The Virus outbreak has been worsening over the weekend with more than 17K cases and while the Chinese market has opened, 2/3 of Chinese economy is still going to be closed this week. The Lancet has created a coronavirus resource center and has published a note saying that the number of infections should double in about 6 days. The latest economic estimates are predicting a 1.4/1.6% worsening in Q1 Chinese Gdp with Hong Kong facing an even bigger blow with a potential 1.7/2.0% shaved off growth this quarter. A more prolonged outbreak could lower full-year growth even below these estimates. Auto makers will probably dial back production by 15% in China this quarter after extending holiday shutdowns due to the potentially deadly coronavirus.

China stocks plunged down to 9% after reopening for holidays, the biggest single day decline since 2015. More than 2,600 stocks fell by the daily 10% limit. Iron ore contract declined by its daily limit of 8%, while many commodities also were limited down. The yield on China’s most actively traded 10-year government bonds dropped the most since 2014. Interestingly, it seems that Chinese demand for oil dropped by 20%, a real black swan event for the oil market, which saw a similar situation back into 2008/2009. OPEC+ is currently considering an emergency meeting as early as next week in order to balance the market.

The People Bank of China announced several measures to calm the market today with little results; a total injection of 1.2 trillion CNY ($170 billion) using reverse repo, the highest daily injection in the past 16 years, and cutting rates by 10bps for both the 7 and 14-day repo rate. Also to note, the yuan lost approximately 3% since the outburst of the virus, with USDCNY hovering around 7.02 level.

For the first time ever, there are 4 trillion-dollar companies in the US: Apple, Microsoft, Google, and Amazon. If you throw in Facebook, you get the top 5 biggest firms by market capitalization, and they compose an amazing 18% of the S&P 500. Another way of looking at this is that the market cap of a full 282 companies in the S&P 500 now equals the same as the top 5 behemoths.

Of course ETFs have helped this situation as over the past years we have seen a huge turn towards passive investments and a surge of money going into ETFs. A paper done by the Federal Reserve explains that passive funds in 2018 now account for 39% of the combined U.S. Mutual Fund and ETF assets under management, up from just 3% in 1995 and 14% in 2005. According to the paper, passive investing is pushing up the prices of index constituents and there is a risk that rising prices can lead to more indexed investing, and the resulting “index bubble” eventually could burst.

This brings us to a potentially huge problem with the overall market. A study done by Factset shows that in some instances of the largest market cap stocks that are held within ETFs, they represent more than 30 days of the average daily trading volume of the individual security that is traded on the exchanges. This means, for example, if only 10% of ETF holders decide to sell the security on any given day, it will represent three times the entire volume that is traded on the NYSE. Therefore, what we have is a condition where investors have become overcrowded in a few positions–just like what has occurred in previous market tops. However, this time around the situation is compounded by an influx of new money that has piled into ETFs. These same investments have doubled down on the doomed strategy of piling into a handful of winners. In 2008 there was just $700 billion invested in ETFs; today, there is just under $5 trillion.

Small note on Fed. Fed chairman Powell last Wednesday started to prepare the market, reiterating that central bank intended to slow down its interventions later this year when the amount of cash swilling around the system reaches an ample level.  He expect this to happen sometime in Q2. Since October last year, the Fed’s balance sheet has grown to 4.1tn$, Bank reserves have risen to 1.6tn$. As we always said, markets are very correlate to the Central Banks balance sheet and over last Fed meeting we had a first mild message that could be strengthen over next weeks.

This will be of course very important to follow as if they will adjust their policy stance we might see a tightening of financial conditions and a potential drop on markets.

Update on Trump’s impeachment: Senate Republicans appear likely to dismiss Trump’s impeachment trial without considering new witnesses or material information, moving closer to acquitting him of both impeachment articles. As expected, the Senate, controlled 53 to 47 by Republicans, is very unlikely to convict Trump.

A quick update on Democratic presidential race. According to the latest Wall Street Journal/NBC News poll, Mr Sanders is leading with 27%, tied with Mr Biden who had 26% (he led in all previous). Third place for Mrs Warren with 15% support. Interestingly, the poll revealed a sharp generational divide in the nominating contest. Mr Sanders held his largest lead ever, 30%, over Mr Biden among primary voters under age 50, and he led by nearly 40% among the youngest voters, those under age 35. Mr Biden led Mr Sanders by 25% among people ages 50 and older.

The 2020 Iowa Democratic caucuses will take place in Iowa today. A Sanders Iowa win could prolong the Democratic primary fight.

The threat of a global trade war escalation has decreased during the past week. It seems that OECD executives agreed to continue on a common project to finalize a global agreement for taxing multinational technology companies that receive foreign revenue abroad (mainly FANGs). Although initially, Trump threatened tariffs as high as 100% on $2.4 billion of French goods (France wanted to impose levies on FANGs), now USA might be willing to co-operate. Also, last week, US commerce officials have withdrawn proposed regulations making it harder for US companies to sell to Huawei (China’s Tech champion) from their overseas facilities, in order to avoid US firms from losing a key source of revenue and technology.

OPEC+ is likely to anticipate the March meeting to next week, in order to deal with slumping oil prices and decreasing demand, mainly due to the Virus. WTI price is down 20% since the first week of January and down 12% since the outburst of the Chinese crisis.  These concerns are not necessarily unfounded as Chinese demand might even be lower than the peak of SARS in 2003 (chart). Also consider that we saw a huge movement on the whole Oil curve, with Brent forward slumping sharply, which is typical of demand concerns (chart).

China Oil Demand under SARS in 2003

Brent Forward Curve

Global bond inflows have made their best start ever in January with almost $72 billion of inflows, along with 56-week inflow streak which is very close to the record of 60-week of the great financial crisis. Sovereign bonds recorded a sharp pick-up in interest at the expense of high yield corporate in the latest weeks, mainly due to the Virus.

Flows into Global Bonds in $

Macro-wise, we saw weak growth data in Europe on Friday. Q4 GDP came at 0.1% vs 0.2% consensus QoQ, and at 1% vs 1.1% consensus YoY, in the Euro-area, the weakest quarter in almost seven years, while underlying inflation slowed at 1.1% vs 1.2% consensus YoY, in January, to the weakest in three months. Q4 GDP in France and Italy unexpectedly contracted, respectively -10bps vs 0.2% consensus QoQ and -30bps vs 0.1% consensus QoQ. Interestingly, Italy’s Q4 2019 drop in output was the biggest since 2013, mainly due to industrial sector and agriculture.

US data were mixed on Friday. Lower personal income and personal spending in December along with in line but still weak PCE (inflation). On one hand, University Michigan came stronger, at 99.8 vs 99.1 consensus, which translates into US consumer sentiment increasing in January to an eight-month high. On the other, Chicago PMI slumped to 42.9 vs 48.9 consensus, which translates again in recent manufacturing weakness.

Today’s Macro

  • January Manufacturing PMI in Japan, Russia, Italy, France, Germany, Euro-area, UK, Canada and USA
  • January US ISM Manufacturing, New Orders, Prices Paid, Employment
  • January Caixin China Manufacturing PMI, December Industrial profits

Friday’s earnings


Caterpillar: bad release, Q4 profit beats estimates but 2020 EPS guidance misses, $8.50-10.00 estimate $10.55. Stock down 3%, up 16% in 2019, dividend yield 3%. Main reason: global slowdown.

Exxon: posted the weakest results in years because of disappointing results in almost all of their business lines. Stock down 4%, up 2% in 2019, 5.5% dividend yield.

Chevron: steepest loss in a decade due to the shrinking value of North American natural gas fields and weakening performance at overseas refineries and oil projects. Stock down 3%, up 11% in 2019, 5% dividend yield.

Today’s earnings

USA: Google

Europe: Julius Baer, NXP Semis

Quick final note on Technicals. Most of medium-term indicators are suggesting the market correction to continue while some short-term signals are already in “oversold”.

What is important to note however is that  most indexes are still within the upward channel that we had since the summer. A break of the lower band will generate more volatility/drawdown.

The Eurostoxx 50 with the negative close of Friday has broken the uptrend and 100-day moving average. If it doesn’t recover that level today it’s a bad signal.

The Nasdaq, along many other Indexes is instead still within the trend.