Potential Chinese Stimulus Helps Keep Wall Street In Rally Mode

Market participants seem to be encouraged by how governments and companies worldwide are taking steps to try to curb the spread of the deadly coronavirus.

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5 min read
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Key Takeaways

  • Tesla shares extend monster rally in overnight session

  • Google beats on top line but misses on revenue

  • ISM manufacturing index shows a return to growth in January

(Tuesday Market Open) As biopharmaceutical companies and Chinese medical personnel work on treating the coronavirus, policymakers in the Asian nation are apparently preparing measures to inoculate their economy—and by extension the world’s—against the financial fallout from the deadly illness.

While China is considering lowering its 2020 growth target, its central bank is likely to lower its key lending rate and reduce banks’ reserve requirement ratios, according to a Reuters report. That would be in addition to the hundreds of billions of dollars the People’s Bank of China has already injected into the financial system there in recent days.

That seems to be giving investors enough confidence to continue yesterday’s rally this morning after Asian shares stabilized overnight. Market participants also seem to be encouraged by how governments and companies worldwide are taking steps to try to curb the spread of the disease. Investors are apparently thinking that while company earnings might take a short-term hit because of the virus, in the long term things will settle down. 

Buying the Dips

With a deadly outbreak like that of the coronavirus, it can sometimes be hard to talk about financial things like stocks when people are dying of a rapidly spreading illness. So our thoughts go out to people affected by the virus. 

As scientific understanding of the virus has progressed and drug companies are on the case, individuals and companies have also been taking precautions, such as Apple(AAPL) shutting stores and Disney(DIS)—which reports earnings after the close today—closing its namesake theme parks in Hong Kong and Shanghai. 

But, of course, prudent measures like that also can affect companies’ bottom lines, and that has been worrying Wall Street lately as the death toll rises and moves outside mainland China’s borders and the number of infected has grown to more than 20,000.

Fears about the contagion’s potential impact on the global economy—with Chinese businesses reeling and multinational corporations on edge about their sales and supply chain footprints—have caused the stock market to stumble.

But it seems like investors have an appetite to buy the dips, as they did last week and yesterday. So, while we’re probably seeing some reallocation going on, there still seems to be an appetite for stocks. 

Each of the three main U.S. indices moved higher Monday after tanking the previous session. While bargain hunting probably played a role, it also seems like investors may be starting to get a handle on what their comfort level is with the new threat from the coronavirus.

Traders and investors in the United States on Monday were able to shrug off steep losses in mainland Chinese stocks because the declines had been expected as traders returned to their desks there and played catch up after being gone for an extended Lunar New year holiday period. Basically, people saw that coming. 

Manufacturing Rebounds, Google Disappoints

Like they did when trade war anxieties were higher, investors are having to grapple with the unknown of how much the virus issue could impact global growth. But also similarly, U.S. investors are seeing the domestic economy keep on trucking, providing some counterbalance to coronavirus fears as it did to trade worries before the partial deal was signed.

In that respect, the market got a boost on Monday from a stronger-than-expected showing from the U.S. manufacturing sector. (See more below.)

Anticipation in front of Alphabet’s (GOOGL) earnings also helped things, as GOOGL jumped nearly 3.5% during the day’s trading session. But the company’s shares are down more than 3% this morning after the company reported results. GOOGL handily beat earnings-per-share expectations, but it missed Wall Street forecasts for revenue. 

In other corporate news, Tesla’s (TSLA) shares jumped nearly 20% on Monday after Panasonic(PCRFY)reported profitability at the plant the two companies operate jointly. Also, one analyst raised his price target on TSLA to more than $800 (but shares blew through that level this morning). 

TSLA shares are continuing their frenzy this morning, with the stock up another 13%. As the losses keep mounting for TSLA shorts, it seems like trying to pick a top for this stock right now is folly.

CHART OF THE DAY: COOLING VIX. As Wall Street fears about the coronavirus once again ebbed, giving investors enough comfort to buy the dip on Monday and early Tuesday, the market’s main fear gauge eased. The Cboe Volatility Index(VIX) fell 4.6% Monday, and another 10% in the overnight hours Tuesday, to around 16. While that's elevated compared to what we’ve seen in recent days, the fact that VIX was quick to move below its long-term average around 18 (blue line) seems to indicate that the markets aren’t in panic mode. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Manufacturing Rebounds: Prior to January, the U.S. manufacturing sector had been in contraction for several months. And expectations were for another month of a contractionary reading of below 50 from the Institute for Supply Management’s manufacturing index, according to a Briefing.com consensus. But that number surprised to the upside, reaching 50.9 on Monday after five straight months of being below 50. Of course, one month won’t necessarily undo the negative trend, but it's a good sign for the U.S. economy. A recovery in manufacturing would add to a strong jobs market and could help get the Fed’s preferred measure of inflation closer to its target rate of 2%.

Construction Spending Declines: But all was not well on the economic-data front on Monday. Construction spending took an unexpected turn for the worse. The December measure dipped 0.2% when a gain of 0.5% had been expected, according to a Briefing.com consensus. The bulk of the declines came from nonresidential construction—a category that includes office buildings—which declined 1.8%. But overall residential construction partially offset the losses, rising 1.4%, helped by gains in new single family residential construction. That might bode well for the housing market, even though the overall construction spending picture wasn’t too bright. 

GDP Closer to 3: After those two reports, the latest estimate for Q1 GDP from the Atlanta Fed moved closer to having a three handle on it. Despite the lower-than-forecast headline construction spending number, the GDPNow model estimate for seasonally adjusted annual real GDP growth rose to 2.9% from 2.7%. We haven’t seen a GDP figure with a three in front of it since the first quarter of 2019. Of course the coronavirus’s effect on the economy is a wild card, but if that gets contained fairly quickly, it seems that 2020 GDP could have less overhanging it because of the progress made on the trade front. After all, the trade dispute weighed heavily on corporate confidence last year.

Good Trading,

JJ

@TDAJJKinahan

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

  • Tesla shares extend monster rally in overnight session

  • Google beats on top line but misses on revenue

  • ISM manufacturing index shows a return to growth in January

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