ECONOMIC DATA WATCH AND MARKET OUTLOOK
With all of the concern that the COVID-19 virus has engendered due to its potential negative impact on global economic growth, the S&P 500 still had enough momentum to achieve a new all-time high of 3386 last Wednesday. U.S. equities have been buoyed by stronger than expected Q4 earnings growth. According to FactSet, with 87% (438 companies) of the S&P 500 having reported, EPS grew by 1.6% y/o/y and revenues by 3.6%. This compares favorably to the December 31, 2019 ESP projection of a 1.7% decline in earnings. After the initial decline in the equity market on February 3 after the announcement of the spread of the coronavirus by China, the S&P 500 through last Friday is up approximately 5%.
As we enter next week’s trading sessions, with the corporate earnings season coming to an end, COVID-19 and the possibility of its continued spread throughout the world will undoubtedly dictate global market price direction and volatility. COVID-19’s strong influence on asset prices is due to the dramatic slowdown it can inflict on global economic growth, should it not be contained. We have seen early Q1 2020 revenue warnings from Apple and Jaguar due to supply chain disruptions. Oxford economics in a study reported the shutting of factories and supply chain disruptions could cost the Asian economy $400 billion in income and reduce China’s GDP from 6.0% to 5.4% for 2020. Should COVID-19 become a global pandemic, the loss in global income could soar to $1.1 trillion, shaving about 1.3% from global growth. The IMF in January had originally projected 2020 global growth to improve to 3.3% from 2.9% seen in 2019.
In turning to next week’s economic calendar, the key data releases will center around the U.S. real estate market and the consumer. On Tuesday we get a read on the consumer with Conference Board’s Consumer Confidence index, which is projected to have increased by 0.4 points to 132.0 In February. Consumers have been positive due to the record low unemployment rate and higher wages.
New Home Sales out on Wednesday is expected to increase by 4.5% to 725,000 units in January. The housing trend continues to be favorable despite a recent slowdown in sales during the fourth quarter of 2019.
On Thursday, expectations are for Durable Goods to drop by 0.9% in January, while related shipments increased by 0.1%. The 2.4% rise in December was due to a surge in defense goods order, and January is expected to show a bit of a pullback.
Finishing the week on Friday is the release of the Personal Income where a 0.5% gain for January is the call. The January report is expected to show a solid month for private sector wage growth. Consumer spending out on Friday is projected to show a pickup of 0.1% in January, with an increase in unit auto sales leading the way. We finish the week with both the headline and core PCE price measures, which is estimated to have risen 0.2% in January, with the core index higher by 0.21%. This would move the headline index to up 1.9% and the core measure to 1.8% on an annual basis.
THE WEEK IN REVIEW
U.S. EQUITIES
U.S. equity markets fell last week breaking a two-week winning streak, as the spread of the COVID-19 virus increased concerns the disease could have on the global supply chain and economic growth.
a) Dow Jones -1.36%, MTD +2.85%, YTD +1.94 b) S&P 500 -1.22%, MTD +3.63%, YTD +3.59% c) Russell 2000 -0.52% MTD +4.08%, YTD +0.74%
Drivers: I) The Empire State Manufacturing Survey which measures current conditions for New York factors, saw a nice improvement in February. The index jumped by more than 8 points to 12.9, its highest level in over ten months. Double digit improvements were seen in new orders and shipments, boosting the index. The six-month forward outlook for general business conditions was unchanged from January, but remained optimistic and is consistent with what we have as seen over the past year.
II) The U.S. Producer Price Index exceeded consensus expectations in January by rising 0.5%. The majority of the gain in PPI was due to a rise in the cost for final demand services. The price for final demand goods rose by 0.1% in January, and ex- food and energy, good prices gained 0.3%. The reading does not portend a significant change in domestic inflation expectations or alter the expectation that the Fed rate policy is still on hold.
III) The minutes from the last FOMC meeting has not changed the central bank’s stance that monetary policy is to remain steady, but they did reference possible drags on the U.S. economy from Covid-19. There were no signs from the minutes that the Fed would deviate from its forecast that the fed funds rate would remain unchanged for the year. However, the bias maybe for lower rates should inflation continue to lag, or the COVID-19 virus has a greater than expected negative impact on U.S. growth.
IV) Existing-home sales fell 1.3% to 5.46 million units in January, giving back part of December’s strong gains, but are still up 9.6% since January 2019. Single-family sales fell 1.2% and condo/co-op sales fell 1.6% in January. Housing affordability challenges are weighing on sales in the West. In addition, unseasonably warm weather helped support sales in the Northeast and the Midwest. Nationwide listings rose 2.2% in January, but still remain near their all-time low.
V) Equities Month to Date are higher with Small-Cap, Growth, REITs and Communication Services leading equity price performance. The laggards on the year are Mid-Cap, Value, Energy and Utilities.
Capitalization: Large Caps +3.80% (YTD +3.92%), Mid-Caps +3.67% (YTD +2.84%) and Small Caps +4.08% (YTD +0.74). Style: Value +3.31% (YTD -1.67%) and Growth +4.03% (YTD +2.66%). Industry Groups: Utilities +1.95% (YTD +8.71%), Technology +4.30% (YTD +8.42%), REITs +6.77% (YTD +8.27%), Information Technology +4.17% (YTD +7.93%), Communication Services +4.48% (YTD +5.03%), Consumer Discretionary +3.95% (YTD +3.90%), Consumer Staples +2.35% (YTD +2.68%), Industrials +3.09% (YTD +2.62%), Healthcare +4.32% (YTD +1.48), Financials +2.65% (YTD +0.00%), Materials +4.72% (YTD -1.79%) and Energy +1.22 (YTD -9.96%).
EUROPEAN EQUITIES
The MSCI Europe Index fell last week by -0.52% as markets were concerned with the outbreak of new cases of the COVID-19 virus in the UK, Italy and France
Drivers: I) The Euro-zone composite PMI rose 0.3 points to 51.6 in February, which is in line with a GDP growth estimate of 1.3% on an annualized basis. The increase in PMI for the second straight month provides some evidence that growth can improve in Q2, as the severe inventory correction may be ending. The report was helped by Germany’s improvement in output and domestic orders.
II) Euro-zone core inflation in January fell to an annual rate of 1.09%, down 0.21% from December’s reading of 1.30%. The report showed a 0.13% drop in core goods inflation to a 0.33% annual rate, and a 0.27% decline in services inflation to a 1.53% yearly rate. Core goods saw a decline clothing and footwear prices, while on the services side, transportation price inflation declined by 0.45%.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was lower by -0.52% for the week (MTD +1.90%, YTD -0.67%).
ASIAN EQUITIES
Asian equity markets were primarily lower for the week as investors were worried about the spread of the COVID-19 virus to South Korea, Singapore and other Asian economies. The Dow Jones Asia Index declined by -2.29% for the week, (MTD +1.33%, YTD -1.77%).
Drivers: I) Japan’s real GDP contracted the most in more than five years in the final quarter of 2019, as seasonally adjusted real GDP declined by 1.6% q/q following a 0.1% expansion in the prior quarter. Japan’s GDP was negatively affected by the sales tax hike, poor global demand, and a typhoon. This poor showing along with concerns over the COVID-19 outbreak raises concerns of a possible recession in the coming quarters.
II) China’s State Council last week emphasized they will provide help for industries and sectors most affected by the COVID- 19 outbreak. The sectors to be targeted with monetary and credit support include wholesale and retail, catering, transport and logistics, and the culture and tourism. The Council are particularly interested in providing help to SMEs (small-mid sized enterprises) who have solid growth prospects. To help these companies restart production in the near term, the central bank is providing lower lending rates, loan increases and increase the availability of medium to long term loans.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was lower by -1.27%
(MTD +0.78%, YTD -1.13%), the Hang Seng Index fell by -2.11% (MTD +3.56%, YTD -3.16%) and the Shanghai Composite
was higher by +4.21% (MTD +2.12%, YTD -0.34%).
FIXED INCOME
Treasury yields fell last week as cases of the COVID-19 virus spread well beyond China’s borders. The 30-year Treasury finished at a new record low yield of 1.917%, down from the record of 1.95% seen on Thursday.
Performance: I) The 10-year Treasury yield was lower last week ending at 1.474% down from 1.588%. The 30-year yield was lower last week finishing at 1.917% down from 2.041%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.57% last week, MTD +0.53% and YTD +2.47%. The Bloomberg Barclays US MBS TR was higher by +0.21% last week, MTD +0.35% and YTD +1.05%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.09%, MTD +1.18% and YTD +1.21%.
COMMODITIES
The DJ Commodity Index rose last week climbing +1.04% and is higher month to date +2.19% (YTD -5.92%). The commodity index was driven higher as the metals, palladium and rhodium have staged a strong rally due to heavy demand from makers of catalytic converters, in light of tightening global emissions standards.
Performance: I) The price of oil was higher last week by +2.31% to close at $53.46 and is higher month to date in February by +3.54% (YTD -12.44%). Oil prices were higher on the week, supported by the continued stimulus from China’s central bank which eased some concerns over the COVID-19 virus’s impact on the economy.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was higher by +0.18 ending at 99.34 for the week (MTD +2.03%, YTD +3.06%). The USD rose to a two-year high, gaining a risk-off bid as well as seeing inflows from investors who are confident the US economy is growing and stable.
III) Gold rose last week to a seven-year high, as the impact the COVID-19 virus can have on the global economy has raised expectations for further central bank stimulus. Gold was higher by +3.71% last week, climbing to $1645.9 (MTD +3.29%, YTD +8.06%).
HEDGE FUNDS
Hedge fund returns in February are higher with all of the core strategies, Equity Hedge, Event Driven, Macro, Relative Value and Multi-Strategy in positive territory.
Performance:
- I) The HFRX Global Hedge Fund Index is higher at +1.18% MTD and up +1.59% YTD.
- II) Equity Hedge has risen by +0.78% MTD and is up +0.45% YTD.
- III) Event Driven is higher MTD +0.77% and is up YTD +1.28%.
- IV) Macro/CTA has risen by +3.20% MTD and is up +4.05% YTD.
- V) Relative Value Arbitrage has advanced by +0.59% and is up +1.28% YTD.
- VI) Multi-Strategy is up MTD at +0.52% and is higher by +1.20% YTD.
Data Source: Haver Economics
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