The Market Today
Coronavirus Weighs on Markets, Oil Drops to 7-Week Low on Fears of Travel Slowdown
by Craig Dismuke, Dudley Carter
Jobless Claims Remain Positive: Initial jobless claims for the week ending January 18 confirmed the previous week’s strong results, rising from 205k to 211k but remaining near the low end of the recent range.
Leading Index Expected to Continue Downward Trend: December’s Leading Economic Index will be released at 9:00 a.m. CT and is expected to drop 0.2%. The index has had a downward trajectory since peaking in late-2017. Driving the decline have been a decline in hours worked, weakness in manufacturing metrics, a softening in consumer confidence, and the flattening of the yield curve.
Regional Manufacturing Index: The Kansas City Fed Manufacturing Index is expected to improve from -8 to -6 at 10:00 a.m. CT.
Stocks Gave Up Early Gains as Virus Fears Lingered: After a strong start, U.S. equities gave up essentially all of their gains by the close as lingering worries around China’s coronavirus continued to weigh. The S&P 500 rose as much as 0.5% to a new intraday record level before retreating just before 10 a.m. CT. Following the slow and steady decline, the index ended the day virtually flat. While the market’s fever appeared to break during the overnight session, persistent concerns that the coronavirus could spread further kept a chill over markets. On Wednesday, the fatal case count increased and China banned travel from Wuhan, the city believed to be the source of the outbreak.
Yields Continued to Inch Lower: Energy companies were the biggest drag on the equity index as the contagion fears spread into the oil markets. U.S. WTI fell more than 3% on concerns that sickness-related travel disruptions could disrupt demand for a the commodity. Airlines also closed weaker on the day. Likely linked to another upbeat housing report for December released earlier in the morning (more below), homebuilders rose even as other consumer discretionary stocks closed down. The return of uncertainty kept Treasury yields under pressure for the duration off the day, leaving the 2-year yield down a marginal 0.2 bps at 1.53% and the 10-year yield 0.5 bps lower at 1.77%. The benchmark bond has dropped 13 bps so far this year to its lowest level since December 3.
Chinese Stocks Plunge as Virus Fears Keep Investors Wary: Chinese stocks plunged Thursday as stronger steps from the Chinese government to stem the spread of the coronavirus also stirred investors’ fears of just how severe the sickness could be. China has now shutdown all public transit in the city of Wuhan as they seek to prevent further spreading of the illness that has reportedly killed 17 and already infected more than 500. Within the last hour, Singapore confirmed its first identified case of the virus. China’s CSI slumped 3.1%, its biggest decline in nearly nine months, to a new low for the year. Global equities elsewhere were also generally weaker, although the losses were less severe. European stocks were down nearly 0.5% around 7 a.m. CT while U.S. equities were holding just below yesterday’s closing levels.
ECB Launches Policy Review: Although the immediate market impact is likely to be limited considering the focus on the virus, developments as part of today’s ECB decision could have longer-lasting and more wide-reaching effects. In addition to keeping the current policy stance and forward guidance unchanged as expected, the ECB followed the Fed’s lead in formally announcing a comprehensive review of its policy framework. The review, telegraphed by higher-ups from the bank in recent public remarks, is the first undertaken by the central bank since 2003. Details of the review will be released after the conclusion of President Lagarde’s press conference. Treasury yields fell for a third day as uncertainty kept global bonds in high demand. The 2-year yield was down 1.7 bps at 7:15 am. CT to 1.51%, the lowest level since October 9. The 10-year yield had slipped 2.8 bps to 1.74%, a new low since December 3.
Solid December Caps Off Strong 2019 Recovery for Home Sales: Existing home sales rose more than expected in December, completing 2019’s v-shaped recovery that saw activity rebound from a steep slide in 2018. Sales rose 3.6% in the final month of the year, more than double the gain economists expected, to push the annualized sales pace to 5.54MM units. The December-to-December gain of 10.8% in 2019 was the strongest since a 12.4% gain in 2012 and followed a comparable-period decline of 10.2% in 2018, the weakest since 2007. The v-shaped snapback in activity was driven primarily by, and favored closely in appearance when inverted, the hump-shaped trend in mortgage rates. Freddie Mac’s 30-year mortgage rate rose from 3.99% at the end of 2017 to as high as 4.94% by November 2018, before tumbling back throughout 2019 to as low as 3.49% in September. While a comparison of December 2019 (5.54MM units) to December 2017 (5.57MM units) shows no net gain in sales over the last two years, the solid upward trajectory over the last twelve months provides support for the hopes that housing will remain growth-positive in 2020, as long as mortgage rates remain contained.