Economic Data Watch and Market Outlook
The last week of January brought us the long-awaited correction investors have been fearing. Global equity markets had become complacent, with the VIX in the U.S. hovering around a multi-year low and the S&P 500 reaching historical new highs that had the index trading at over 18 times forward earnings. This all changed last week as global equity markets indexes fell into negative territory for the year, as the coronavirus continued to spread throughout the world. As of Saturday morning, according to China authorities and the World Health Organization (WHO) there have been 12,000 cases diagnosed leading to 259 deaths. The spreading of the outbreak has led major airlines to halt service to China for a week up to an indefinite time period. Equity markets fear the unhalted spreading of the coronavirus will lead to a protracted global economic slowdown, with some strategists already calling for a decline in Q1 GDP for China to fall to 4.5% and a shaving of 0.5% from U.S. growth. It is difficult to know how long it will take the virus to be contained, but we do know it will heighten market volatility and the probability of further downside market action until it is.
As we enter next week’s trading sessions, the market will brace for the re-opening of the Shanghai Index which has been closed for the Lunar New Year, and its shuttering was extended by the Chinese authorizes to Monday, February 3. China’s Deputy Bank Governor, Pan Gongsheng announced last Friday the government was ready to inject liquidity into the equity markets to help stabilize equity prices from the negative effects of the coronavirus and sharp equity market declines seen last week in the U.S. and Europe. A quick scan of research regarding equity market performance during past epidemics brought me to some data from the Schwab Center for Financial Research. Though the data has not been statistically verified, it did show that epidemics as far back as July 1952 did create in some cases an initial drawdown in equity prices. But within one month from the beginning of the epidemic, the S&P 500 actually gained on average 0.5% over 16 epidemic outbreaks. After three months, the S&P 500 gained on average 2.4%. We are all trying to assess the potential impact the epidemic will have on risk assets, and will it derail the projected recovery in global growth we were all hoping for.
In turning to next week’s economic calendar, the key data releases will center around January U.S. ISM Manufacturing and Services, and the Non-Farm payroll results due out on Friday. On Monday, we start off with the ISM Manufacturing Index for January where the Street is projecting a rise to 49.1 from 47.8 in December. There is expected strength to be shown in the in orders component and we have seen across the board increases in regional manufacturing indicators since the beginning of the year.
The ISM Non-Manufacturing Index reporting on Wednesday, is expected to show a small decline to 54.7 from 55.0 in December. Though January will show a modest decline, the level of growth still shows a solid increase in the services based sectors.
On Friday, the Non-Farm payroll data is estimated to have grown by 187,000 jobs to start the year in January. The unemployment rate should be unchanged at 3.5%, the participation rate should remain stable and average hourly earnings are projected to rise by 0.3% month over month, a rise from the 0.1% seen in December.
The Week In Review
U.S. Equities
U.S. equity markets suffered a steep decline last week as market participant’s solid equities due to the uncertain economic impact the coronavirus could have on global economic growth.
a) Dow Jones -2.52%, MTD -0.89%, YTD -0.89 b) S&P 500 -2.10%, MTD -0.04%, YTD -0.04% c) Russell 2000 -2.89%, MTD -3.21%, YTD -3.21%
Drivers: I) The U.S. Senate impeachment trail saw the end last week of the White House defense arguments, and late on Friday the Senate voted 51-49 to call no further witnesses. The three-week trial will hear closing arguments on Monday for four hours and Senators will be able to speak on the trail as well. The final impeachment vote will take place on Wednesday and it is expected that President Trump will be acquitted.
II) New home sales in December weakened a bit, but the overall housing trend remains favorable. New single- family hope sales reached 694,000 in December which was a 0.4% decline over the month. The result was below the consensus Street estimate which called for a slight increase. Positively, new home sales are up 23.0% year over year, and housing inventory increased from 5.5 to 5.7 months. The median price of a new home rose by 0.5% to $331,400.
III) The Federal Reserve’s inflation target of 2.0% was missed last week, as the PCE deflator rose a above trend 0.3% in December bringing it up to 1.6% from a year ago. Excluding the volatile food and energy, the core PCE increased by 0.2% after rising 0.1% during the four previous months. The PCE met Street expectations and on a year-ago basis, the core PCE was up 1.6% versus 1.5% in November. Inflation is the U.S. remains muted and it may prompt a rate cut later in the year.
IV) U.S. GDP for Q4 came in at 2.1%, which bring growth for all of 2019 to 2.3%. Despite a modest decline, consumer spending continued to be a major contributor to growth, and residential investment along with intellectual property investment were also additive to GDP growth. Trade was additive as imports declined, but inventory investment was a drag. Government spending was a contributor, while real disposable income growth dropped to 1.5% from 2.9%.
V) Equities Month to Date are lower with Large-Cap, Growth, Utilities and Technology leading equity price performance. The laggards on the year are Small-Cap, Value, Energy and Materials.
Capitalization: Large Caps +0.11% (YTD +0.11%), Mid-Caps -0.80%(YTD -0.80%) and Small Caps -3.21% (YTD -3.21). Style: Value –4.82% (YTD -4.82%) and Growth -1.33% (YTD -1.33%). Industry Groups: Utilities +6.62% (YTD +6.62%), Technology +3.95% (YTD +3.95%), Information Technology +3.60% (YTD +3.60%), REITs +1.41%(YTD +1.41%), Communication Services +0.53% (YTD +0.53%), Consumer Staples +0.32% (YTD +0.32%), Consumer Discretionary -0.05% (YTD -0.05%), Industrials -0.46% (YTD -0.46%), Financials -2.59% (YTD -2.59%), Healthcare -2.72% (YTD -2.72), Materials -6.22% (YTD -6.22%) and Energy -11.04%(YTD -11.04%).
European Equities
The MSCI Europe index fell last week by -2.64% as coronavirus continued to spread and investors were concerned over the negative impact it may have on China and European growth.
Drivers: I) Euro-zone GDP grew by only 0.1% during Q4, slowing from the 0.3% rate seen in Q3 and was below expectations of 0.2%. On an annual basis, growth eased to 1.0% from 1.2%. Inventories were the largest drag which match the individual countries’ preliminary estimates, while domestic demand increased, and net trade was a positive contributor to growth. One of the primary detractors to growth were the worker strikes in France.
II) Business and consumer sentiment in the euro-zone rose to 102.8 in January, from 101.3 in December. Headwinds eased last month as industry confidence rose 2 points as managers’ views of production and inventory expectations rose. On the flip side, services confidence fell 0.1 points on worsening assessments of past demand while consumer confidence remained stable. Retail sales dropped 0.8 points on a poor view of current stocks.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was lower by -2.64% for the week (MTD -2.51%, YTD -2.51%).
Asian Equities
Asian equity markets The Dow Jones Asia Index declined by -4.18% for the week, (MTD -3.06%, YTD -3.06%) as investors fled risk assets due to the potential negative growth impact of the coronavirus.
Drivers: I) China’s manufacturing PMI fell in January to 50 from December’s level of 50.2. Positive expectations from the Phase One trade deal has been offset by the Wuhan coronavirus epidemic, which is dragging down retail, gaming and travel related sectors. The trajectory of the Chinese economy over the next few months will depend on the length of time it will take to contain the virus, after which manufacturing should improve.
II) Japan’s seasonally adjusted industrial production bounced back in December by rising 1.3%, after declining by 1.0% and 4.5% respectively in November and October. The annual drop was 3.0% which reflected continued weakness in domestic production following Japan’s implementation of the higher tax regime in October and weaker global demand. The lessening of trade tensions may boost industrial production in 2020, but the outbreak of the coronavirus in China may negatively affect trade with Japan over the next several weeks.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was lower by -2.60% (MTD -1.90%, YTD -1.90%), the Hang Seng Index fell by -5.68%(MTD -6.44%, YTD -6.44%) and the Shanghai Composite was closed for the Lunar New Year 0.00% (MTD -2.41%, YTD -2.41%).
Fixed Income
Treasury yields have seen a precipitous decline over the past two weeks, as the coronavirus outbreak has driven investors into safe haven treasuries.
Performance: I) The 10-year Treasury yield was lower last week ending at 1.508% down from 1.687%. The 30-year yield declined last week finishing at 1.998 down from 2.133%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.62% last week, MTD +1.92% and YTD +1.92%. The Bloomberg Barclays US MBS TR was higher by +0.19% last week, MTD +0.70% and YTD +0.70%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.26%, MTD +0.03% and YTD +0.03%.
Commodities
The DJ Commodity Index plunged last week declining -3.24% and is lower month to date -7.94% (YTD -7.94%). Commodity prices dropped last week as investors worried about a potential economic growth slowdown brought on by the coronavirus, which will curtail the demand for energy and industrial metals.
Performance: I) The price of oil dropped last week by -4.74% to close at $51.63 and is lower month to date in January by -15.44% (YTD -15.44%). Oil prices continued to fall last week as investors are concerned the coronavirus will slow the demand for energy as global growth falls.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was lower by -0.53 ending at 97.36 for the week (MTD +1.00%, YTD +1.00%). The USD fell last week as investment firms such as Goldman Sachs are forecasting the coronavirus epidemic could slice 0.5% from Q1 U.S. GDP growth.
III) Gold rose last week as investors remained in risk-off mode due to the coronavirus and as central banks continue to buy the precious metal. Gold was higher by +1.40% last week, rising to $1593.4 (MTD +4.61%, YTD +4.61%).
Hedge Funds
Hedge fund returns in January are primarily higher with the core strategies, Event Driven, Macro, Relative Value and Multi Strategy in positive territory, while Equity Hedge is lower on the month.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.54% MTD and up +0.54% YTD.
- Equity Hedge has fallen by -0.02% MTD and is down -0.02% YTD.
- Event Driven is higher MTD +0.44% and is up YTD +0.44%.
- Macro/CTA has risen by +1.05% MTD and is up +1.05% YTD.
- Relative Value Arbitrage has advanced by +0.74% and is up +0.74% YTD.
- Multi-Strategy is up MTD at +0.73% and is higher by +0.73% YTD.
Data Source: Haver Economics
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