The Market Today
Dow Drops 1,000 on Growing Coronavirus Fears
by Craig Dismuke, Dudley Carter
Concerns about the coronavirus have reached a new level, evidenced in the market response yesterday (discussed more below). The virus has spread to multiple countries and the number of confirmed cases has grown parabolically -borderline exponentially. The number of cases outside of mainland China is now up to 2,684 and has been growing at an average rate of 16% over the past ten days, mirroring the rapid rate of growth seen in the initial outbreak in China. There are now outbreaks in South Korea, Italy, and Iran, among other countries. Disease specialists are uncertain about how some of these outbreaks began, with many of the infected persons having no known exposure to China, nor people who traveled from China. There is uncertainty about the mode of transmission. There is uncertainty about the efficacy of the testing processes in many countries. The coronavirus is increasingly becoming a pandemic concern and likely to result in a monetary policy response. To see our updated Coronavirus Chartbooks, please click here.
Home Prices, Consumer Confidence, and Fedspeak: Today’s economic calendar brings three home price reports, February’s consumer confidence report from the Conference Board, the Richmond Fed manufacturing index, and speeches from Fed Vice Chair Clarida and Dallas Bank President Kaplan. The home price reports are expected to show reversal higher for the pace of price gains continuing. Consumer confidence is expected to remain very strong. In comments from early January, Vice Chair Clarida expressed satisfaction with the stance of monetary policy, noting that the weaker economic results had not yet warranted a re-evaluation of policy. Kaplan has said, as recently as last week, that it remains too early to tell if the effects of the coronavirus would warrant a change in policy.
Accelerating Virus Cases Outside of China Sent Global Markets Reeling: U.S. markets opened into turbulent global trading on Monday after the latest case-count updates from the weekend showed spread of the COVID-19 coronavirus accelerating outside of China. While the number of new cases in China has continued to slow, the number of new infections in South Korea has ballooned and an outbreak in Italy has raised alarms in Europe. Additionally, several countries in the Middle East reported their first cases. The consensus fear has been that any evidence the virus was spreading outside of China could be the spark that led to increased market volatility and concerns about a global recession. U.S. futures had tumbled overnight as markets cratered across Asia and Europe. South Korea’s KOSPI had slumped more than 4% and Europe’s Stoxx 600 sank 3.8% before it closed, its worst day since the sessions in the immediate aftermath of the 2016 Brexit referendum.
10-Year Yield Tested All-Time Low as Stocks Sank: After briefly paring an opening drop, the selling resumed to knock more than 1,000 points, or 3.6%, off the Dow by the final tick. The S&P 500 tumbled 3.4%. Both indices posted their worst performances since February 2018 and turned negative for the year. Oil prices suffered amid the flight from risk with both U.S. WTI and Brent crude collapsing 4% amid worries of dwindling global demand for oil. The fear-filled trading drove the price of gold up nearly 1% to a new seven-year high, reinvigorated demand for the Japanese yen, and pushed Treasury yields sharply lower. The 2-year yield sank 10.7 bps to 1.25%, the lowest since May 2017, as investors ratcheted up expectations that the Fed will be forced to ease. Fed Funds futures ended the day fully priced for a rate cut by June, and another one-and-a-half cuts by January 2021. The 10-year yield closed down 10.1 bps at 1.37% after briefly falling below the all-time low close of 1.358% from July 2016. Earlier, the entire German yield curve moved back into negative territory for the first time since October.
Global Markets Stabilize After Monday’s Melee: Global markets remain on edge Tuesday following one of the sharpest risk-off shifts in at least a couple of years to start the week. South Korea’s KOSPI recovered 1.2% to lead a mixed session in Asia while Italy’s FTSE MIB dipped 0.3%, one of the better performances in a downbeat day across Europe. The two countries saw domestic cases of the virus jump sharply over the weekend which was the catalyst for yesterday’s calamitous global trading. Both reported case increases on Tuesday, taking South Korea’s total nearer to 1,000 and Italy’s to almost 300. Globally, the number of infected has crossed above 80,000, with more than 77,500 of those in China.
Global Yields Continue to Reflect Uncertainty: Europe’s STOXX 600 initially recovered at the open but has since given up those gains to trade 0.3% lower at 7:20 a.m. CT. U.S. futures, however, pointed to tech shares leading the major indices higher at the opening bell. Futures on the S&P 500 were 0.5% higher while contracts on the Nasdaq rose 0.9%. Gold prices fell for the first time in six sessions and crude prices inched up 0.5%. Global bond markets, however, continued to reflect a sense of uncertainty around the global effects of the COVID-19 coronavirus. The German yield curve moved deeper into negative territory while yields on peripheral European debt edged up. At 7:30 a.m., the Treasury curve was mixed but little changed; the 2-year yield was holding at 1.25% while the 10-year yield remained at 1.37%.
Dallas Fed’s Manufacturing Index Perked Up, But Details Remain Weak: Generally taken in stride in a typical market environment, the Dallas Fed’s stronger-than-expected manufacturing activity index was entirely ignored by virus-focused investors. The headline activity index rose 1.4 points to 1.2 in February, ending a four-month stretch below zero. Despite the monthly improvement, the index has averaged a negative reading since the start of 2019 and remains notably depressed from stronger levels in 2017 and 2018. Providing further reason for caution, most of the components away from the current activity index cooled from January, including current and expected readings on new orders, shipments, and employment, resulting in the ISM-weighted derived composite actually edging lower.
Mester is Monitoring the Virus But Doesn’t Support a Policy Response: While markets are becoming increasingly convinced that the Fed will be forced to ease policy to offset economic uncertainty created by COVID-19’s accelerating spread outside of China, officials from the U.S. central bank have yet to confirm the speculation. Cleveland Fed President Mester said she still expects “the expansion to continue, with growth around trend” in 2020, but that the “recent emergence of the coronavirus” poses a risk. She said the virus is “clouding the near-term economic outlook for China, with potential spillovers to the rest of the world” that could result in a larger impact than the SARS outbreak in 2003. However, she said it’s still too early to determine the level of economic damage and too soon to support any adjustment to interest rates. Answering questions after her prepared remarks, Mester said the yield curve inversion isn’t concerning to her yet and noted the U.S. economy has been resilient in the face of global risks.