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Are Markets Looking Beyond Coronavirus?

The Chinese economy is a lot more important to the global economy now than in 2003 when SARS broke out.

Friday, Feb. 7, 2020 —

Fred Imbert of CNBC reports the Dow drops more than 250 points on Friday, snapping 4-day winning streak amid coronavirus worries:

Stocks fell on Friday as worries over the coronavirus’ impact on the Chinese economy outweighed the release of stronger-than-expected U.S. jobs data.

The Dow Jones Industrial Average closed 277.26 points lower, or nearly 1%, to 29,102.51. The S&P 500 dipped 0.5% to 3,327.71. The Nasdaq Composite also slid 0.5% to close at 9,520.51. Those losses snapped a four-day winning streak for the major average. Still, stocks notched strong weekly gains despite Friday’s losses.

China’s National Health Commission on Friday confirmed 31,131 cases of the deadly pneumonia-like virus in the country, with 636 deaths. These numbers have stoked worries about how China’s economy — the second-largest in the world — will be affected. Chinese economic slowed down last year to 6.1% from 6.8% in 2018.

“China is really slowing and that’s worrying people for sure,” said Ed Hyman, chairman of Evercore ISI, on CNBC’s “Squawk on the Street.” “People are not going out. They are not shopping, and that’s what’s hurting particularly China.” Hyman added he sees 0% growth for the Chinese economy this quarter.

Haibin Zhu, a China equity strategist at JPMorgan, also cut his China GDP growth estimate to 1% for the first quarter.

President Donald Trump tweeted Friday that his Chinese counterpart, President Xi Jinping, is “focused on leading the counterattack on the Coronavirus.”

Caterpillar and Boeing — two bellwether stocks for the global economy — fell 2.8% and 1.6%, respectively. Disney and Goldman Sachs also dropped more than 1% each to pressure the Dow. Materials, tech and health care led the S&P 500 500 lower as each sector declined by at least 0.9%.

The spike in confirmed coronavirus cases and deaths came as investors pored through the latest U.S. jobs report. The U.S. economy added 225,000 jobs in January. Economists polled by Dow Jones expected a print of 158,000 jobs. Wages rose 3.1% on a year-over-year basis, also topping expectations.

“The biggest takeaway for investors is there are no monetary policy implications in this jobs report,” said Jason Thomas, chief economist at AssetMark. “We’re generating enough jobs to keep consumer confidence high and enough wage growth to bring in people from the sidelines.”

But while the report shows a robust labor market, it may not be reflective of the most current economic conditions, Tom Hainlin of Ascent Private Capital Management.

“The challenge for investors is they’re in this foggy place where all the economic data that’s coming in is pre-coronavirus,” he said. “So there’s nothing really materially to grab on to in terms of the data.”

“We won’t get that data probably until the middle of March,” Hainlin said.

The S&P 500 gained more than 3% week to date, and its best weekly performance since early June. The Dow climbed 3% for the week while the Nasdaq gained 4%.

The major averages also reached record highs on Thursday boosted by China’s decision to halve tariffs on a slew of U.S. products. The world’s second-largest economy announced it would halve tariffs on $75 billion worth of U.S. imports on Thursday.

It’s Friday and time to take another look at markets as a winter blizzard slams the Northeast.

Last Friday, I discussed how the fast-spreading coronavirus was slamming stocks. That lasted a day as the market came roaring back this week until today when traders sold after renewed concern the virus is spreading and not under control.

As I stated last week, there are two important things governing these markets:

  1. The novel coronavirus is spreading, there will be secondary effects and most importantly, if it’s spreading in China and not under control, it will have pronounced effects on the Chinese and global economy. That’s not good for stocks and other risk assets.
  2. But central banks around the world are on guard, pumping hundreds of billions into the global financial system every month, ready to prop up risk assets at all cost.

This mixture of deteriorating global economic fundamentals and rising global liquidity is what’s driving stocks higher but with a lot of volatility.

So far, central banks are winning, ample liquidity is driving stocks higher, but as I said last week, if this novel coronavirus turns out to be a lot worse than what people think, even central banks won’t be able to fight the downtrend.

One trader told me bluntly this week: “You have to be crazy to short this market. Even coronavirus dips are being bought hard.”

I politely reminded him that it’s still very early in the game and we still know very little about this new coronavirus.

It’s amazing how the buy the dip mentality still rules the day as investors shrug off bad news from China as if it’s meaningless.

It isn’t, the Chinese economy is a lot more important to the global economy now than in 2003 when SARS broke out. This is why Ambrose-Evans Pritchard of The Telegraph rightly warns that a financial shock gathers steam as the world holds its breath on coronavirus.

What remains to be seen is how widespread this virus is within China, whether or not there will be secondary cases all over the world, and whether the fallout from this virus is temporary or more prolonged (See Rabobank’s commentary on the economic implications of the coronavirus).

One thing is for sure, coronavirus is striking a blow to US airlines’ bottom lines, as carriers have no choice but to wait out an indeterminable number of cancelled flights and decreased demand to and from China and Hong Kong:

“The scale of changes and cancellations is unprecedented,” John Grant, senior analyst with flight data firm OAG, told Yahoo Finance. “There has never been such a swift response in terms of cancellation of flights as we’ve been seeing with this particular event… It’s quite a dramatic change of strategy than was previously applied when SARS was here.”

The same can be said about cruise liners, casinos, and other industries which will feel the heat if this virus spreads and doesn’t come under control soon (pretty much all industries will feel the heat).

The point I’m making is what happens in China is extremely important and it’s fair to say that US stocks have been ignoring or dismissing the spread of the virus, and this very odd as the reverberations will be felt around the world.

But in this is a liquidity-driven rally where central banks are driving risk assets higher, you’ll see strange things and many parabolic moves.

A great example of this is Tesla’s shares (TSLA) which went parabolic recently as algos gunned for $1000+ a share but then gravity took over this week:

Do you see how algos aren’t letting it drop below its 10-day moving average? Traders with experience won’t go long or short Tesla shares because they know it can go either way from here. That’s why I tell everyone, it’s a crapshoot, stay away from it because it can easily burn you.

Only the algos at Citadel can front-run these parabolic moves, most retail investors will lose their shirt trying to trade this stock.

Speaking of Citadel, the best hedge fund of 2019 even if others made more profit, its founder Ken Griffin came out this week to warn that US markets “are utterly and completely unprepared” for inflation:

This isn’t the first time Griffin has warned about inflation. In fact, three years ago, Griffin warned of inflation and I was just as perplexed back then as I am today.

Importantly, there’s no inflation risk whatsoever and if God forbid this coronavirus runs out of control, we are going to be a lot more worried about global deflation.

What about today’s US jobs report? What about it? Do you drive your car looking in the rear-view mirror? Why do investors spend so much time analyzing a US jobs report when there’s a coronavirus out there that will hit the Chinese and global economy hard?

It’s totally irrelevant. As far as the January ISM report which showed growth picking up again, that too is highly suspect and I would wait to see a three-month trend before jumping to any conclusions.

“But Leo, stocks keep surging higher and higher, all the dips are one day only and being bought hard, the market is telling you that it wants to go higher no matter what comes its way.”

I know, “don’t fight the Fed”, stocks aren’t as expensive as you think, but my question then is why are insiders cashing out if everything is so peachy?:

Maybe because they see the writing on the wall and are worried about what lies ahead?

Admittedly, insiders aren’t the best gauge of future stock market returns as they’re often wrong, but you still have to wonder why they’re cashing out in droves.

Having said all this, when I look at the S&P 500 ETF (SPY), I see a small pullback in a rising and bullish market led by the powerful ongoing rally in tech shares (XLK) (which is really Apple and Microsoft):

In other words, it’s nothing to panic about, at least not yet, but if panic does strike these markets, watch out, your limit orders won’t get filled in time. That much I can guarantee you.

Lastly, for those of you wondering which sectors are outperforming year-to-date, it’s Technology (XLK) and Utilities (XLU) while Materials (XLB) and Energy (XLE) are lagging far behind the overall market:

This barbell strategy of going long bonds (TLT) or a proxy of them like Utilities and long Tech (XLK) has been working well because we aren’t in a bear market. Once we are, only long bonds will save your portfolio from being ravaged.

Below, Ed Hyman of Evercore ISI joins “Squawk on the Street” to discuss the latest jobs number and what they mean for the US economy and markets. Listen to his comments on “China is really slowing but there’s still a lot of liquidity in the system.”

Second, CNBC’s Ylan Mui details the Fed’s semi-annual monetary policy report, which cites coronavirus as a new risk.

Third, David Rennie, Beijing bureau chief at the Economist, joins “Squawk Box” to discuss what’s happening on the ground in China as the coronavirus outbreak continues.

Lastly, Michael Zinn, senior portfolio manager at UBS Financial Services, and Dan Nathan, principal at Risk Reversal Advisors, talk about markets after the closing bell.


Equities Contributor: Leo Kolivakis

Source: Equities News

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