Fast-Spreading Coronavirus Slams Stocks
Stocks fell sharply on Friday, wiping out the Dow Jones Industrial Average’s gain for January, as investors grew increasingly worried about the potential economic impact of China’s fast-spreading coronavirus.
The Dow dropped 603.41 points, or 2.1%, to 28,256.03 in the 30-stock average’s worst day since August. The S&P 500 had its worst day since October, falling 1.8% to 3,225.52. The Nasdaq Composite dropped 1.6% to 9,150.94.
On Friday, the U.S. declared the coronavirus a public health emergency within the country. Delta, American and United suspended all flights between China and the U.S.
The virus, which was first discovered in the Chinese city of Wuhan, has now spread to at least 18 other countries and has dampened sentiment over global economic growth. China’s National Health Commission confirmed on Friday that there have been 9,692 confirmed cases of the coronavirus, with 213 deaths.
“There’s fear going into the weekend,” said Ilya Feygin, senior strategist at WallachBeth Capital. “The theme coming into this year was the Fed and Trump are going to bail us out of any problems, but the virus is something neither one can do anything about. That’s a reason to become more fearful.”
Las Vegas Sands, a proxy stock for the coronavirus given the company’s exposure to the Chinese market, fell more than 1%. Airline stocks such as American and United dropped more than 3% each while Delta slid 2.4%. Travel stocks also got hit as the Trump administration imposed tighter travel restrictions to China.
The WHO recognized the deadly pneumonia-like virus as a global health emergency on Thursday, citing concern that the outbreak continues to spread to other countries with weaker health systems. WHO’s designation was made to help the United Nations health agency mobilize financial and political support to contain the outbreak.
“The outbreak of the coronavirus has added another headwind to the near-term outlook for stocks,” said Peter Berezin, chief global strategist at BCA Research, said in a note. “Viruses often become less lethal as they mutate because a virus that kills its host is also a virus that kills itself. Unfortunately, in a world of mass travel, a virus can spread across the globe before it has time to lose potency.”
Las Vegas Sands and Wynn Resorts, two stocks that are coronavirus proxies given their gaming exposure in China, fell more than 1.5% each. Airline stocks such as American and United dropped more than 2.5% each while Delta slid 2%. Travel stocks also got hit as the Trump administration mulls over tighter travel restrictions to China.
Caterpillar shares fell 3% after the industrial giant’s CEO warned about “global economic uncertainty” in the company’s latest quarterly earnings report, in part a reference to the virus. Caterpillar also issued disappointing earnings guidance for 2020.
On the positive side, Amazon shares surged 7.4% after the company posted a quarterly profit and revenue that easily beat analyst expectations. Amazon Web Services, the company’s cloud business, saw stronger-than-expected revenues.
Investors are nearly halfway through the corporate earnings season. More than 70% of the 226 S&P 500 companies that have reported have beaten analyst earnings expectations, FactSet data shows.
Volatile January
The major averages saw an uptick in volatility this month as investors grappled with rising tensions between Iran and the U.S., trade worries with China and the recent coronavirus scare.
The S&P 500 closed marginally lower for January, snapping a four-month winning streak. The Dow also had its first monthly loss since August. The Nasdaq posted a 2% gain in January, its fifth-straight monthly advance.
The Cboe Volatility Index (VIX), widely considered to be the best fear gauge in the market, rose to just around 19 this month from 13.78, a gain of more than 37%.
Stocks could face some seasonal headwinds next month. February has not been the market’s best month historically. Data from The Stock Trader’s Almanac shows the S&P 500 averages a gain of just 0.1%. Investors will also face a number of obstacles in the new month, including worries over how the U.S. presidential election shakes out. Coronavirus fears could also persist in February.
“That’s going to hurt China,” said Tom Martin, senior portfolio manager at GLOBALT. “For an economy that is increasingly trying to transition to the consumer, it’s definitely a headwind.”
“When you start seeing real actions on the part of multinational companies, as well as people trying to put a number on it, it’s no longer something that is not going to have an impact at all,” Martin said.
I believe the information in the article is critically important because it tells me one thing: this new coranavirus can easily spread from asymptomatic people who have it to infect others and that's quite disturbing and has huge implications for global health authorities rushing to contain a virus which increasingly appears to be next to impossible to contain.This week, we learned of a new study which documents first case of coronavirus spread by a person showing no symptoms:
In other words, this new virus has all the makings on the next global pandemic, so it's best not to dismiss it and track it closely because if it does spread like wildfire the repercussions on the global economy and financial markets will be dire.
People showing no symptoms appear to be able to spread the novel coronavirus that has caused an outbreak in China and led world health authorities to declare a global emergency, researchers reported Thursday in the New England Journal of Medicine. If confirmed, the finding will make it much harder to contain the virus.Indeed, if asymptomatic transmission is more prevalent than initially believed, it will make the job of containing this virus that much more difficult, if not impossible.
The case described — from Germany — could help resolve one of the major unknowns about the virus, which as of Thursday night had infected nearly 9,700 people in China and killed 213. About 100 more infections have been reported in 18 other countries, but no deaths.
Some viruses, including SARS, which is another coronavirus, can only be passed when a person is showing symptoms. Others, like the flu, can be spread a day or two before the onset of symptoms. If people are contagious before they become sick, they can be unknowingly spreading the virus as they go shopping or to work or to the movies. Trying to snuff out the virus in that case is a much more difficult task.
Equally worrisome, Bloomberg reports that while doctors have focused on respiratory samples from pneumonia cases to identify coronavirus patients, they might have ignored a less apparent and hidden source of the spread: diarrhea:
Many of the emerging coronaviruses are so-called pneumoenteric viruses, meaning they can replicate both in the respiratory tract and the gastrointestinal system, said Ralph Baric, professor of microbiology and immunology at the Gillings School of Global Public Health at the University of North Carolina at Chapel Hill, who has studied coronaviruses for decades.The fast spread of coronavirus is why stocks and other risk assets are getting slammed this week.
Overwhelmed by hundreds of severely sick pneumonia patients, doctors in Wuhan might not have focused on any gastric signs, Baric said in a phone interview.
Importantly, we still don't know enough about this new coronavirus but as it continues to spread, there are heightened fears that this might become the next global pandemic.
And there's nothing more deflationary than a global pandemic. The Fed can raise its balance sheets all it wants, if there's a global pandemic, stocks and other risks assets will get roiled and US long bonds will rally as investors seek safe, liquid assets.
This is exactly what is happening this week. Stocks are getting slammed and bonds are rallying hard.
In fact, Jim Bianco of Bianco Research posted the chart below on LinkedIn of the US 30-year bond yield stating "the only time in history the 30-year has been under 2% is shown on the chart (August and September)":
The rally in US long bonds is impressive and can continue if cases of coronavirus keep exploding up.
On Monday, the Chinese get back to work after the Lunar New Year holiday but according to Bloomberg, at least two thirds of the Chinese economy will stay shut next week.
One thing we know, the coronavirus will be worse for the Chinese economy than SARS and the Chinese economy is a lot more important to the global economy now than in 2003.
Exactly how big the economic hit will be is hard to predict. China hasn't come to a complete standstill — the Shanghai Stock Exchange is reopening on February 3. Grocery stores and food delivery services are still up and running, even in areas under lockdown.Global economic weakness translates into lower global bond yields, more negative bond yields around the world, more uncertainty, all of which is supportive of US long bond prices (TLT) which are close to making record highs (as yields make record lows):
ING economist Iris Pang said Wednesday that the outbreak would knock a modest 0.3 percentage points off China's first quarter growth.
But Tommy Wu, analyst at Oxford Economics, said the impact could be worse than the SARS outbreak in 2003, given the coronavirus is spreading rapidly and coincides with the holiday travel rush. Economists at Nomura warned that the outbreak could knock more than two percentage points off growth in the first quarter — larger than the quarterly drop registered during SARS.
Patrick Perret-Green, an economist with research firm AdMacro, said the hit to China's annual growth rate could be even more severe.
"There will be no quick recovery. China was growing strongly [during SARS], as was the rest of the world," he said. "Now China and the global economy is like a patient on dialysis, and somebody just pulled an IV out."
Now, one astute bond trader I spoke to told me on Thursday he's waiting for the World Health Organization "to declare a global pandemic" and wants to see a blow-off bottom in bond yields before going short bonds and he may be right as the underlying US economic activity doesn't warrant long bond yields this low.
But that's all fine and dandy to say in normal times, these aren't normal times. Maybe fears of coronavirus are exaggerated, maybe not. We hear a lot of people stating all sorts of things but the truth is, we simply don't know enough about this new virus yet to proclaim anything and asymptomatic transmission is definitely something to worry about (although we only really have one documented case).
How does the coronavirus outbreak end? Vox published a great article where three epidemiologists said it will end in one of three ways:
- The spread of the virus gets under control through public health interventions. This is the best-case scenario, and essentially what happened with the SARS (severe acute respiratory syndrome) outbreak in 2003. In late 2002 and 2003, SARS infected 8,096 people (mainly in China), and killed 774 people in 17 countries. Remarkably, by 2004, SARS was basically gone. “SARS was the classic case of how various public health interventions can work and stop an outbreak,” Jessica Fairley, a professor of global health medicine at Emory University, explains.
- The virus burns itself out after it infects all or most of the people most susceptible to it. Michael Mina, an epidemiologist at the Harvard School of Public Health, offers the 2015-2016 Zika virus epidemic in Puerto Rico and South America as an example of an epidemic that essentially burned itself out. “Tons and tons of people got infected very rapidly,” he says. (There were more than than 35,000 cases in Puerto Rico in 2016.) But then the number of people susceptible to the disease dwindled. Those who were most at risk of coming into contact with the disease-carrying mosquitoes already got the disease. “And that ultimately leaves fewer people for those viruses to go in and infect.”
- Coronavirus becomes yet another common virus. There’s a third scenario about how this outbreak ends. That it doesn’t. Adalja explains there are now four coronavirus strains that commonly infect humans as common colds or pneumonia. It’s possible that this virus becomes the fifth — and like the flu, it could come and go with the seasons. Possibly, it could become a seasonal virus in China. Or, it could, like the flu, envelop the whole world.
I suspect we will see a lot of volatility in these markets as this all plays out, traders will be trading the news and if it's negative, they will be selling equities.
Apart from the spread of coronavirus, the other interesting story this week is what's next for the Federal Reserve's balance sheet:
The Federal Reserve will keep injecting cash into the banking system and buying billions of dollars of Treasury bills for a few more months, but it aims to start dialing back on both in the second quarter, Chair Jerome Powell said Wednesday.Don't kid yourself, when the Fed is pumping billions into the financial system every month, giving bankers money for nothing and risk for free, you'd better believe it's lifting stocks and other risk assets.
Powell’s comments, following the Fed’s latest interest-rate setting meeting, provided investors with some clarity on just how much longer the Fed plans to keep pumping liquidity into U.S. money markets and lifting the level of bank reserves. It has been doing both since last fall in response to a jarring surge in borrowing costs in bank funding markets.
Here is a look at what is known about the central bank’s plans for its bond holdings and market interventions:
WHEN DID THE FED START REBUILDING ITS BALANCE SHEET AND WHY?
The Fed acquired a vast portfolio of Treasuries and mortgage-backed securities in the wake of the financial crisis through three operations known as quantitative easing, or QE. These were meant to stimulate the economy by bringing down long-term yields and lowering borrowing costs.
It started reducing the size of its balance sheet in late 2017 to slowly unwind that stimulus, a process that ended last August. But September’s money market upheaval indicated officials had let the balance sheet get too small.
In response, it began daily cash injections in the repurchase agreement, or repo, market. In addition, it started buying Treasury bills to return bank reserves to level from early September.
HOW MUCH IS THE FED BUYING AND HOW LONG WILL IT CONTINUE?
Since mid-October, the Fed has been buying $60 billion a month of T-bills, and reserve levels have risen by more than $270 billion since then to roughly $1.67 trillion.
While Powell did not give a specific target, he set a floor: $1.5 trillion. That was roughly the level in early September before the liquidity problems arose. “We want to be clear that will be the bottom end of the range,” Powell said.
Powell said the aim is to reduce support in the least disruptive and most transparent manner possible, but he offered no specific schedule.
Jon Hill, an interest rate strategist for BMO Capital Markets, expects the Fed could taper purchases to $30 billion a month starting in March. Others expect the Fed to hold the current pace for longer.
POWELL SAYS THIS IS NOT QUANTITATIVE EASING. HOW DOES IT DIFFER?
The Fed’s previous rounds of asset purchases focused on long-term bonds in an effort to bring down interest rates. The purchases were paired with a strong message from the Fed that it was trying to stimulate the economy and intended to keep rates low.
This time, it is buying only short-term Treasury bills and making no pledge about long-term rate levels. Minneapolis Fed President Neel Kashkari recently likened it to trading one short-term risk-free investment for another.
IS THE FED’S BALANCE SHEET PROGRAM LIFTING THE STOCK MARKET?
A number of investors say so, contending it is inadvertently fueling higher stock prices because some market participants still associate it with stimulus.
Powell deflected questions about that on Wednesday, repeating his assertion the current action is purely technical and is not meant to be stimulative.
“It’s very hard to say what is affecting financial markets with any precision,” Powell said during the press conference.
Powell said Wednesday officials expect to reach an “ample” level of reserves, where the market is less reliant on the Fed, at some point in the second quarter.
And the Fed is on record stating it will not raise rates unless it sees persistent inflation, basically giving everyone the green light to leverage up and keep buying risk assets.
Of course, the Fed can create asset inflation, it cannot create economic inflation. And therein lies the problem because this new coronavirus can cause the Fed to keep pumping billions into the system a lot longer but if a global pandemic ensues, that will not help.
But be warned, there's plenty of liquidity out there, so I expect a lot of volatility in these markets, and it will persist until some good news breaks out about the virus finally being contained or the spread is slowing.
If the news keeps going from bad to worse, expect the S&P 500 to decline a lot more from these levels. In the short-term, I expect the S&P 500 ETF (SPY) to drop below its 20-week moving average but if there is more bad news from the coronavirus, expect an even more pronounced drop below its 50-week moving average:
And don't forget, next week we get the US ISM manufacturing and non-manufacturing figures as well as payroll numbers for January.
If for any reason those disappoint, investors will continue de-risking.
My hunch is most investors are in de-risking mode, worried about how things play out.
Below, CNBC's Eunice Yoon reports on the coronavirus in China.
Second, NBC News medical correspondent John Torres joins CNBC's "Power Lunch" team to discuss how the coronavirus outbreak is spreading as the death toll tops 170.
Third, former FDA commissioner Dr. Scott Gottlieb joins "Squawk Box" to discuss why he thinks the coronavirus in China is likely more widespread than the country's statistics suggest and that global spread of the virus appears inevitable.
Fourth, on Monday morning, Dr. Gittlieb joined Dr. Gregory Poland, professor of medicine and infectious diseases and the director of the Vaccine Research Group at Mayo Clinic who said "we're basically at a pandemic now."
Dr. Gottlieb said "the next two weeks are pivotal, if we don't start to see outbreaks in the US in the next two or three weeks, we might have dodged a bullet. I think we are going to start seeing secondary outbreaks over next two or three weeks and then it will be a difficult month."
Fifth, Mark Mobius of Mobius Capital Partners joins "Closing Bell" to discuss the state of the markets amid the coronavirus outbreak. Listen to what he says about contagion to other emerging markets. He sees this as an opportunity to buy and sees things more benign but it's too early to make such conclusions.
Lastly, Byron Wien, vice chairman at Private Wealth Solutions Group at Blackstone, weighs on global growth on "Squawk Alley." Listen carefully to Wien, he's spot on, the longer this goes on, the bigger the impact on the global economy.
Comments
Post a Comment