The Market Today
Coronavirus Continues to Spread; Iowa Caucus Kicks off 2020 Elections
by Craig Dismuke, Dudley Carter
It Begins… Iowa Caucus Today: Today’s calendar kicks off an important week with some important data/event. At 9:00 a.m. CT, the January ISM Manufacturing index is expected to remain below 50 for a sixth consecutive month, the longest period in contractionary territory since the recession. On a positive note, the index is expected to be less-bad, rising from 47.2 to 48.5. Also at 9:00 a.m., December’s construction spending data is expected to remain strong. Atlanta Fed Bank President Bostic is scheduled to speak this afternoon, although monetary policy is not his scheduled topic. Perhaps most interestingly, today begins what is expected to be an exciting and volatile Democratic primary. The politico anticipate that Sanders, who has surged in the polls recently (see Chart of the Day), will come away with a victory tonight.
Chinese Stocks Tumble in Catch-Up Convulsion: Chinese stocks plunged upon their return from the Lunar New Year break, catching up with a sell-off that has punished global equities as the Coronavirus ripped through China and spread around the globe. Chinese markets were closed for six days through last Friday, a period over which MSCI’s All-Country World Index dropped 3.0% amid the virus fears to hit a seven-week low. China’s CSI 300 closed down 7.9% Monday after slumping as much as 9% earlier in the day. Those sharp declines unfolded even as China’s government stepped in to soften the blow. As part of lengthy list of measures to support the Chinese economy and markets, the central bank pumped liquidity into the markets, the most in a day in 16 years, and cut key interest rates to reinforce their efforts to encourage lending and ease the economic strain. China’s yuan hit a seven-week low.
Sentiment Stabilizes as Investors Wait for More Developments: Despite the overnight collapse in Chinese markets, and even with the death count and number of cases being tallied higher over the weekend, markets outside of Asia have stabilized. Following last Friday’s steep drop (more below), European stocks had steadied near unchanged at 7 a.m. CT and U.S. futures were 0.5% firmer. Global bond yields had also ticked higher with Treasury yields out in front. Prior to U.S. trading opening, maturities between two and ten years were yielding between 3 and 4 bps more. Global manufacturing PMIs for January were released but likely don’t fully reflect effects of the ongoing virus disruptions. Mixed results in Asia averaged near a stall reading of 50 but included an expansionary 51.1 for China. Results from Europe were generally better than expected but most countries remained near, if not in, contraction.
Weekly Recap for Week Ending January 31, 2020 – Expected Economic Impact of nCoV Grows, Investors Expect Fed Will Cut, Curve Inverts: Last week’s calendar was crammed with data, corporate earnings, a Fed policy decision, and anxiety-inducing headlines regarding the coronavirus. Yields were already falling coming into the week as the rate of confirmed coronavirus cases doubled from Friday to Monday, but those cases almost quadrupled over the course of last week alone. As the virus spread, the World Health organization declared the situation a global emergency and the U.S. State Department raised its alert to level 4, saying “do not travel to China.” Major U.S. airlines canceled all U.S.-China routes, United and American through the end of March and Delta through the end of April. Concerns grew throughout the week over the economic impact of the epidemic. As those fears grew, yields fell across the Treasury curve with short yields dropping to their lowest levels since 2017. The Fed’s mid-week policy decision was uneventful with a wait-and-watch tone, but investors increasingly priced in expectations for a 2020 rate cut (or two). By the end of the week, Fed Funds Futures contracts showed an almost-100 percent chance of a cut by June and the possibility of a second cut before year-end. The 2y5y and 3m10y yield spreads inverted for the first time since October, making investors even more skittish. The initial estimate of 4Q GDP beat expectations, growing 2.1%, but masked some volatile underlying items. Real final sales rose at a less encouraging 1.6%, the second weakest pace since 2015. Corporate earnings were solid, including a blockbuster report from Amazon. Despite that, the S&P fell 2.1% on Friday, alone, giving up all of its gains for the year.