Seeking Terra Firma: Solid Ground Elusive as China’s Economy Digs Deeper Hole

Stocks and Treasury yields start the week under more pressure as data from China show the impact of the virus and chances for a Fed rate cut appear to grow.

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5 min read
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Key Takeaways

  • Chinese economic data over weekend comes in worse than expected

  • Hopes for fiscal stimulus helps send Asian stocks higher, but U.S. still in the red

  • Big week for data with jobs report, manufacturing numbers ahead

JJ Kinahan, Chief Market Strategist, TD Ameritrade

(Monday Market Open) Climbing out of this ditch is going to be an uphill battle. That’s the takeaway after a night when futures on the Dow Jones Industrial Average ($DJI) traded in a huge range of 1,000 points and struggled to find footing.

Markets were all over the place overnight as people continue trying to get a grasp of what the virus means for global supply chains, and for more down-to-earth kind of things like whether people are going out to restaurants. By the time the opening bell approached, the red vibe remained here in the U.S. and Europe.

However, Asian stocks revived a bit as analysts said maybe this deep economic dive could make governments decide to throw in some fiscal stimulus.

Hopes for a stimulus in China got more fuel over the weekend as a manufacturing metric there plunged to the worst level not just since the 2008 financial crisis, but in history (well, at least since these records started being kept). China’s official manufacturing purchasing managers’ index (PMI) dropped to 35.7 in February from 50.0 in January, below the previous low of 38.8 in November 2008.

On another China-related note, casino revenues plunged 88% in Macau last month, media reports said. This isn’t good news for travel-related stocks like resorts and casinos. They came under pressure again in futures trading before Monday’s open.

On the Home Front

Back home, there’s a weird kind of situation where people are mindful about watching the virus spread but are reacting in contrary ways. Anecdotally, restaurants still seem packed. At the same time, you can’t get a cart at Costco (COST) because everyone is stocking up. It makes you wonder how much of the fear is being spread by media—social or otherwise.

Goldman Sachs (GS) came out with a note over the weekend saying it expects the Fed to cut rates by 50 basis points, maybe before the March 18 meeting. Looking at the 10-year yield, where investors forced rates down to all-time lows just above 1% early Monday, it’s unclear how much of this is built into the market.

People are trying to figure that out. Is the market forcing the Fed, or will the market keep pounding the rate no matter what? That’s the kind of conundrum that everyone is trying to trade around. You’ve got CME futures now pointing to a 100% chance of a 50-basis point cut by the March meeting. A couple of weeks ago, there were 90% chances of no cut at all. That’s the kind of crazy situation we’re in.

If you’re bullish, you’re probably starting the week looking for those “green shoots” people talk about. Well, maybe consider a few this morning. Shares of Apple (AAPL), Microsoft (MSFT), Verizon (VZ), and Amazon (AMZN) all climbed into slightly greener territory in futures trading ahead of the opening bell. At times like these, investors are likely going to have to focus on some of the big gorillas like those as they seek direction. In another positive sign, crude oil is trading slightly higher this morning.

Calendar Page Turns with Fresh Retail Earnings Up Next

Remember that embattled oil company executive a few years ago who said, “I want my life back” after his company’s accident caused a massive crude spill in the Gulf of Mexico?

Investors might be feeling kind of like that by this point, wondering when analysts and the media will stop focusing on coronavirus and return to talking about typical market stuff like earnings and data. All of that goes on even when the entire market is focused on so-called “black swan” events, which some analysts say the coronavirus might be.


If you can pry your eyes away from the virus headlines, remember that a few big retailers have earnings coming up this week. Those include Kohl’s (KSS) and Target (TGT) tomorrow morning. 


Hearing executives talk about holiday season sales might feel a bit surreal when you consider how long ago that was and everything that’s happened since. Still, it might be worth tuning into these calls to hear how the companies are handling any virus-related disruptions to their supply chains, and to get a sense of whether executives see this improving or getting worse in weeks to come. It’s always good to get an insider’s view.

Dollar Tree (DLTR) and Ross Stores (ROST) are other notable retailers reporting this week. There’s also data ahead, with the February jobs report looming this Friday.

Jobs, Manufacturing and Super Tuesday Mark Busy Week

If there’s any evidence of the U.S. economy slowing due to recent weak service and manufacturing numbers, along with the beginning of the virus impact, the February payrolls report might start picking that up. Early indications show that analysts aren’t expecting February’s hiring pace to match the 225,000 jobs added in January.

Before that, today’s ISM manufacturing index could give investors the latest sense of U.S. manufacturing health. It comes out right after the open, and the Briefing.com consensus is for a slight drop to 50.3% for a headline number, down from 50.9% last time. Any number above 50% indicates expansion. If the number falls below 50%, it could represent a psychological blow, and has been known to sometimes hurt stock prices pretty quickly.

The other big event this week is Super Tuesday tomorrow. We say it often: This isn’t a political column and doesn’t express any political views or favor any particular party or candidate. However, we can’t pretend Tuesday isn’t an important day for the market.

If current front-runner Sen. Bernie Sanders starts to pull away with a large delegate count, it’s possibly going to weigh on stocks because many investors consider him unfriendly to business. The market impact could be worse for certain industries like pharmaceuticals, defense contractors, and the Energy sector, based on policies Sanders advocates.

This Horror Movie Might Not Spook

A few major firms like MSFT and AAPL have already warned about the potential virus impact on their quarterly numbers. It’s possible these warnings could really start to jack up this week as we’re past mid-quarter and companies have had time to get a feel for the potential hit on revenue and earnings.

This sounds a bit scary, but it might not have the same sort of impact the initial announcements from AAPL and MSFT had. The market appears to already have done a pretty decent job of discounting for possible bad news, most people would probably agree.

Other companies outside of tech that might be hurt by slower supply chains out of China include apparel, pharmaceutical, and retailers like Target (TGT), Walmart (WMT), and AMZN, which source so much from Asia. As Barron’s reported over the weekend, some stuff people don’t tend to consider depends on supply chains from China, including active pharmaceutical ingredients (API) in many drugs.

Who benefits? Maybe some of the firms we briefly mentioned last week that some people call the “stay at home” economy. Stocks like Netflix (NFLX), Slack (WORK), and Zoom Video Communications (ZM) that people use to entertain themselves and work without leaving home. Companies that make exercise equipment for homes might also get some support if spread of the virus keeps people from getting out to the gym.

CHART OF THE DAY: WILD OVERNIGHT RIDE. Though last week felt like a straight-down move, there were a few periods of mini-recovery. Of particular interest has been the range since Friday afternoon (blue lines). Futures on the S&P 500 Index (/ES—candlestick) rallied from the mid-2800s to near 3000 in the final hours of trading Friday. Then, Sunday night, /ES traded below 2900, rallied all the way to 3021, and back again to near 2900. No matter where the market goes from here, it's important to keep your seatbelt fastened. Data source: CME Group.  Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Loss Leaders: Leaving the benefits behind, let’s take a quick look back at last week’s washout to see which sectors took the worst beating. It was brutal, no doubt about it, and no sector had it worse than Energy’s 17.5% decline. Information Technology (down 13.8%), Financials (down 12.1%), Materials (down 12%), and Communication Services (down 12%) had the most egg on their faces when it was all over.  Staples, Utilities, Health Care and Real Estate finished on top of the leaderboard, but all fell 8% or more.

The takeaway appears pretty simple: Cyclical stocks did worse than “defensive” ones, but there’s a bit more to it than that. For instance, biotech stocks made up a big portion of the top-performing companies last week, helped by hopes for some sort of antidote or vaccine.

One interesting note overseas is that Shanghai’s market had one of the “best” weekly performances, falling just 5.2%. Hong Kong did even “better” with a 4.3% decline. It could just mean these markets got taken out to the woodshed before it happened in Europe and the West and now the U.S. and Europe are catching up.

Consumer Sentiment Remains High: The latest University of Michigan consumer sentiment index landed Friday amid worry that the coronavirus could ultimately put a dent in U.S. consumer spending. But the numbers don’t appear to reflect much alarm among domestic consumers. The final headline reading for February rose to 101.0 from 99.8 in January. The new figure came in ahead of a Briefing.com consensus of 100.8. The survey’s chief economist Richard Curtin said 8% of all consumers in February mentioned the outbreak when talking about the reasons for their economic expectations. That number ratcheted up to 20% on Monday and Tuesday—the last days of the survey—because of the sharp pullback in equities and CDC commentary about the potential domestic threat.

Of course, that was early on in last week’s steep drop in stock prices, but it also came before a CDC official on Thursday painted a more optimistic picture, saying the risk to the American public is low. It’s interesting that even among those consumers who mentioned the coronavirus, the sentiment index was still over 90. So while Curtin said a domestic spread of the virus could have a significant impact on consumer spending, he also said that “early indications suggested only a very modest impact.”

Mortgage Rates Fall: While buying a home and consumer expenditures on goods and services aren’t exactly the same thing, they are related. Both tend to increase when the economy is healthy. The strong jobs market at the moment, as well as low interest rates, have been helping the housing market and are reasons why that market may remain robust even if retailers take a hit from the coronavirus. In fact, coronavirus fears are pushing down interest rates and increasing market expectations of a Fed rate cut. According to data out yesterday from Freddie Mac, the weekly average for a U.S. 30-year fixed-rate mortgage fell to 3.45%, down from 3.72% in early January. “Given the recent volatility of the ten-year Treasury yield, it's not surprising that mortgage rates again have dropped,” Freddie Mac said. “These low rates combined with high consumer confidence continue to drive home sales upward, a trend that is likely to endure as we enter spring.”

Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Chinese economic data over weekend comes in worse than expected

  • Hopes for fiscal stimulus helps send Asian stocks higher, but U.S. still in the red

  • Big week for data with jobs report, manufacturing numbers ahead

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