emanating from central China but by Friday the growing uncertainty prompted a steep US equity selloff and volatility levels remain elevated. Overnight, equities in Asia were mixed even as mainland Chinese markets suffered significant downside upon reopening from the Lunar New Year holiday. Meanwhile, EU equities are posting modest gains. Treasuries are retracing a portion of their recent rally, which has been driven by safe haven demand, with the 10-year yield edging above three-month lows at 1.54%. The dollar is stronger as the pound and renminbi both decline around 1% (more below). Crude oil is extending its steep downtrend as Brent prices sink to multi-month lows below $57 per barrel.

Volatility Remains Elevated Amid Coronavirus Concerns

As investors continue to monitor the pace of the outbreak, mainland Chinese markets opened to heavy selling even as authorities attempted to cushion the blow, while US stocks are set to stabilize after Friday’s plunge. The Shanghai Composite reopened to major declines after being closed for more than a week on an extended Lunar New Year holiday break. Losses of nearly 10% marked the intraday low, with support from various policies helping the index recover to a session decline of 7.7%. Specifically, Chinese officials effected a variety of supportive initiatives, including a People’s Bank of China liquidity injection of 1.2 trillion renminbi into domestic banks, modest cuts of certain policy rates, and a ban on short-selling stocks. The renminbi, meanwhile, lost 1.1% versus the dollar, depreciating past the closely-watched 7 level, matching losses already reflected in last week’s offshore renminbi trading. Headlines over the weekend kept investors on edge, with reported infections rising to 17,485 and fatalities to 362, as more governments around the world impose travel restrictions on mainland China. Nevertheless, US equities are attempting to recoup some of Friday’s nearly 2% losses, which were spurred by fears of adverse developments while markets were closed on Saturday and Sunday.

 Corporate Earnings Remain Supportive of Equities

Although fourth quarter (4Q19) corporate reports generally continue to impress, coronavirus-related risk aversion has capped gains. Amazon returned to the $1 trillion market club on Friday, which includes Apple Google and Microsoft, after 4Q earnings smashed expectation and the company also gave upbeat guidance for 1Q20. Shares rose 7.4%. Also, 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 Colgate-Palmolive rose 6.2% after 4Q19 sales beat consensus expectations and in-line earnings. 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.” Of the 225 S&P 500 companies that have reported 4Q19 results, 74% have topped earnings expectations and 64% have beaten sales estimates. This is the final week of peak earnings reporting season, and features Google, Aflac, Allstate, Prudential, Clorox, Chipotle, Disney, Ford, GM, MetLife, Qualcomm, Kellogg, Philip Morris, T-Mobile, Tyson Foods, and Twitter.

          Additional Themes

OPEC Seeks to Support Oil Prices – With the impact of the coronavirus on oil demand worsening an already challenging outlook, and Brent crude trading at its lowest level since August, headlines this morning indicate that OPEC is considering an emergency meeting to push for additional supply cuts to support prices. For context, reports this morning that China’s oil demand has dropped 20% during the coronavirus outbreak sent crude oil prices spiraling downward but the OPEC news has roughly halved the losses to 2.6%. February 14-15 are said to be the dates under consideration for the OPEC meeting, amid estimates of a potential 500k barrel per day coordinated output cut, though Iran and Russia are reportedly reluctant.

Pound Slides Post-Brexit – To start its first full week of trading following the UK’s official departure from the EU on Friday, the pound is 1.1% lower versus the dollar as the focus shifts from Brexit to the upcoming challenge of forging a trade agreement between the EU and UK. Even so, the pound remains well off August’s multi-year lows. Today’s speech by Prime Minister Johnson emphasized his willingness to reject an unfavorable post-Brexit trade deal with the EU while Chief EU negotiator Barnier stressed that the UK will need to remain bound by an array of EU standards in any future trading relationship.

Summary and Price Action Rundown

Global risk assets are lower again this morning after yesterday’s intraday comeback, as markets struggle to find direction amid growing concerns over the coronavirus outbreak but broadly supportive corporate earnings and decent growth indicators. S&P 500 futures point to a 0.3% loss at the open, which would add to the index’s 1.4% downside from its record high earlier this month. In recent days, investors have been attempting to look past the economic impact of the viral outbreak emanating from central China but uncertainty remains high and volatility levels are elevated (more below). Overnight, equities in Asia were mixed as selling pressure increased going into the weekend. Meanwhile, mainland Chinese markets remain closed for the Lunar New Year holiday, with the reopening delayed until Monday at the earliest. EU equities are under moderate pressure as well, losing 0.4%. Treasuries continue to benefit from safe haven demand, with the 10-year yield revisiting yesterday’s three-month lows at 1.56%, while the dollar is once again little changed. Crude oil, however, is pausing its steep downtrend as Brent prices hold above $58 per barrel, near their lowest level since August.

Wuhan Virus Outbreak Keeps Investors on Edge

Although sentiment steadied yesterday following measured statements from the World Health Organization (WHO), selling pressure has reemerged 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 have once again darkened the market mood ahead of the US trading session, and like last Friday, investors may be prone to reduce equity 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 is estimating 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, the S&P 500 has 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 9,776 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.”

 Corporate Earnings Remain Broadly Upbeat Despite Isolated Disappointments

Impressive results from Amazon yesterday afternoon are balancing the drag from Facebook, as fourth quarter (4Q19) corporate reports generally continue to impress. Shares of Amazon are up 8.8% after the consumer giant handily topped estimates after yesterday’s closing bell. This follows a downbeat report from Facebook, which sent its stock 6.1% lower yesterday after the company reported a 51% rise in expenses related to the company’s privacy and security improvements. Meanwhile, Tesla surged 10.3% as management said that they expect positive cash flow and net income on a regular basis going forward. Coca-Cola also rallied, gaining 3.3% after 4Q earnings topped estimates. Verizon, Dupont, and Truist Financial were among the few disappointments. Caterpillar, Honeywell, Exxon Mobil, and Chevron issue reports today to close a busy and generally impressive week of earnings. Of the 212 S&P 500 companies that have reported 4Q19 results, 74% have topped earnings expectations and 64% have beaten sales estimates. Next week features Google, Aflac, Allstate, Prudential, Clorox, Chipotle, Disney, Ford, GM, MetLife, Qualcomm, Kellogg, Philip Morris, T-Mobile, Tyson Foods, and Twitter.

          Additional Themes

Mixed Global Economic Data – Eurozone GDP expanded just 0.1% quarter-on-quarter in 4Q19, putting growth at a meager 1.0% on the year, sinking below 3Q’s 1.2% pace and undershooting the 1.1% forecast. Regional inflation remained limp as well, with a gauge of January’s core consumer prices reflecting a dismal 1.1% versus 1.2% expected and the prior month’s 1.3%. Meanwhile, China’s purchasing managers’ indexes (PMIs) for January were roughly as expected, with manufacturing stalled at 50 but services surprising to the upside at 54.1. For context, PMI readings above 50 denote expansion and below 50 reflect contraction of activity in the sector.

Decent US GDP Data – With investors bracing for economic fallout from the Wuhan virus over the coming months, fourth quarter GDP narrowly topped estimates, leaving full year 2019 GDP at a mild 2.3%. With the first estimate for 4Q19 GDP, the BLS estimated that the US economy grew 2.1% for the quarter, the same as in 3Q and just above consensus expectations of 2.0%. Today, analysts will note December income, spending, and inflation figures, and next week, January’s nonfarm payrolls and US PMIs will be in focus.

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 20^th 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.

          Additional Themes

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.