U.S. equities finished lower on a shortened week as investors continued to assess the potential impact of the ongoing Coronavirus outbreak. The retreat in equities primarily came on Friday when the S&P 500 fell .90%, to close down 1.03%, its worst day since October 8, 2019. Despite the recent bout of volatility, the index maintained its three-month streak of closing without a 1% move up or down. The tone set by markets was risk-off, with most sectors ending lower on the week and led by Energy, Materials, Financials, Health Care and Consumer Discretionary. Utilities, REITs, and Tech were the only sectors that finished in the green.
A quick analysis of the week’s largest sector declines showed the following:
- Energy names were lower as crude sold off for a third consecutive week, hitting its lowest levels since October as it sold off 7.5% over the five-day span amid ongoing global growth concerns.
- Financials sold off, primarily related to yields, paired with Discovery Financial guiding their outlook lower. The KBW Bank Index (2.9%) posted its fourth consecutive decline and worst weekly performance since early October.
- Healthcare was lower amid growing fears that upcoming elections may ignite lawmakers to take action against the increasing cost of medicines as large pharma companies were one of the notable drags.
- Consumer discretionary lagged with the main culprit being apparel names, airlines, as well as hotel/ gaming stocks amid the Wuhan concerns.
Technology was an unsuspecting outperformer after better than expected earnings from semi giants Intel and Broadcom, which finished up 14.9% and 4.9% respectively on the week. Treasuries were higher with the curve flattening slightly on the short end as the 3M2Y actually inverted briefly before turning back positive. Gold was modestly higher, finishing up 0.7% for the week.
The narrative throughout the week was headlined by concerns related to the Wuhan Coronavirus. The virus which originated in China, is believed to have been transmitted from an animal reservoir through bat or snake meat at a “wet market” located in the city, and is similar to both SARS and MERS. Since the strain was identified on December 31st, about 6,100+ cases have been reported in more than a dozen countries with 6,000+ of those in China. Of all cases reported, there have been 100+ deaths to date, although it is worth noting that authorities have said many of the deaths were in older patients with underlying medical conditions. The World Health Organization has yet to declare an international public health emergency, however continues to monitor the situation closely. The ongoing outbreak has sparked fears of a global pandemic that would ultimately lead to negative impacts on economic growth. While exact figures on longer-term economic impact cannot be established, analysts believe it has the potential to take 1%+ off of China’s 2020 GDP.
Additionally, global growth concerns were back in the spotlight after earlier in the week when the IMF made modest cuts to its growth forecast, predicting 2.9% versus the previous estimates of 3.2% amid threats related to trade and tensions in the Middle East. On the trade front, President Trump was able to ease strained relations with France over its proposed digital services tax and used the opportunity to threaten the EU with auto tariffs. There were no notable developments on the U.S.-China trade negotiations except for President Trump confirming that tariffs will remain in place during the “phase two” negotiations, which was no surprise to investors.
It was the busiest week thus far of the Q4 earnings season as reported earnings have been coming in slightly lighter than expected, with FactSet’s latest Earnings Insight report noting the blended earnings decline for the S&P is 1.9% against the 1.6% decline forecasted by analysts. While the quarter is still expected to post a fourth consecutive quarter of earnings declines, its longest stretch since Q3 2015-Q2 2016, results seemed to turn up modestly after being helped by positive surprises within the tech sector.
Economic news remained extremely light as December existing home sales were up 3.6% month-over-month, posting the fastest increase since February 2018, however much of that was due to an extremely slow November print. Elsewhere, weekly initial jobless claims rose less than expected and remain near longer-term lows.
Concerns surrounding global growth continued to mount as the Coronavirus spread to four continents and has slowed both business activity as well as demand. The VIX jumped over 25% to 19.02, which was its highest level since October before paring gains (52-week high at 24.81 back in August), as investors continue to look to hedge and whether the storm. Price action was complete risk-off with all sectors closing in the red and investors aggressively fleeing any names linked to China. Only 81 of the 501 S&P 500 companies finished higher with many of them being interest rate and defensive names as they continue to see strength amid treasury yields falling, gold prices rising, and a flight to safety. The S&P snapped its streak of days without closing lower by 1% at 74 after finishing 1.57% in the red on Monday. Investor mentality appears to be sell first, ask questions later as markets continue to grapple with the uncertainty of how badly the virus will hurt both China and the global economy.
Despite what appears to be irrational selling pressures, investors will also have to turn and focus on continued earnings reports. This week will be the busiest of the earnings season with more than 140 S&P 500 companies reporting Q4 results including heavyweights Apple, SAP, Facebook, GE, United Technologies, Caterpillar, Exxon Mobile, Shell, Chevron and Lockheed Martin to name a few.
Additionally, investors will also watch the FOMC decision later this week, as they will hold their first meeting of 2020 featuring the newest voting regional presidents which include Loretta Mester, Patrick Harker, Robert Kaplan, and Neil Kashkari, who are replacing James Bullard, Charles Evans, Esther George, and Eric Rosengren. Expectations remain low and many expect the meeting to be a non-event calling for the Fed to continue to hold rates steady which would be consistent with officials’ recent statements that the current stance of policy is likely to remain appropriate barring a material change to the outlook. It would not be surprising to sees light changes to their statement regarding economic activity and outlook, however should not reflect any material fluctuations. Most of the focus should surround Chairman Powell’s press conference, with investors looking for any statements about balance sheet policy and the current $60B monthly purchases for reserve management.
THIS WEEK INTERNATIONAL:
APAC – Equities finished weaker in the region on Monday in a sea of red weighed down by concerns about the Coronavirus outbreak. Tourism stocks led the way lower in the Nikkei as the index closed down over 2% as economists warned Japanese GDP could takea hit from reduced Chinese travelers. Health care related shares outperformed on anticipated demand for medical equipment. Chinese markets remained closed for the Lunar New Year holiday as the country extended the holiday until February 2nd versus January 30th as originally planned in order to help deal with the Coronavirus outbreak.
Multiple measures have been taken to help contain the outbreak with several cities in China remaining on lock-down as the country announced:
- A ban on all outbound overseas tours
- The ban of trading wildlife across the nation
- Hong Kong saying they will not allow residents of Hubei province into the region
Europe – European markets ended lower last week, with sentiment turning negative amid China’s Coronavirus and political tensions in Italy as Auto’s & parts, Basic Resources, and Travel & Leisure names were the major underperformers in the region. Defensive sectors Utilities, Real Estate, Insurance, and Financial Services all outperformed with the risk off tone gripping financial markets. European luxury names sold off as investors continued to digest the impact of the Wuhan virus outbreak with top luxury names all finishing between 2% and 11% lower as China remains one of the largest markets for luxury companies.
At Davos, President Trump and EU leaders called a truce on the French digital tax plan, which the U.S. threatened would result in a tariff. President Trump said that a trade deal is expected to be negotiated before the elections in November however would have no problem slapping tariffs on products if negotiations fell apart. According to various analysts there is no shortage of issues which include:
- Plans for a tax on big digital American companies and aircraft subsidies
- The involvement of China’s Huawei in building 5G networks
- Different approaches to tackling Iran’s nuclear program
Additionally, the auto industry could come under significant pressure if discussions were to fail and looks to be extremely vulnerable after Trump held off on making a final decision last year regarding tariffs on some of the region’s auto manufacturers. The U.S. remains the main export destination for EU-made cars according to Eurostat as cars from the bloc accounted for 29% of total U.S. auto imports in 2018, while the next closest country was China at 17%.
Political tensions in Italy continued to dominate headlines after Five Star leader Di Maio resigned after a collapse of support in his party which has seen more than 20 MPs defect from the group. Di Maio’s decision comes ahead of key regional elections. Elsewhere in the region, investors will watch for a potential BoE rate cut which are ~50% ahead of next Thursday’s policy meeting. The 50% chance is down from the ~75% chance just a week earlier with the shift in expectations coming after better-than-expected economic data was released throughout the week. The various data points are consistent with economic growth of 0.2% and may give BoE time to pause before it evaluates more incoming data towards the spring. On the corporate earnings front Q4 earnings season is following in the footsteps of its U.S. counterparts, showing a fairly sluggish backdrop thus far. According to I/B/E/S Refinitiv, European companies will report a smaller growth in Q4 earnings than previously expected, however are still set to end a nine-month long recession.
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