The Market Today

Accelerating Virus Spread Outside of China Sends Markets into a Tailspin

by Craig Dismuke, Dudley Carter


Today’s Calendar: Monday’s economic release schedule offers a subdued start to an incredibly busy weekly calendar filled with updates on each key component of the economic outlook. Already this morning, the Chicago Fed’s National Activity index was weaker than expected in January, fanning the flames of worry created by dour PMI data released last Friday (more below). The details of the report showed that, even before the recent breakout of the virus, production and income; the labor market; and sales, orders and inventories all continued to experience below-trend growth. At 9:30 a.m. CT, the Dallas Fed’s Manufacturing Activity Index for February will be announced and is expected to point to activity stagnating, an actual improvement compared to January’s dip.

Later This Week: In addition to this morning’s regional Fed releases, three additional reports are scheduled for the remainder of the week – manufacturing activity indices from the Richmond and Kansas City Fed Banks and the MNI Chicago PMI. Three housing reports will show the latest home price trends and activity updates on new home sales and pending contracts on existing properties. Both consumer confidence surveys will be refreshed, the Conference Board’s index on Tuesday and the survey from the University of Michigan on Friday. Considering how significantly the outlook has been impacted by the new coronavirus, the second estimate of 4Q GDP will be less important than more recent trends in business spending in Thursday’s durable goods report and consumer spending in Friday’s personal income and outlays data.

Virus Watch: Away from the economic data, markets will continue to monitor developments related to COVID-19. While the rate of growth of new infections in China has slowed in recent days, an explosion in the number of cases in South Korea and separate outbreaks in Italy have heightened anxieties about an acceleration of the illness outside of China. Signs that the virus is potentially spreading at a more rapid rate outside of China could be a spark for even steeper cuts to global growth estimates and a prolonged period of market volatility and worry.


Weekend Updates Showed Acceleration of Virus Spread Outside of China: Global markets are melting down Monday after weekend updates showed the new coronavirus has continued to spread outside of China. The number of new cases in South Korea has continued to soar and an outbreak in Italy has raised alarms around Europe. A week ago, data from the W.H.O showed there were 29 cases in South Korea and just 3 in Italy. The latest updates from those governments (W.H.O. data won’t be updated until later in the day) showed total cases have swelled to more than 760 in South Korea and more than 200 in Italy. Additionally, several countries in the Middle East reported their first confirmed cases.

Markets Melting Down on Monday: In response, global equities have plunged, sending the price of haven assets sharply higher. South Korea’s KOSPI fell more than 4% to lead widespread losses across Asia. Most national indices in Europe have slumped more than 3%, sending the Stoxx 600 tumbling 3.6%, its worst performance since June 2016. With less than an hour until the open of cash trading, U.S. futures had dropped 2.7%. Gold prices surged 2% to a more than seven-year high. Oil prices crumbled more than 4% and the Dollar shot 0.3% higher. Treasury yields sank across the curve, dragging yields to their lowest levels in several years. The 2-year yield was 8.2 bps lower at 1.27%, the lowest yield since September 2017. The 10-year yield slid 8.4 bps to 1.39%, within 3 bps of its all-time low of 1.36% from July 2016. The 30-year yield fell 8.0 bps to 1.83%, resetting last week’s all-time low. The spread between the 3-month and 10-year Treasurys plunged to -16 bps, the deepest inversion since early October.

ICYMI – February 21, 2020 Weekly Market Recap: Last week’s economic data was heavily focused on the housing sector. Home builder confidence inched lower but remained high, while housing starts, building permits, and existing home sales all exceeded expectations. Building permits surged to a new high for the cycle while housing starts held at the second best level since the housing crisis. However, the markets were entirely focused on signs COVID-19 could be spreading outside of China and already impacting the global economy. Apple warned it would miss its revenue guidance and economic confidence in the Eurozone fell more than expected, both affected by the virus. However, markets held it together until Thursday when South Korea announced a spike in new cases that fueled anxieties about a faster pace of spreading outside of China. Fears peaked Friday after exceptionally disappointing U.S. PMI data pointed to the sharpest contraction of the services sector since 2013, a worrisome indicator that the U.S. may not be immune to the virus’s economic side effects. Stocks closed the week down more than 1% and Treasury yields fell sharply, with most maturities touching their lowest levels in several years; the 30-year Treasury bond set a new all-time low. The spread between the 3-month Treasury and the 10-year Treasury reached its deepest inversion since October. Click here to view the full recap.

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