- Weekly global market focus
- Stocks continue to fall on virus risk uncertainty
- Markets boost expectations for Fed easing after Powell’s unusual statement
- U.S. ISM manufacturing index expected to show a small declineÂ
Weekly global market focus — The U.S. markets this week will focus on (1) the extent to which the coronavirus continues to spread and morph into a global pandemic, (2) any immediate reaction by the Fed and other global central banks to the coronavirus after Fed Chair Powell released an unusual statement last Friday saying the Fed would “act as appropriate,” (3) whether the stock market continues to plunge as it discounts economic fallout from the coronavirus, (4) this week’s heavy schedule of Fedspeak, (5) the tail-end of Q4 earnings season with reports from 15 of the S&P 500 companies, and (6) politics with this week’s Super Tuesday Democratic primaries in more than a dozen states.
April WTI crude oil prices last Friday plunged to another new 14-month nearest-futures low and closed the day sharply lower by -$2.33 (-4.95%) at $44.76. The markets are waiting to see whether Saudi Arabia can corral Russia into a new production cut at the OPEC+ meeting this Thursday and Friday to counteract the plunge in global oil demand.
In Europe, the markets will assess the growing fallout from the coronavirus, which has been particularly acute in Italy. The EU and UK today will begin the first round of their formal negotiations to reach a trade deal before the transition expires at the end of this year.
In Asia, the markets today will react to last Friday night’s news that China’s PMI indexes unexpectedly plunged to record lows, taking out even the lows seen during the 2007/09 global financial crisis. China’s Feb manufacturing PMI plunged by -14.3 points to 35.7. There were even larger drops in the sub-indexes as the Feb new orders sub-index plunged by -22.1 points to 29.3, and the new export orders sub-index plunged by -20.0 points to 28.7. The Feb non-manufacturing PMI plunged by -24.5 points to 29.6 as the service sector was hard-hit by quarantines and sharply reduced consumer spending.
Pimco made some news by predicting a -6.0% q/q annualized plunge in Chinese GDP in Q1, which would result in a year-on-year gain of only +3.0% y/y vs +6.0% in Q4.
Stocks continue to fall on virus risk uncertainty — The U.S. stock market plunged again last Friday as the markets continue to suffer from the uncertainty being caused by the spread of the coronavirus in the United States. The U.S. had its third case of community transmission with a new case in Oregon, and the U.S. reported its first death from the virus. There is an investigation of a possible outbreak of the virus at a nursing home in the Seattle area. The U.S. has tested so few people that the coronavirus might have already spread significantly without the knowledge of health authorities.
The S&P 500 index last Friday posted a new 6-month low and closed the day down by -0.82%, bringing the weekly decline to -11.49%. The S&P 500 index has now corrected lower by a total of -15.8% from the mid-Feb record high.
The VIX index last Friday soared to a 2-year high of 49.48 but then fell back to close the day up by only +0.95 at 40.11. The VIX on last Friday’s high of 49.48 was just mildly below the 4-1/2 year high of 50.30 posted in Feb 2018 when Volmageddon caused some VIX products to blow up. The VIX reached a record high of 89.53 during the financial market crisis in October 2008.
Markets boost expectations for Fed easing after Powell’s unusual statement — The markets are now expecting even more Fed easing after Fed Chair Powell last Friday released an unusual statement saying in part that, “We will use our tools and act as appropriate to support the economy.”
The market is now expecting a 100% chance of a -25 bp Fed rate cut at its meeting in two weeks on March 17-18 and a 53% chance of a -50 bp rate cut at that meeting. There is talk that the Fed might even announce an inter-meeting rate cut as soon as this week, not wanting to wait for the March 17-18 meeting and feeling pressure to halt the bleeding in the stock market. There is also talk that the Fed might announce coordinated easing measures with other global central banks, thus getting more bang for their buck with group action.
The markets last Friday boosted expectations for Fed easing by year-end by 21.5 bp to 96.5 bp (3.9 rate cuts), thus adding in a single day almost a full rate-cut to easing expectations. The Dec 2020 federal funds futures contract last Friday closed -21.5 bp at 0.66%, reflecting expectations for an overall 96.5 bp rate cut from the current funds rate target mid-point of 1.625%.
A Fed easing cannot directly counteract the economic fallout from the coronavirus, which could become much worse if there are school and business shutdowns. However, a rate cut would help the stock market, underpin U.S. business and consumer confidence, and provide reassurance that the Fed is on the job with some crisis management.
U.S. ISM manufacturing index expected to show a small decline — The market consensus is for today’s Feb U.S. ISM manufacturing index to fall by -0.4 to 50.5, reversing part of Jan’s sharp +3.1 point gain to 50.9. The ISM index in January finally rose above 50 after having been below 50.0 in the previous 5 months (Aug-Dec).
The markets will pay little attention to today’s ISM index since it will not reflect the full scope of the fallout from the coronavirus, which only became highlighted as a major problem when the U.S. stock market plunged in late February. The extent of the drop in China’s PMI indexes shows that the U.S. ISM indexes could have much farther to fall if the virus spreads significantly in the U.S.
