Economic Data Watch and Market Outlook
The holiday shortened week saw equity markets decline due to worries over the spreading of the coronavirus beyond China. In China, there have been 2800 confirmed cases which have led to 81 deaths. This has caused the Chinese government to lockdown the cities of Wuhan (where the virus began), Huanggang, Ezhou and Chiba, making public transportation unavailable in these cities. The virus has spread to Hong Kong, Australia, the U.S. and nine other countries. Unlike the SARS, outbreak in 2002 and 2003, when the Chinese government hid the outbreak for four months, China has been pro-active at trying to contain the virus. The SARS outbreak from 17 years ago, which claimed 800 lives, was estimated to have cost the global economy $40 billion in the study conducted by the Australian National University and Brookings Institution. In 2020, global economies are more closely linked today than in 2002 and 2003. Investors will anxious to see the effects the coronavirus will have on tourism, capital flows, global trade and international capital flows. Expect downside market risks to heighten.
As we enter next week’s trading sessions, the Senate impeachment trail will have the White House legal team continue with its defense of President Trump. The highly anticipated prosecution case from the Democratic House Impeachment team essentially repeated many of the same points heard since October and called for new witnesses. The financial markets have mostly ignored the proceedings. On deck, next week will be the FOMC January meeting where no change in interest rates is the call. Finally, we are in the middle of earnings season, and 86 companies or 17.0% of the S&P 500 have reported. Thus far, 73.0% and 66.0% have beaten earnings and revenues estimates respectively, and growth y/o/y is coming in at +0.8% for earnings and revenues are +3.3%. The original earnings estimate for Q4 from FactSet on December 31, 2019 was -1.5%.
In turning to next week’s economic calendar, a heavy schedule of data releases will be dominated by news regarding U.S. housing, the FOMC and Personal Income. On Monday, we start off with New Home Sales where the Street estimate is projecting sales increased in December by 1.5% to 730,000 units. Sales have risen as mortgage rates have decline and the affordability index has improved. Also, out on Monday is the report for Durable Goods which is estimated by the Street to have declined by 0.9% in December. The decline in orders was partly based on a drop in car production and weakness in the aircraft industry.
On Wednesday, the FOMC is expected to announce no change in monetary policy nor its outlook for the remainder of 2020. Economic growth remains steady, the unemployment rate is historically low, and inflation continues to run below 2.0%.
The first estimate for Q4 GDP growth will be released on Thursday and the Street estimate is growth at 1.6%. The primary drivers are the decline in imports and inventories as well.
We close out the week on Friday with Personal Consumer Expenditure Index which is estimated to have increased by 0.2% in December, while the Core PCE Price Index is projected to rise by 0.18%. The annual rate of 1.6% has been driven partially by an increase in private sector wages.
The Week In Review
U.S. Equities
U.S. equity markets dropped last week on worries over the outbreak of the coronavirus in China and the potential negative effect it may have on global economic growth.
a) Dow Jones -1.20%, MTD +1.68%, YTD +1.68 b) S&P 500 -1.01%, MTD +2.10%, YTD +2.10% c) Russell 2000 -2.19%, MTD -0.33%, YTD -0.33%
Drivers: I) The coronavirus in China spread to 12 countries last week, including Hong Kong, Macau, and Australia. Concerns over the potential impact on the tourism industry was exacerbated, as China announced it will be cancelling overseas flights and tours for its citizens beginning on Monday,January 27th. Expectations for a decline in global tourism negatively impacted the shares of energy, hotel, gaming and airline companies.
II) Existing Home sales were up a solid 3.6% in December to 5.54 million units. The December report exceeded Street consensus expectations and the monthly sales figure was the strongest since February 2018. The housing market has benefited from the decline in mortgage rates. With other housing data in hand, it appears that real residential investment was higher by 5.0% on a seasonal adjusted rate for the second straight quarter in Q4.
III) The Existing Homes Sales report has shown a firming in its price data as the median sale pricewas higher by a 7.8% annual rate in December. This is the strongest rise seen in almost four years., while housing data from other sectors of the housing industry has shown a more moderate rise in prices. Specifically, the FHFA house price index reported prices were up by 4.9% annual on an annual basis in November.
IV) The Markit Manufacturing PMI in the flash January report declined by 0.7 points to 51.7, which came in under expectations. On the flip side, the Services PMI rose 0.4 points to 53.2, beating expectations. After declining for much of 2018 and 2019, the manufacturing and services PMI surveys have bounced off low levels in recent months. Manufacturing though has slide lower for two straight months, while services have risen over the past three months in a row.
V) Equities Month to Date are higher with Large-Cap, Growth, Technology and Info. Technology leading equity price performance. The laggards on the year are Small-Cap, Value, Energy and Materials.
Capitalization: Large Caps +2.20% (YTD +2.20%), Mid-Caps+1.66%(YTD +1.66%) and Small Caps -0.33% (YTD -0.33). Style: Value –1.47% (YTD -1.47%) and Growth +1.34% (YTD +1.34%). Industry Groups: Technology +6.24% (YTD +6.24%), Information Technology +6.07% (YTD +6.07%), Utilities +5.73%(YTD +5.73%), Communication Services +3.82% (YTD +3.82%), REITs +3.29%(YTD +3.29%), Industrials +2.50% (YTD +2.50%), Consumer Staples +0.97 (YTD +0.97%), Healthcare +0.53% (YTD +0.53), Consumer Discretionary +0.45% (YTD +0.45%), Financials -1.29% (YTD -1.29%), Materials -2.76% (YTD -2.76%) and Energy -5.82 (YTD -5.82%).
European Equities
The MSCI Europe index was lower last week by -0.86% as economic data showed that Germany may be bottoming, and the World Health Organization stopped short of declaring the China coronavirus a health emergency.
Drivers: I) Euro-zone PMI in January was unchanged on the whole at 50.9, but the underlying components are beginning to show a turnaround. The PMI implied a 1.1% annual rate of growth for the start of 2020, which is on par with the Street growth estimate of 1.25% for Q1 2020. Manufacturing rebounded strongly, including Germany, and new orders rose 0.2 pints to 50.8 and have increased 2.1 points since September. The Employment Index rose by o.2 points to 51.1 which implies employment growth in the private sector is growth at a 1.0% rate.
II) The ECB at its January meeting last week left monetary policy unchanged as well as its near-term outlook. In terms of economic growth, risks were still seen “on the downside”, but were not as prominent as discussed at the last meeting. In fact, there was some discussion for describing the risks to growth as “balanced”. In terms of inflation, the “modest” increase in underlying inflation was seen as in line with current expectations.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was lower by -0.86% for the week (MTD +0.13%, YTD +0.13%).
Asian Equities
Asian equity markets declined on news of the outbreak of the coronavirus in China and its potential impact on travel during the Lunar New Year. The Dow Jones Asia Index declined by -0.73% for the week, (MTD +1.17%,YTD +1.17%)
Drivers: I) The Bank of Japan kept monetary policy on hold in January as expected. The 10-year yield for the JGB was maintained at around 0.0% and the short-term rate was held at -0.1%. Positive revisions were made to the GDP forecasts for fiscal 2019, 2020 and 2021 due to the bank’s expectation for moderate improvement in the growth trend, particularly related to global demand. After the deployment of the government’s fiscal stimulus package in December, the possibility for further loosening of monetary stimulus has been greatly reduced.
II) The Core CPI (excluding food) in Japan rose by 0.7% year over year in December, an increase from the 0.5% rise seen in November. Core-core CPI (ex food and energy) rose by 0.9% year over year after gaining 0.8% in the prior month. This is in line with expectations of an upward trend in prices as a result of the tax hike even though lower education costs, weak commodity prices, and reduced spending will moderate some of the net increase.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was higher by -0.89% (MTD +0.72%, YTD +0.72%), the Hang Seng Index rose by -3.98 (MTD -0.80%, YTD -0.80%) and the Shanghai Composite declined by -3.22% (MTD -2.41%, YTD -2.41%).
Fixed Income
Treasury yields were lower on the week as the outbreak of the coronavirus in China drove investors into safe haven treasuries and out of risk assets.
Performance: I) The 10-year Treasury yield was lower last week ending at 1.687% down from 1.823%. The 30-year yield declined last week finishing at 2.133 down from 2.282%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.79% last week, MTD +1.30% and YTD +1.30%. The Bloomberg Barclays US MBS TR was higher by +0.20% last week, MTD +0.51% and YTD +0.51%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.42%, MTD +0.28% and YTD +0.28%.
Commodities
The DJ Commodity Index slumped last week declining -3.48% and is lower month to date -4.70% (YTD -4.70%). Commodity prices plummeted last week as energy prices including oil and natural gas declined on concerns the coronavirus in China would spread globally, and negative effect global travel and leisure.
Performance: I) The price of oil plunged last week by -7.83% to close at $54.20 and is lower month to date in January by -11.23% (YTD -11.23%). Oil prices suffered a severe decline as the China coronavirus outbreak engendered fears over a slowdown in global travel.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was higher by +0.24 ending at 97.88 for the week (MTD +1.54%, YTD +1.54%). The USD rallied last week on solid US economic data and concerns over the potential spreading of the coronavirus beyond China.
III) Gold rose last week as investor fears of a global economic slowdown prompted by the coronavirus in China, drove capital into the safe haven metal. Gold was higher by +0.90% last week, rising to $1571.3 (MTD +3.16%, YTD +3.16%).
Hedge Funds
Hedge fund returns in January are primarily higher with the core strategies Equity Hedge, Event Driven, Macro, Relative Value and Multi-Strategy all in positive territory.
Performance:
- The HFRX Global Hedge Fund Index is higher at +1.03% MTD and up +1.03% YTD.
- Equity Hedge has risen by +0.97% MTD and is up +0.97% YTD.
- Event Driven is higher MTD +0.70% and is up YTD +0.70%.
- Macro/CTA has risen by +1.79% MTD and is up +1.79% YTD.
- Relative Value Arbitrage has advanced by +0.74% and is up +0.74% YTD.
- Multi-Strategy is up MTD at +0.70% and is higher by +0.70% YTD.
Data Source: Haver Economics
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