Market and Economic Commentary - Week Ending 03/06/2020

Market and Economic Commentary - Week Ending 03/06/2020

Global Stocks Settle Lower on Concern about the Economic Fallout from the Spreading Coronavirus

The S&P 500 Index ($SPX) on Friday close down -1.71%, the Dow Jones Industrials Index ($DOWI) closed down -0.98%, and the Nasdaq 100 Index ($IUXX) closed down -1.63%.

U.S. stock indexes on Friday sold off sharply again on concern about the economic fallout from the spreading coronavirus. Confirmed cases of the coronavirus have risen above 100,000 in more than 60 countries, with more than 3,400 deaths.

Energy stocks on Friday plummeted as crude oil prices sank more than 10% to a 3-1/2 year low. Crude prices dropped after Russian Energy Minister Novak told OPEC ministers Friday in Vienna that he favored maintaining OPEC+ crude output at current levels until June when they could again consider deeper cuts. OPEC ministers on Thursday had agreed to an additional 1.5 million bpd cut in crude production for Q2 with 1.0 million bpd coming from OPEC members and 500,000 bpd coming from non-OPEC members such as Russia. However, the proposed cut was contingent on Russia's support.

Stock indexes recovered from their worst levels Friday after White House adviser Kudlow said the Trump administration is working on targeted measures that could be rolled out "quickly" to address the economic impact of the coronavirus.

Dovish Fed comments were also supportive for stocks. Dallas Fed President Kaplan (voter) said Thursday night that the acceleration of coronavirus cases across the U.S. would be an important factor if the Fed needs to cut interest rates again at the Mar 17-18 FOMC meeting. St. Louis Fed President Bullard (non-voter) said Friday morning that the Fed is "willing to do more" if needed to shelter the U.S. economy from the impact of the coronavirus.

Friday's U.S. labor data was bullish for stocks. Feb non-farm payrolls rose +273,000, stronger than expectations of +175,000, and matched January's increase as the most in 1-3/4 years. Also, the Feb unemployment rate unexpectedly fell -0.1 to 3.5%, matching last year's 50-1/2 year low and showing a stronger labor market than expectations of unchanged at 3.6%. Another supportive factor for stocks was record low global interest rates as the 10-year T-note yield on Friday sank to a record low 0.657%. The fed funds market has priced in an additional 50 bp Fed rate cut at the Mar 17-18 FOMC meeting and then at least one more -25 bp rate cut later in the year. The 10-year German bund yield dropped to a record low of -0.747%, and the 10-year UK gilt yield tumbled to a record low 0.203%.

The VIX S&P 500 Volatility Index ($VIX) on Friday soared to an 11-year high of 54.39% and finished the day up +2.32 at 41.94%.

Big Picture U.S. Stock Market Factors: Bearish factors for the U.S. stock market include (1) the damage being done to the global economy by the spreading Chinese coronavirus, (2) ongoing U.S./Chinese trade and tech tensions despite the phase-one agreement, and (3) geopolitical risks from Iran, North Korea, and Venezuela.

Bullish factors include (1) reduced trade tensions after the U.S./China phase-one trade agreement, although the U.S./China trade conflict will continue as phase-two negotiations are expected to begin later in 2020, (2) record low bond yields in the U.S., UK, and Eurozone, and (3) expectations for S&P 500 earnings growth in 2020 of +9% after growth of +1% in 2019 and +23% in 2018.

Returns in the Global Markets for the week ending 03/06/2020 were as follows:

US Major Market Indexes (The first number is each category is the 1-week performance. The second number is the year-to-date performance)

Dow Jones 30 Industrial Average (+1.79%. -9.37%). S&P 500 (+0.61%, -8.00%). NASDAQ Index (+0.10%, -4.42%). US Small-Cap Index (-1.85%, -13.14%). CBOE Volatility Index, or Fear Gage, (+4.56%, +204.35%).

US Sector ETFs

Communication Services (-1.85%, -7.10%). Consumer Discretionary (-1.02%, -8.59%). Consumer Staples (+6.12%, -2.29%). Energy (-6.12%, -2.9.21%). Financial (-3.91%, -16.99%). Health Care (+4.90%, -4.62%). Industrials (-0.86%, -11.07%). Materials (+1.54%, -12.85%). Real Estate (+4.65%, -0.44%). Technology (+0.61%, -3.01%). Utilities (+7.93%, +3.85%).

Global Market ETFs

ACWI all-country World index (-0.04%, -8.86%). ACWX all-country World index ex US (-0.59%, -10.38%). AAXJ all-country Asia ex Japan (-0.37%, -7.36%). EWJ Japan (-0.68%, -11.21%). EZU Eurozone (-1.28%, -111.71%). ILF Latin America 40 Index (-5.61%, -22.26%). EEM Emerging Markets (-0.96%, -10.56%).

Commodities ETFs

DBC Commodity Tracking Index (-1.84%, -16.24%). DBA Commodities Agriculture (-1.44%, -9.24%). USO United States Oil (-7.62%, -31.85%). DBB Base Metals (-0.37%, -8.70%). IAU Gold (+6.17% +10.34%). BDRY Dry Bulk Shipping (+0.73%, -46.60%).

Bond Market

In the bond market, the 10-year US Treasury interest rate went from 1.103 on February 28, to 0.773 on March 6, for a 29.92% decline on the week.

Currencies

The DXY US Dollar Index went from 98.081 on February 27 to 95.934 on March 6 for a drop of 2.74% for the week.

Other Significant Events

Week Ahead

Next week, focus will again remain on cornovarius developments. As the virus hit transport, travel and tourism sectors all over the world, investors will be waiting for more stimulus measures from central banks and governments. The ECB holds monetary policy meeting on Thursday and UK will publish Spring Budget for 2020 on Wendesday. In the US, main releases include inflation and consumer confidence data. Other important events to be followed are UK monthly GDP, Eurozone and Japan final Q4 GDP figures; Germany industrial output; China consumer and producer inflation; Australia business and consumer morale; and India inflation and industrial production.

US Stocks Tumble as Virus Concerns Mount

Wall Street sold off once again on Friday despite a late comeback that pared some losses, as coronavirus fears more than offset US data employment. On Friday, data showed that nonfarm payrolls increased by 273 thousand in February, climbing the most since May 2018 and comfortably beating market expectations. Meanwhile, the jobless rate retreated to a 50-year low of 3.5 percent. However, fears of a global recession triggered by mounting coronavirus cases more than offset solid domestic macro data and dragged equities, while the 10-year Treasury yield tumbled below 0.7% for the first time ever. The energy sector suffered deep losses, as oil prices plummeted more than 10% after OPEC’s allies rejected additional output cuts. The Dow Jones plunged 256 points or 1% to 25865. The S&P 500 sank 52 points or 1.7% to 2972. The Nasdaq tumbled 163 points or 1.9% to 8576. On the week, the Dow gained 1.8%, the S&P 500 0.6% and the Nasdaq 0.1%.

Dollar Crashes to Over 1-Year Low

The dollar plunged to over one-year low on Friday and was set for its biggest weekly fall since May 2016, as expectations grew for more policy easing by the US Federal Reserve to cushion the impact of the fast-spreading coronavirus. The currency has become less attractive to investors following an emergency half-percentage point interest rate cut by Federal Reserve on Tuesday. The DXY was trading at 95.75 around 10:00 AM NY time, a level not seen since February of 2019.

US 10-Year Treasury Yield Below 0.7% for 1st Time

The yield on 10-year US Treasury dropped below 0.70% for the first time on Friday amid concerns about the impact of the coronavirus outbreak on global growth and expectations that the Federal Reserve will cut interest rates by another 50bps this month.

Germany 10Y Bond Yield Hits 26-week Low

Germany 10 Year Government Bond Yield decreased to a 26-week low of -0.726

Japan 10Y Bond Yield Hits 17-week Low

Japan 10 Year Government Bond Yield decreased to a 17-week low of -0.131%

France 10Y Bond Yield Hits 25-week Low

France 10 Year Government Bond Yield decreased to a 25-week low of -0.359%

US Crude Hits Lowest Since 2016

Crude oil prices slipped nearly 9% to below $42 per barrel on Friday, a level not seen since August of 2016, after OPEC’s producer allies rejected calls from the Cartel to together cut almost 4% of global crude supply. OPEC, led by Saudi Arabia, has recommended on Thursday to cut production by 1.5 million barrels per day to offset a slump in demand caused by the coronavirus outbreak. The COVID-19 outbreak already led major consultancies to slash their projection for global demand growth to the weakest level since the financial crisis.

German Stocks Drop to Over 6-Month Low

The DAX 30 tumbled 403 points or 3.4% to 11,542 on Friday, its lowest level since August 2019, as concerns about the impact of the coronavirus outbreak on the economy mounted. The losses came in even after manufacturing orders data from Germany came in much better than expected in January. Investor focus will turn to the ECB meeting next week, as policymakers are seen cutting the deposit rate by 10bps in an attempt to support growth. Other stock market indexes finished in the red: the CAC 40 plunged 222 points or 4.1% to the lowest level in nearly a year; the FTSE MIB slid 755 points or 3.5% to a six-month low; and the IBEX 35 tanked 307 points or 3.5% to the lowest since December 2018.

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Len Martinez is a Financial Consultant. Information in the "Bull Valley Advisor” newsletter should not be considered as investment advice or an offer to buy or sell securities. Data is derived from sources considered to be reliable including Morningstar, StockCharts.com, YAHOO Finance, FINVIZ, TipRanks, Investing.com, ECRI, OCED, gurufocus, Crestmont Research, Trading Economics and S2O. Results are not guaranteed. Len Martinez is not an RIA. The data is shown for informational purposes and should not be considered investment advice or an offer to buy or sell securities.