Market has stabilized after the very volatile days we had last week. China’s stocks recouped a slide of more than 2%, minutes after opening trading, helping stoke US futures and lifting equities across Asia. China earlier set the daily yuan fixing at stronger than 7 per dollar, a sign of support, though it continued to trade weaker than that level offshore. Analysts are anticipating a series of measures to support economic growth as the hit to the country mounts.

It is quite impressive to see China bouncing when yesterday all but 162 of the ~4,000 stocks in Shanghai and Shenzhen fell yesterday with a big chunk falling by the maximum limit (-10%). The main reason is of course that the PBOC this morning pumped Y400 billion($57 billion) via reverse repo.

Iowa Democratic Party discovered inconsistencies in Caucus results and decided to delay their release. According to first projections, Sanders should be leading the vote, but it’s just a representative total, 40% of precincts total, still unverified, then not reliable.

Today OPEC+ executives are meeting in Vienna in an emergency meeting to discuss immediate actions to balance the oil market, with WTI down 15% in just 2 weeks (remember 20% less of Chinese demand approximately).

The important exercise that everybody is trying to do is to evaluate the impact of the virus on China’s and worldwide economy.

We know that 14 provinces and cities have said businesses need not start operations until at least the second week of February and they accounted for almost 69% of China’s gross domestic product in 2019 and 90% of exports. Chinese executives are considering to lower the 2020 target for economic growth. China expanded at 6.1% in 2019, the lowest point in the last thirty years. Before the virus outburst, analysts expected to see an annual growth target around 6%. Now, of course, the situation is pretty much different. In a base case scenario, where the crisis is contained by the end of Q1 2020, China could see its economy slumping to 4-4.5% growth in Q1 2020, one of the lowest levels since 1990s. In a worst-case scenario (long-standing impact), a sharp weakness could continue for the whole 2020.

UBS yesterday has slashed its Q1 global GDP forecast to just +0.7% from +3.2% qoq annualized. Chinese Q1 GDP is now expected to be -1.5% (prev+6.5%)

Oil price is a very interesting indicator on China’s economy as China’s oil demand is -3m /day ~20% of total consumption. China may soon reach storage limits, raising the risk they’ll have to cut the volume of crude they process. OPEC press speculates that Russia is now saying it’s open to Saudi Arabia’s push for an emergency meeting this month.

Tonight we are going to have the important Iowa Caucus with an anticipated record-breaking turnout to the Democratic Party. Bernie Sanders has been moving up the ranks and is likely to be the winner.

Until the end of Q3 2019, Joe Biden was leading the polls with 27.5% of preferences while Sanders was following at 15% of preferences. Today the situation is pretty different as some polls are suggesting Sanders tied with Biden or even in the lead. However, the current market consensus still expects Joe Biden to win the Iowa contest. This might create some market volatility if Sanders unexpectedly jumped to the first position. With respect to Equity and Fixed Income sectors, we would see some sharp risk-off mood on Healthcare and Energy in particular. Among Sanders’ proposal, we would like to remind you, the Medicare-for-all plan that would ban private health insurance (a killer for healthcare stocks), lifting restrictions on US imports of prescription drugs from Canada, prohibition against fracking to extract oil and natural gas along with banning the export of crude oil (US is a net exporter, many Oil energy companies are heavy-loaded, this move would destroy corporate profits).

Let’s have an update situation on positioning.

On US futures, despite the sell-off we had so far, the aggregate positioning on S&P, Nasdaq, Russell, S&P Mid-cap and Dow Jones is still substantially above the average while short positioning is below the average of the last few years.

Some equity supply from Systematic investors has already hit the market but more has possibly to come considering the fragile scenario and increased volatility. We showed you already how weighted were the Vol Control investors last week, have a look at the updated situation on the chart below as shown from the arrow. It can of course continue to go lower but something has already changed.

On CTA funds, so far the de-risking has been small on US equities while more pronounced on non-US equities. The situation is however getting more interesting now as it would only take a further decline of just under 2% from current levels to start pushing shorter-term signals into negative territory and generating substantial amounts of sell orders.

Net exposure on Hedge Funds has decreased but it is still above the average of the last years.

Update on the Earning Season.

The Q4 reporting season is well underway in the US, with 40% of the S&P market cap reported this week. In Europe and Japan, only 16% and 21% of companies have released earnings, respectively. Initial results set an optimistic tone, with positive earnings surprises in both the US and Europe, to the tune of 4% and 2%, respectively.

US: 73% of the S&P500 companies that have reported beat EPS estimates. EPS growth is running at +6% y/y, surprising positively by 4%. Most sectors are seeing positive earnings surprises, with Tech earnings being particularly strong. Overall topline growth is holding up well, at +2% y/y, with 64% of the companies beating estimates. Keep in mind that over the course of the 4th quarter, analysts collectively revised their Q419 earnings estimates lower by 4.1%.

Interestingly, of the 152 companies that have beaten earnings estimates so far, only half of them would have beaten Q419 earnings estimates as of the start of Q19. Of these same 152 companies, only 109 of them would have beaten expectations as of October 1st, 2019.

Europe: 64% of Stoxx600 companies beat EPS estimates, the highest level since 2017. EPS growth is negative at -3%y/y, but still 2% ahead of expectations. Ex-Energy the earnings growth is faring much better. At a sector level, commodity sectors and Industrials are weak, while Tech, Discretionary, Real Estate and Utilities are delivering better earnings. On topline, 58% of companies beat estimates, and revenue growth is coming in at -1% y/y.

Japan: 53% of Topix companies beat EPS estimates, with overall growth at -4% y/y. Topline growth is coming in at -1%y/y with only 32% of companies beating estimates.

Important to note that European companies that are beating earnings are being rewarded by investors, while misses are not being proportionately penalized. This is in contrast to what was observed in previous quarters, and also to what is seen in the US thus far.

In looking top-down at results, you can argue that the overall takeaway so far is that earnings have been “better than feared”. If this trend holds, 4Q19 could reveal a meaningful improvement in corporate operating leverage, which notably deteriorated over the course of last year amid varying and persistent margin pressures (trade, labor costs, etc.).

Today’s earning release

USA: ConocoPhillips, Walt Disney, Ford

Europe: British Petroleum, Glencore, Intesa San Paolo, Ferrari, Micro Focus International, Nokian Tires, Qiagen

Last night Google:  delivered a miss mainly on sales, with the stock trading down 4% in aftermarket. Q4 advertising revenues jumped +17% vs +20% consensus YoY (Google’s search ad business isn’t expanding as quickly because of the proliferation of other ways to reach huge audiences). Google disclosed Youtube and Cloud revenue for the first time. Stock up 28% in 2019 and up 11% year-to-date.

Macro-wise, we saw again a mixed bag of data on Monday. In China, December industrial profits came at -6.3% vs 5.4% consensus, while January Caixin China PMI was broadly in line at 51. Of course, these data don’t account for the Virus effect and are set to be worsening in the next months. Without any doubt the macro backdrop is turning more unfriendly. Also, in Japan and South Korea, January Manufacturing PMI were a touch weaker, respectively at 48.8 vs 49.3 and 49.8 vs 50.1 consensus (and will be worsening in Q120 indeed). On the positive side, Hong Kong GDP came a little weaker than forecast, -1.2% vs -1.4% consensus YoY.

In Europe, January Manufacturing PMI were better than estimates, although still weak on average as the situation remains very fragile. Euro-area in line, Germany at 45.3 vs 45.2 rising to 11-month high, France at 51.1 vs 51 6th consecutive month of expansion, UK at 50 vs 49.8 back to expansion level in one year, Spain at 48.5 marking a 5-month high and Italy 48.9 vs 47.3 still weak after a tough Q4 contraction (note that almost all of them are still below 50, expansion and no one takes the virus effect into account).

In US, strong Macro data in January with ISM Manufacturing increasing to 50.9, expansion territory and largest monthly move since 2013. Also, strong improvements in the order and production components, respectively 52 vs 47.7 consensus, an eight month-high and 53.3 vs 51 consensus, the largest gain in six years while ISM employment was basically flattish.

Lower construction spending in December -0.2% vs 0.5% consensus, although New York is currently seeing the biggest home-building boom in years, the highest pace since 2015 which reflects a strong optimism in the American economy.

Today’s Macro release

-January Euro-area PPI

-December US Factory orders, Durable goods and Cap goods

A final note on Private Debt market as it has become an important asset for fixed income investors, more than tripling over the past 10 years (chart). Without any doubt shrinking liquidity in public market, negative rates, search-for-yield and crowded segments are among the reason of its success.

Private Debt market

Institutional are still among the largest investors, such as private and public pension funds, Insurance and Asset Managers.

It is also interesting to assess where investors prefer to invest their capital in direct lending; among the largest borrower base we find high-risk, innovative sectors such as Information Technology, Discretionary, Industrial and Healthcare.

Direct lending

Please note that we won’t be able to send the daily updates until Friday (unless something super-important happens) as we are in the process of writing our monthly comment.