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Well that was the worse trading session in years. In case you missed it the S&P shed 3.35% in a single day, erasing all the 2020 gains. Hard to believe this is the index that made a new all-time high last Wednesday. The virus remains the big culprit, with more cases being reported outside China. The total number of cases has just passed through 80k, though the pace of new cases continues to slow. However, the market seems to care more about the locations of new cases these days.
After yesterday’s sell-off we are looking at a slightly higher open. Safe haven assets such as bonds and gold are a bit lower too.
So what triggered the suddenly heightened concern surrounding coronavirus? Cases in Iran and Europe are continuing to climb. Spain has isolated 1000 people at a holiday resort after one tourist initially tested positive. It’s not only the hospitality industry that is under pressure. The global supply chain, already reeling after the trade war, now faces further strain from the coronavirus. While cross-national supply chains are more robust than they may appear, if they fail, they will do so suddenly and without much warning. The erratic market movement continues to suggest the world is on edge as more companies such as Mastercard and United Airlines issue profit warnings.
For now, following yesterday’s impulse lower, markets are on firmer ground. Treasuries and global bonds are holding steady and stock markets are mixed. European markets are lower again across the board, while U.S. futures are pointing towards a firmer open. Energy markets are flat, and gold prices are slightly lower for the first time in seven sessions.
The World leaders are doing their best to restore confidence. Trump notes that Beijing is ‘getting it under control’, and touted “tremendous progress” on a trade deal with India. As the NY Times reports, a joint public appearance between the two leaders was long on florid language about the strength of their relationship and short on concrete results. While Mr. Trump had said before departing the United States that “we may make a tremendous deal there,” the two sides appeared far apart on major points of a trade pact.
The U.S. yield curve has become even more inverted in recent days. The chart below shows the current curve in green and what it looked like a month ago. The shift lower from two years onward has been nearly parallel.
Following yesterday’s sell-off its good to see a spattering of positive headlines. Home Depot reported solid earnings reinforcing the strength of the U.S. housing market. With bond yields back near historic lows, the real estate market has been given a shot of octane. 30-year mortgage rates are down nearly a percent from this time last year. Higher U.S. home prices is one of the most important metrics for Home Depot, as when owners see their property more as an investment, they are more likely to renovate. This morning we’ll get another housing update when the CoreLogic Case-Shiller home prices for December are released. Expectations are for a 3.6% YoY increase.
The Democratic nominees are back on the debate stage tonight, this time in South Carolina. Last week Bloomberg seemed to have a target on him, but after his abysmal showing, it’s anticipated that the target will shift to the clear frontrunner at this point – Bernie Sanders. Despite Bernie’s overall lead, Joe Biden is the favourite in South Carolina, and given Biden’s campaign’s slow start, he needs a strong showing to stay relevant. Keep in mind that thus far only 100 delegates have been declared (with Bernie winning 45), but you need 1991 delegates to win the nomination. The DNC has over 400 superdelegates, which are individual elected officials, party activists and officials that all receive their own personal delegate vote. They have the potential to swing the nomination if the popular vote isn’t conclusive.
According to MIT researchers, the key to New York’s Green Dreams may be to turn Quebec into a Mega-Battery. By producing power grids on both sides of the border, emissions could be slashed by exchanging electricity back and forth through new transmission lines. The tundra of northern Quebec and existing network of hydroelectric dams from the Hudson Bay to the St. Lawrence River, could hold the key to slashing greenhouse-gas emissions created by powering the dense cities and suburbs between Boston and New York, at a very low rate.
Diversion: At Kobe Bryant's celebration of life, Michael Jordan got choked up and blamed his "little brother" for creating another Michael Jordan crying meme. Watch the video here. For history on the meme, it actually has its own wikipedia page.
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It’s a big week for Canadian banks this week, with earnings reports from Bank of Montreal and Scotiabank having come out today. Both banks topped EPS market expectations; the former driven by their wealth management division growth, while the latter reaped the benefits from the revival of their capital markets unit. In other earnings news, shares in Shake Shack plunged after its 2020 earnings outlook fell below estimates. Same-store sales, delivery growth, and revenue also missed. Meanwhile, Mastercard is shifting its C-suite, with Chief Product Officer Michael Miebach becoming the CEO and board member effective next year’s January. On the deal front, IHS Holdings has hired Citibank and JPMorgan as bookrunners in what may be the largest IPO of an African company in America; the company may be valued as high as US$7 billion.
Commodities
Crude prices steadied following a volatile sell-off yesterday; at the time of writing, WTI Crude futures were down -10 bps to US$51.36/bbl, while Brent Crude futures gained +10 bps to US$56.34/bbl. The big driver today comes from OPEC+, who still hasn’t decided yet whether it will extend or modify it’s in-place output cut program. Still, ministers will be meeting in Vienna next week to assess the situation. It’s worth noting that Saudi Arabia has done the heaviest lifting thus far in ensuring that global supply curbs are kept in check; allies like Russia and Iraq are still struggling to fully comply. In America, analysts are predicting that crude stockpiles will have increased for a fifth week straight by +1.8mm bbl last week. API numbers are due today after the close.
Gold prices, meanwhile, edged lower after a stunning rally left the yellow metal near its 7-year highs; at the time of writing, the spot price for the commodity was trading -50 bps to US$1,651.66/oz. China’s gold imports from Hong Kong stood at 14.7k kg in January, while exports of the metal to the city were 6.2k kg.
Fixed income and economics
Currency markets whipsawed overnight, digesting the broad global sell-off in commodities and equities yesterday that at time of writing, appears to be abating (somewhat). We start the action in the land of the rising sun, where the Japanese Yen safe-haven reputation is being tarnished on the heels of the nation’s coronavirus cases escalating to report the most known cases outside of China. The Yen has diverged dramatically with other traditional havens such as Treasuries and gold as investors shun the currency over fears the virus may spread through the mainland and trigger a recession. Japan, already reeling from last October’s consumption tax hike, has started showing the impact from the epidemic with the preliminary PMI services report for February contracting to a near six-year low (+46.7) and manufacturing dropping to its weakest since 2012 (+47.6). Currently at 110.61 against the greenback, the Yen has also been losing its funding currency allure amid the global move lower in interest rates and bleak economic outlook, which has prompted BoJ Governor Kuroda to state that he won’t hesitate to act if needed. In Australia, the dollar dropped below 0.66 versus the USD for the first time since March 2009 this morning amid renewed virus concerns and dismal labor data. The nation’s unemployment rate jumped to 5.3% from 5.1% and the underutilization rate rising to a 19-month high, combining with preliminary PMI services and manufacturing contracting in February, bolstered the negative sentiment on AUD. The RBA contends the jobless rate needs to fall to at least 4.5% to spur wage growth so the recent uptick has raised the prospect for a rate cut. Futures are pricing in a 25 bps cut by August. Lastly, the British Pound is down -1% this morning, effectively ignoring the sanguine economic data of inflation accelerating to +1.8% y/y ending 2019, retail sales increasing +0.9% m/m in January, and PMI expanding to a 10-month high (+51.9) published last week. The encouraging data was offset by signs of growing discord between London and Brussels ahead of crucial trade negotiations as the U.K. seeks a free trade agreement similar to Canada while the EU insists the two cannot be compared and demands Britain agree to a “level playing field”. The widening divide should remain a headwind for GBP as talks begin in earnest next week.