A storm on the horizon. Stocks plunged on Friday as equity investors finally took note of the Coronavirus. The UK became single, finally exiting the EU after they were together for 47 years.
N O T E W O R T H Y
Temperature is rising. Just when you thought it was safe to move on…. Nobody is comfortable when I start my writeup with those words, but here we go, let’s deal with it with both eyes open. On Friday, the Dow Jones Industrial Average gave up -603 points, or -2.09%. Most of us recognize that as a large drop from a heuristic standpoint. While it is a significant loss, for many the biggest eye opener was the fact that we have just come off of a relatively long period relative calm. The last time we experienced daily losses of this magnitude was back in August of last year as the the trade war tension between the US and China was at its peak. OK, OK so what’s all the fuss about? First off, the Coronavirus is real and it is serious. The World Health Organization finally declared it a global health crisis on Thursday after thinking about it for a few weeks. As of this morning here are the numbers: Total cases… 17,390, Deaths… 362, Countries affected… 18. China has expanded its quarantine to the city of Wenzhou, the first city outside the, now infamous, Hubei province. The US is restricting incoming travelers from China to only eight cities where they will be screened for the virus. That is assuming one can get a flight out of China as Delta, American, and United airlines announced on Friday that they were suspending all flights between the US and China. It is too early to tell how much further the virus will spread but the CDC expects that symptoms can appear as long as 14 days after contraction, so we need to asses things in 2-week periods. WHILE YOU SLEPT, the New York Times reported that the Chinese Government already knew about he virus in December but kept it under wraps, that means the virus had ample time to spread. Science class is over, let’s get to the economics. China is an industrial giant and is therefore a large consumer of raw materials. Think industrial metals like iron ore, copper, gold, palladium, etc. China is also the second largest consumer of crude oil in the world, consuming 13.57 million barrels a day; that is 14% of the world’s production. It is estimated that China has cut its oil consumption by around 20% as a result of the virus, which is why crude oil prices have been sliding and will most likely continue to slide until the virus is contained. OPEC+ may act by adding further production cuts, which may soften the impact. Many factories in China have been temporarily shuttered and large companies like Toyota and Honda expect to remain closed for another two weeks. Other manufacturing plants make parts which are shipped abroad and those closures are impacting supply chains. KIA motors, for example is slowing production in its South Korean facilities because of a shortage in Chinese manufactured parts. At this point it is unclear what the impact will be on US companies but one positive thing about the smoldering trade trade war is that many of the larger US companies who rely on China have shifted, been shifting, or created alternatives outside China which will enable them to ease the impact. Apple, for example announced last week that it would shift production outside the region in order to minimize any supply chain impacts. Now to the markets. WHILE YOU WATCHED THE HALF TIME SHOW, the PBOC (Chinese central bank) cut interest rates and injected liquidity into the economy in order to minimize economic impacts. Chinese traders had a rough session as many markets in the region were closed last week for the lunar new year celebration. Many stocks opened today’s session (which is last night for the US) down with 85% of stocks hitting limit down circuit breakers. The CSI 300 which includes companies listed on the Shenzhen and Shanghai exchanges fell by -7.9%. In the US, stock futures have been in the green since opening yesterday which means that Asian markets are playing catch-up after being closed for the holiday. Market impact in the US last week: the S&P500 gave up -2.12% for the week and, for perspective, the index ended the month down only by -0.16%. Perhaps a bigger impact happened in bonds as capital flowed into safe haven treasuries pushing 10-year treasury yields down by -18 basis points, or down -20 basis points for the month. Gold, another safe haven asset, was up +1.12% last week, or +4.74% for January. Going forward, expect volatility to remain high. The VIX index, which measures S&P500 volatility, rose by +29.4% last week closing at 18.84. So far the market contagion, despite Friday’s selloff, appears to be somewhat contained but that can change quickly if the spread of the virus widens significantly in the days ahead. Some positive news: Doctors in Thailand had positive results after treating an infected patient with two antiviral drugs, Gilead will begin human trials for a treatment, and a Chinese health official recommended an HIV drug manufactured by AbbVie as an interim solution. That’s ABBV and GILD, if you were wondering. For now the prescription remains diversify, continue to monitor the situation, and wash your hands… often.
Stocks fell on Friday as fears of the Coronavirus finally spread to equity markets, which were looking for a reason to take cool off anyway. The S&P500 dropped by -1.77%, the Dow Jones Industrial Average sold off by -2.09%, the Russell 2000 fell by -2.07%, and the NASDAQ Composite Index slipped by -1.59%. Bonds traded up and 10-year treasury yields fell by -8 basis points to 1.5%.
– Markit Manufacturing PMI is expected to come in at 51.7, same as last month.
– ISM Manufacturing is expected to be 48.6 compared to last month’s 47.8.
– Construction Spending may have grown by +0.5%. month over month compared to last month’s growth of +0.6%.
– This morning ON Semiconductor missed expectations and we will hear from Google/Alphabet after the close.
– Atlanta Fed President Raphael Bostic will speak today.
– Lots of earnings this week along with Factory Orders, Durable Goods Orders, services PMI’s, and the monthly employment numbers from the Bureau of Labor Statistics. Please refer to the attached economic and earnings calendars for details.