Stocks finished sharply higher on the week as the S&P posted its largest weekly advance since June of 2019. The S&P was led higher by all sectors except for Utilities, over the five-day session as the risk-on tone gripped U.S. markets. There were multiple factors attributed to the week’s bounce, which included:
- Coronavirus draw-downs appeared to have been overdone
- Continued accommodative monetary policy by the Fed
- Better than expected earnings
- Better U.S. economic data (ISM Manufacturing, Non-ISM Manufacturing, Non-Farm Payrolls)
Despite the stellar week, Energy once again lagged the broader market as oil failed to join the rally in risk assets amid global demand concerns, paired with Russia’s potential willingness to agree to additional production cuts proposed by the OPEC+ Joint Technical Committee. OPEC+, which controls about half of the world’s global oil production, recommended an additional supply cut of 600Kbpd until June, in addition to the current 2.1mbpd that is already in place. Furthermore, the technical experts from the group suggested the 2.1mbpd cut be extended until December 31st rather than expiring in March, which the agreement originally called for. None of the proposed cuts have been solidified and cannot be put into place until each country’s oil minister has officially agreed.
Throughout the week, markets saw better-than- expected U.S. economic data released for January as numbers consistently surprised to the upside. The ISM manufacturing index moved back into expansionary territory for the first time since July, while components such as new orders and production also expanded and beat expectations. The ISM non-manufacturing index beat estimates, as well as showed improvements in both business activity and new orders. Additionally, Non-farm payrolls increased 225K, which came in well above the 165K consensus, showcasing that the U.S. economy and consumers remain in good shape.
The data released appears to confirm that a fourth cyclical recovery is underway as noted by Cornerstone Macro. While the data may soften next month due to the ongoing Coronavirus concerns, we anticipate any weakness to be short-lived and would look past it, as long as the virus does not become materially worse and further impact economic activity globally. With the better economic data releases, cyclical sectors could come back into favor for investors who appear to have been positioned in a defensive manner. Our equity screens and valuation models have shown defensive sectors, such as Utilities and Consumer Staples, remain generally overvalued. (Utility Names: NEE, DTE, AEP, ETR, FE, SRE, XEL all hit 52-week highs early last week).
U.S. Equities started the week closing in positive territory as investors continued to brush off the potential economic impact from the Coronavirus. The S&P closed at a new all-time high Monday with almost all sectors advancing (Energy being the exception) led by Technology, Consumer Discretionary, Real Estate, and Commercial Services. The NASDAQ Composite also touched a fresh all-time high with upside leadership from large cap tech names AMZN, GOOGL, MSFT and NFLX. The “FANG” index, once again outpaced broader indexes as both Chinese workers and factories returned to business following the extended closures due to the ongoing Coronavirus outbreak.
On the virus front, the latest update showed there were
over 1,000 confirmed deaths and 3,062 new confirmed infections on Sunday,
bringing the total number of infected to 40,171 per a Reuters report (depicted
in the graph on page 3). The most recent death toll numbers have now surpassed
the SARS outbreak in 2002-2003 as models predict the number of cases should
peak in mid-to-late February with a prevalence of over 5% which equates to
about 500K infections.
Another notable development continues to be the flattening of the yield curve yet again, reigniting investor fears over the future of the U.S. economy. The 3M/2Y spread is currently negative 16bps, whilethe 3M/5Y spread stands at 15bps negative as of Monday’s close. The 10Y/3M spread remains in positive territory, however not by much, closing at just a 1.5bp difference between the two. While we have seen multiple inversions along the curve over the last year and a half, the signal appears to be a less reliable indicator of an economic cycle than it once was. It seems to say more about the world outlook rather than just the United States given the fact that Treasuries now make up more than half of all global safe haven assets.
Elsewhere, the Fed will be in focus over the course of the week as chairman Powell is set to deliver his semi-annual testimony to Congress. Many investors will look to clues in the commentary regarding:
- Ongoing risks from the Coronavirus
- Continued balance sheet expansion
In Politics, investors will continue to watch and assess the Democratic Party primaries as Senator Bernie Sanders won the New Hampshire primary on Tuesday capturing 25.9% of the vote, slightly less than what was initially anticipated. Following Senator Sanders was Mayor Pete Buttigieg, who fared better than expected and captured 24.4% of the vote, as well as Amy Klobuchar who took 11.7%. The Elizabeth Warren (11.0) and Joe Biden (8.4%campaigns continued to take major hits as the two candidates continued to fall further back in the polls with their recent lackluster performances.
Stocks appear to be signaling that either a Bernie Sanders win or an unexpected loss in the state is acceptable with investors as some analysts call it a “win-win” scenario because:
- President Donald Trump winning is seen as a positive for stocks and a Sanders
nomination could boost the Presidents chances given his extreme ideals
- A more moderate candidate would also be viewed as positive for equities
While Democrat’s continued to campaign ahead of Tuesday’s voting, President Trump released a $4.8T budget on Monday. The budget includes steep reductions in social-safety-net programs, foreign aid, and illustrates an increase in military spending by 0.3, while decreasing non-defense spending by 5%. The plan would also offer higher outlays for veterans. Despite what the President has proposed, it appears highly unlikely the budget would become a law as bipartisan support is needed between both the Democrat controlled House and the GOP controlled Senate.
THIS WEEK INTERNATIONAL:
APAC – The Shanghai Stock Exchange Composite Index posted a solid 4.5% gain last week, benefiting from the tailwinds of Coronavirus containment progress, and the announcement of China cutting tariffs in half on 75% of U.S. goods. The relief rally sustained momentum throughout the week on the news that the People’s Bank of China would inject $174 billion into financial markets via reverse repo operations by February 10th. Additionally, the country took other extensive measures to help limit the financial and economic impact the Coronavirus has on the country. According to Cornerstone Macro’s economics team, they note that 10 easing measures were taken to help stimulate the economy as more is expected from Beijing. In currency news, the Chinese Yuan maintained a flat exchange rate last week with the U.S. dollar despite some volatility midweek.
In Japan, The Nikkei 225 closely followed European markets and mimicked the Euro Stoxx 50 Composite Index with a 3.59% weekly gain. However, general optimism was offset by a Friday sell-off that particularly affected Japanese auto manufacturers. In fact, Coronavirus dominated the headlines with multiple auto manufacturers shutting down their Chinese plants to cope with the virus. Elsewhere, South Korea exports, which is a good leading indicator of the strength of the APAC region, fell 6.1% year-over-year. Exports to the EU dropped by a whopping 16.2% year-over-year.
Europe – In Europe, the Euro Stoxx 600 index ended the week higher by 3.36% led by Banks, Technology, Chemicals, Insurance and Healthcare. Authorities across Europe continue to do all that they can to contain the spread of the Coronavirus, however a state of emergency has been declared in most countries limiting air traffic coming in from China. Furthermore, Italy has suspended all visa issuance from China, following the lead of Greece and Czech Republic.
In Germany, recent data showed that German exports grew by 0.8% in 2019. The People’s Republic of China remains one of Germany’s main trading partners behind the United States, and France. Business confidence was partially reflected in the German 10-year Bund yield ending the week lower at -0.38%. Additionally, German factory orders month-over-month fell by 2.1%. This metric has been in the red in nine of the last 12 months.
In other news, ECB president Christine Lagarde said that central banks have a few tools in their toolbox to de-escalate global risks. With treasury rates largely negative across Europe, balance sheet expansion is one of the few options available.
In Ireland, leftist party Sinn Fein emerged from general elections over the weekend. The country known for being business-friendly with attractive corporate tax rates will likely deal with a coalition government.
The information provided, including any tools, services, strategies, methodologies and opinions, is expressed as of the date hereof and is subject to change. Level Four Capital Management (“LFCM”) assumes no obligation to update or otherwise revise these materials. The information presented in this document has been obtained from or based upon sources believed by the trader or sales personnel or product specialist to be reliable, but LFCM does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.
This material has been prepared by personnel of LFCM and is not investment research or a research recommendation, as it does not constitute substantive research or analysis. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject LFCM to any registration or licensing requirement within such jurisdiction. It is provided for informational purposes, is intended for your use only, and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned, and must not be forwarded or shared with retail customers or the public. The information provided is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of certain LFCM personnel. Observations and views expressed herein may be changed by the personnel at any time without notice.
Nothing in this document constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to your individual circumstances. This document is not to be relied upon in substitution for the exercise of independent judgment. This document is not to be reproduced, in whole or part, without the written consent of LFCM.