Pictet North America Advisors

2020 Weekly Views — February 10

Pictet North America Advisors 2020 Weekly Views — February 10
Pictet North America Advisors

2020 Weekly Views — February 10

Pictet North America Advisors 2020 Weekly Views — February 10

Market update

Finding footing

The S&P 500 closed the week at 3,327,71, +3.17% higher. The Dow Jones closed at 29,102.51, +3.00%, and the Nasdaq rallied +4.04%. The volatility index VIX closed the week at 15.47 from 18.84. The Euro Stoxx 600 rallied +3.32%.

The 10-year UST closed at 1.58% from 1.51% a week before. The yield curve moved up and steepened with the yield spread between the 3-month and 10-year UST at +2.47bps. US Corporate Bond spreads: Investment Grade tightened 4bps to 130bps; High Yield tightened 23bps to 443bps. German 10-year Bunds yield closed at -0.38% vs. -0.43% a week ago. European Corporate Investment Grade spreads tightened 4bps to 101bps, High Yield spreads tightened 28bps to 350bps.

The US Dollar Index (DXY) appreciated +1.34% during the week and closed at 98.70. The Euro closed at 1.0946 (-1.33% weekly); the Japanese Yen at 109.74 (+1.28% weekly) and the Swiss Franc at 0.9776 (+1.47% weekly). Gold closed at 1,570.30, depreciating -1.19%. Oil ended the week lower: Brent closed at 54.50 (-6.29%) and WTI at 50.34 (-2.37%).

Macroeconomy

Coronavirus
Coronavirus concerns continued to dominate the headlines as the number of confirmed cases jumped above 40K, the death toll surpassed 900 and there was another flurry of reports highlighting quarantines, travel restrictions, business closures, supply chain disruptions and growth risks. However, the WHO did point out that Wednesday was the first day since the outbreak that the number of new cases dropped.  China stepped its support measures last week and is expected to do more. The People’s Bank of China (PBOC) injected nearly $250bn via reverse repos and cut some key money market rates. Reuters reported that the PBOC is likely to lower its key lending rate (the loan prime rate, LPR) on February 20, and cut banks reserve requirement ratios (RRRs) in the coming weeks.

On trade
Presidents Trump and Xi Jinping held a conference call on Thursday where they “agreed to continue extensive communication and cooperation between both sides”. They also noted the great achievement of the recent United States – China Phase One Trade Deal and reaffirmed their commitment to its implementation. Also, China announced that it will halve tariffs on 1,717 US goods ($75bn worth) starting on February 14, which is part of the Phase One deal. Lastly, US Economic Adviser Kudlow also said auto tariffs on Europe are on hold right now as two sides work toward a trade deal.

January payrolls
The payrolls growth was stronger than the market expected (225k vs 165k expected), up from 147k in December. The three-month average was a healthy 211,000. The numbers were helped by clement weather which boosted jobs in construction and leisure. Wage growth remained moderate at 3.1% y-o-y in January, up from 3.0% in December, while the unemployment rate ticked up marginally to 3.6% from 3.5%.

Economic data
US January’s ISM manufacturing index was stronger than expected at 50.9 vs. 47.9 in December helped by new orders and production back in expansion territory. ISM Non-manufacturing was also stronger than expected at 55.5 vs. 55.1 and 54.9 in December. Eurozone Final PMI for January came out higher than the flash estimate and versus December at 51.3, signaling continued expansion and the highest reading since August. Manufacturing PMIs were higher at 47.9 (46.3 in Dec.), while services ticked slightly lower at 52.5 (52.0 in Dec.). Business confidence is now at a 15-month high. Germany improved at 51.2 (50.2 in Dec.) while France disappointed. UK PMIs improved further with the composite at 53.3 (52.7 in Dec.) with both the services and manufacturing sectors improving.

Highlights

Coronavirus impact
Chinese markets reopened last Monday after the Lunar New Year holiday with the Shanghai Composite plunging nearly 8%. During the week the index recovered some 5.5%. The economy was in focus as more than a dozen Chinese provinces announced a further extension of the holiday, while Macau shut its casinos until mid-February. Some institutions announced revised China’s GDP growth for 2020 such as S&P Global Ratings which cut its estimation from 5.7% to 5%.

Earnings season
In the US, 64% of the companies in the S&P 500 reported actual results for Q4 2019. In terms of earnings, the percentage of companies reporting actual EPS above estimates is 75% with earnings that are 5.5% above the estimates. In terms of sales, the percentage of companies reporting actual sales above estimates is 67%. In Europe, 36% of the Euro Stoxx 600 companies reported with 55% beating earnings estimates by 3.52%.

Crude
The price of Brent crude moved last week in a range between 53.60 to 56.80 from levels of 66.00 seen at the beginning of the year. OPEC+ met during the past week to discuss additional supply cuts with a potential cut in output of 600k barrels per day, which is about 0.6% of global supply and would extend current curbs of 1.7M barrels per day.

What to watch

Monday: Japanese CPI inflation (Jan.); Swiss unemployment rate and CPI inflation (Jan.); China M2 money supply (Jan.)

Tuesday: UK GDP growth (Q4); Powell’s House testimony; New Hampshire Democratic primary; Singapore Air Show

Wednesday: New Zealand Reserve decision; Sweden’s Riksbank decision; Powell’s Senate testimony

Thursday: US CPI inflation (Jan.); German HICP inflation (Jan.); Mexico and Peru’s central banks

Friday: Eurozone GDP growth (Q4); German GDP growth (Q4); US retail sales (Jan.); Michigan Consumer Sentiment Index (Feb.)

Investment team ― Pictet North America Advisors