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February 3, 2020

The Chinese stock market re-opened overnight, after being closed for a week, for the Lunar New Year. That holiday week just happened to coincide with the outbreak of the coronavirus.

So, heading into what was promising to be a disastrous day for Chinese stocks, the Chinese government got in front of it with large intervention — injecting $174 billion into the markets (adding to bank liquidity). That gave the banks a deluge of cash with which they undoubtedly became buyers of stocks — helping that effort, the Chinese government suspended short selling. And we got this big 9% gap down on the open, and drift higher.

Meanwhile, the Chinese government moved the value of the yuan back above 7 yuan per dollar (the orange line rising represents a weaker yuan, stronger dollar).

These two spots (stocks and the yuan) will likely dictate the sentiment in global markets in the coming days, unless there is new news on the trajectory of the pandemic threat. The extent to which the Chinese government walks down the value of the yuan will be a good gauge as to how economically damaging (and uncertain) they perceive this health crisis to be.

Because of this chart …

China's economy, the second largest in the world, has already been running at recession-like economic activity, before the outbreak. It's hard to imagine that number not plunging considerably in Q1, despite the massive liquidity injection. CNBC said half of China is shut down, and those parts accounted for more than 80% of national GDP last year.

Pro Perspectives 1/31/20

January 31, 2020

We end the week and the first month of the year, with continued unknown on how the coronavirus will play out.

And tonight is the formal exit of the UK from the European Union (the famed Brexit).

With that, there continues to be de-risking in markets.

Let's take a look at some charts as we head into the weekened …

Here's a look at UK stocks. The FTSE is up 25% from the 2016 Brexit vote. It is now, as of today, trading below the 200-day moving average.

Here's a look at U.S. stocks…

It was last Friday that we had a sell-off into the weekend driven by a spike in coronavirus fear, which created this technical reversal signal for stocks. As I said, even with the very positive fundamental tailwinds for stocks, that technical signal was hard to ignore. And that signal has worked thus far. We now have a break of this trendline, which represents the rise in stocks following the verbal agreement on trade between the U.S. and China back in October.

We have a similar line that has given way in German stocks.

So, we close the week with global stocks looking bearish. U.S. yields are just above 1.5% — this is getting near the level in yields marked by major inflection points for the global economy over the past seven years: the potential Italian and Spanish debt default in 2012, the Brexit vote in 2016, and the ugliest moment of the U.S./China trade spat in August of last year.

That said, this level of uncertainty isn't showing up in the VIX, which trades at just under 19. Investors aren't paying up for hedges.

Pro Perspectives 1/30/20

January 30, 2020

Today, the behavior in stocks and interest rates had market participants contemplating a significant drawdown in stocks, and the onset of panic surrounding the pandemic threat.

By the end of the day, with stocks climbing well off of the lows, the focus has shifted to the four trillion-dollar giants (Microsoft, Apple, Google and Amazon) – two of which crushed Q4 earnings estimates today.

So, we have Q4 corporate earnings that continue to look strong. And that supports the data on the economy, which is good — a very strong consumer with an outlook for improvement in investment, government spending and better (post-trade war) exports.

But with numbers rising on the coronavirus, we have an overhanging risk.

Sound familiar?

Think about all of the events along the way over the past ten years: the near global economic apocalypse, there was Cypress, Greece, the near defaults of Italy and Spain, the debt ceiling sagas, government shutdowns, Russia/Ukraine, threats from North Korea, the Ebola scare, an oil price crash, Brexit, trade war and more.

All of these were threats that carried the potential of huge negative, and global, consequences.

But throughout, what mattered most, for the economy and for markets, was globally coordinated intervention, mainly in the form of monetary policy. The central banks were in charge. They were promoting growth and stability through QE and through an explicit commitment to act against shocks. Amazingly, that continues to be the case.

Pro Perspectives 1/29/20

January 29, 2020

The Fed held steady today on rates, as expected. What about the balance sheet?

In their December communication, the Fed said it would continue expanding the balance sheet, at least through January (this month). Today, they extended that timeline through "at least the second quarter of 2020."

Since September, the Fed has gone from shrinking the balance sheet, to expanding it at the fastest pace since the early days of the financial crisis. Stocks have gone up.

But more importantly for stocks, than just the Fed's actions, has been the broader reversal of the global liquidity (from contracting, to once again expanding).

Remember, the gut punch for stocks was December of 2018, when the ECB ended its QE program, and the Fed continued to telegraph a smaller balance sheet. That signaled the reduction of global liquidity. And stocks didn't like it. Prior to that, the ECB and BOJ has been offsetting the Fed's balance sheet reduction. When the ECB thought that they too could step away, that's when global markets became unsettled.

Bottom line, global central banks (led by the Fed) are back in the mode aggressively promoting growth, and playing defense against any potential shocks. And for the Fed’s part, they’ve made it clear that they are staying in this position until they see significant and sustained inflation (above their 2% target). This, even though the very risk that put them in this position has since cleared (i.e. the dark clouds of an indefinite trade war).

With that, the bubbling up of the pandemic threat, going into this month’s Fed meeting, probably made Powell’s job a little easier to defend their stance today.

Pro Perspectives 1/28/20

January 28, 2020

Yesterday we talked about the prospects of the "coronavirus narrative" giving way to the power Q4 earnings.

That was the case today.

Remember, we're in the heart of fourth quarter earnings, with 35% of the S&P 500 reporting this week. And the tech giants are leading the way. We heard from Apple and Ebay after the bell today (both beat). We hear from Microsoft, Amazon and Facebook tomorrow.

Overall, the table has been set for earnings beats. As I've said, never underestimate the appetite of Corporate America to lower the expectations bar when given the opportunity. They did so in their third quarter calls, taking advantage of the global uncertainty surrounding trade.

And now we're getting about seven out of every ten companies beating Q4 estimates. And with a trade deal now papered, the outlook expressed in these Q4 earnings calls is as good as we've seen from corporate America since early 2018 calls, which followed the big corporate tax cut.

With the focus turning toward earnings, we looked at this big trendline support yesterday in stocks.

As you can see, we did indeed get a nice bounce from this line.

And with that, we had a fall back in the VIX from what is relatively subdued levels, for what has been scrutinized as a pandemic threat.

Pro Perspectives 1/27/20

January 27, 2020

On Friday we talked about the rising pandemic scare, and the related bearish technical signal that formed on stocks, as we headed into the weekend.

With that, the likelihood of more coronavirus headlines going into the weekend was high, and therefore the likelihood of a tough to start to the week for global markets was high. Indeed, global stocks open the week down big. U.S. stocks have now given back the gains on the year (up 3% at one point). And the VIX (the fear gauge) is rising, albeit fairly modestly so far (from 14 to 19). Gold, same thing (rising but fairly modestly).

This market behavior suggests what’s probably a rational response to the coronavirus risk to the global economy (i.e. a risk, but a low risk). Remember, back in 2014, when fear spiked about Ebola, the stock market got hit for about seven percent in six days. The VIX spiked from 14 to 31. But stocks recovered the losses in just seven days. The VIX returned to “pre-scare” levels within days too. For more insight into stock market behavior and historic pandemics and pandemic threats, here’s some interesting 2006 research from Fidelity when bird flu was spreading (link).

So, in this current case, stocks are again being sold for non-company specific (non-fundamental) reasons. That typically is a gift to buy at cheaper prices (i.e. to fade the risk-aversion move in markets). But how much cheaper?

Let’s take a look at some charts …

We have some interesting technical levels already developing in key stock markets.

U.S. stocks end the day on this big trendline that represents the recovery that has been driven by 1) the handshake on a U.S./China trade deal back in October, and 2) the Fed and ECB’s return to balance sheet expansion.

German stocks sit on a similar trendline …

What could overwhelm the coronavirus theme? Earnings. And we have a big earnings week ahead – 35% of the S&P report this week. Apple reports tomorrow after the close. And then Wednesday, we get Microsoft, Amazon, Facebook and Visa, to name a few heavyweights.

Pro Perspectives 1/24/20

January 24, 2020

We were watching for the PMI data today, for early clues that a bounceback in global manufacturing may materialize in the months ahead.

We did indeed get a positive surprise on the German number (that’s for the economic engine of Europe). And the overall eurozone PMI number came in better than expected too. That's good news. With this, stocks in Europe had a big day, up 1% on the German DAX, up 1% in the UK and up over 1% on the broad blue chip Euro Stoxx Index.

But overall it was a "de-risking" day heading into the weekend, with uncertainty surrounding the coronavirus. U.S. stocks gave back about a percent of the gains on the month (still up 2%). But the easier place to see global capital flows expressing unease about the virus is in U.S. Treasuries. When fear sets in, money plows into the biggest, most liquid market as a parking place (bond prices go up, yields go down). With that, 10-year yields traded as low as 1.67% today.

We looked at chart on yields yesterday. Let's take a look at stocks as we head into the weekend.

We have a technical reversal signal in stocks today (a bearish outside range).

Even with the very positive fundamental tailwinds for stocks, that's hard to ignore.

As we know from the Ebola scare, fear can hit stocks quickly. But the fear-induced declines tend to be quick and with quick recoveries. When google searches spiked on Ebola back in October of 2014, the stock market got hit for about seven percent in six days. Seven days later, the decline was fully recovered.

Here's a look at the search spike for coronavirus …

In the case of the surge in Ebola fears, the VIX spiked from 14 to 31 during that October period. The VIX closes today at 14.

Pro Perspectives 1/23/20

January 23, 2020

The European Central Bank met this morning and had no surprises for markets.

The ECB has already restarted QE, and now will likely wait to see if the data improves following the removal of the U.S./China trade war drama.

The first indication will come tomorrow, with a "flash" estimate on January manufacturing activity. As you can see in the chart below, Germany is in a manufacturing recession.

The estimate for tomorrow's report is for no improvement. We'll see if there's a positive surprise, given that it has been more than a month (December 13th) since the U.S. and China formally agreed to terms and telegraphed a deal signing. And mid-month (January 15th), we had the official signing of the deal.

For stocks, it doesn't matter. Against the wishes of many market folks, who would like to see a dip to buy, the formula of ultra-low rates, an expanding balance sheet, and deficit spending in the U.S. are overwhelming even risks of pandemic.

What will put the brakes on stocks? Ultimately, it will be rates. But as you can see in the chart below, rates won't be a problem anytime soon.

With stocks on record highs, the key market interest rate/ the 10-year yield traded as low as 1.71% today. Yields were down around these levels when the global economy was beginning to look shaky enough to force the Fed to start expanding the balance sheet again (September), and force Trump to invite China into the Oval Office to signal/make a hand shake deal on trade (October).

But unlike September and October, the level on market interest rates seems to be less about risk, and more about the global monetary policy, and a lack of new economic data that would suggest an inflationary threat.

On that note, the Fed has told us that they won't raise rates until they see "significant and persistent" inflation above their target. With that statement in the minds of market participants, it won't take much hot economic data to start the betting that the Fed will be late, and end up chasing inflation from behind. That "bet" should translate into a 10-year yield much higher than the current effective Fed funds target rate of 1.55%.

Pro Perspectives 1/22/20

January 22, 2020

Markets continue to like the fiscal and monetary fuel — without the overhang of a trade war.

That's not surprising. But what is the new information that will drive markets in the coming months? Earnings and economic data — both of which are setup for positive surprises.

On the latter, as we discussed yesterday, the PMI data will be key, because of this chart …

As confidence in a positive trade war outcome waned last year, so did business confidence, and therefore, so did manufacturing activity — not just in the U.S., but globally.

But a deal has been done. And the data over the next two days on global PMIs will give us early indications on how quickly the business confidence will bounce back. We get UK and Japanese manufacturing data tomorrow, and then German, Eurozone and U.S. readings (for January) on Friday.

On the earnings front: We're getting into the heart of earnings. Remember, coming in, Wall Street was looking for a contraction in S&P 500 earnings for Q4. So far, the big banks have led the way with good numbers, showing a strong consumer. That’s a good sign. And Wall Street is projecting energy, as the sector to be the biggest gainer on the year.

With the above in mind, if you believe (as I do) that we're in for a year of above trend economic growth (finally, 10 years after the financial crisis), then we should like the two sectors that had the biggest weighting dislocation in the S&P 500 over the past decade. In 2006, the financials represented 22% of the S&P 500. Today, the financials are just 13%. In 2006, the energy sector represented 10% of the S&P 500. Today its 5%.

Pro Perspectives 1/21/20

January 21, 2020

We entered the year with clear tailwinds of easy global monetary policy, and the removal of the risk of an indefinite U.S./China trade war.

That has been good for ten new record highs in stocks, in just thirteen trading days.

Global political and business leaders are in Switzerland this week at the World Economic Forum. Trump set the tone for the forum this morning, in a speech, spreading his formula for economic prosperity.

This "economic boom" talk should put pressure on other countries to get more aggressive to stimulate growth this year. As we know, the central banks have already returned to full-throttle easy money policies. And Japan has followed the lead of the U.S., launching a fiscal stimulus package last month. This should be the year that eurozone politicians will be forced to throw a lifeline to the ECB by helping with some stimulative fiscal action.

On that note, we have the ECB meeting on Thursday. Remember, we have a new ECB President. This will be (the former IMF head) Christine Lagarde's second meeting as the head of the ECB. She inherited the job after a decade of global stimulus that has left the eurozone economy running at 1% growth and 1% inflation. Her predecessor, Mario Draghi, had already restarted another bond buying program (QE) in Europe, with no clear end in mind.

In her ECB debut, she made the pleas for fiscal stimulus help. Expect more of that on Thursday.

After that, the market should turn focus to global PMI data – which will start rolling in on Friday.

The PMI data is where the decay in business confidence, from the trade war, was visible over the past six months — which contributed to global central bank action, and likely to Trump pulling the trigger on a trade deal.

The good news: Confidence can bounce back quickly. And with that (trade) risk now removed, the PMIs should be set up for positive surprises.