Market has continued to trend higher despite continuous unhelpful headlines on the virus, the latest are coming from the WHO chief which said the outbreak ‘holds a very grave threat’ for world and Fed’s Powell “closely monitoring” the coronavirus impact on China and global economy.
Volumes on the upside continue to be quite light and US Ytd performances are really staggering: S&P +4%, Nasdaq +7.5%
In New Hampshire, Sanders has won receiving 25.7%, followed by Pete Buttigieg with 24.4%. Big defeat for Warren and Joe Biden who had more preferences in previous polls. So far, the contest moves to the Nevada caucuses on February 22. The choice of the Democratic contender is a tough one, because Trump still has the highest support ever, his personal best, approximately 50%.
Although several companies already re-started production, the economic activity in China still seems to be pretty weak. Among those who are already back to work, we can find carmakers such as Tesla, Daimler, Ford and Nissan, and other big players such as Honeywell and Cargill. In addition, Honda, General Motors and Tencent should be restarting in the next few days. It’s very interesting to us to assess Chinese economic activity by analyzing daily power coal consumption and nationwide passenger traffic. As far as the former, power coal consumption is still down 50% with six major power generation groups consuming only 60% (chart). As far the latter, passenger traffic seems to be down 85/90% pre lunar year (chart).
Daily power consumption today (blue line)
Passenger traffic today (blue line)
Of course the main reason why the market is not caring about the virus is due to Chinese policymakers which have implemented a raft of measures to restore investor confidence. Some Brokers are now assuming that even the FED might start again to cut rates soon to support the economy and the rate market is now expecting the FED to cut of 25bps by September with a 70% probability. The low yield environment has once again supported the renewed appetite for risk, with bond yields close to 2019 lows.
New liquidity measures after the Fed has done the greatest injection for a rolling 12-month period in history.
With the strong bounce Ytd of Nasdaq and Tech stocks, the S&P Technology/S&P weekly ratio is now trading at the 2nd most overbought time ever approaching the levels we had in the Tech bubble.
In terms of positioning, interesting to spot that global net length across Long/Short funds has now risen to the highest level in 4 years and even in Asia (ex-Japan) nobody seem to be afraid with net positioning reaching new highs (chart)
As far as Macro is concerned, we saw mixed data yesterday. In UK, Q4 GDP came flat in line with consensus, although December Industrial and Manufacturing production were quite weak, respectively 0.1% vs 0.3% consensus and 0.3% vs 0.5% consensus. Despite recent weakness, overall UK sentiment and hard data are currently pointing to a pick-up in January activity, with business expectations, consumer confidence, housing and capex intentions trending higher, lowering the likelihood of rate cuts and strengthening the sterling.
In US Sentiment of US Small Business rebounded at 104.3 vs 103.5 consensus, increasing for the the third time in the last four months. Also interestingly, the Global Citi Economic Surprise Index is bouncing back from 2019 (chart) while the Citi Global Inflation Surprise Index continues to be pretty weak (it makes sense as inflation is undershooting in every DM economy).
Citi Surprise Index (histogram) vs Citi Inflation Index (light bar)
Quick note on currencies.
For the second week, the Euro currency was the most sold currency especially among leveraged funds and global macro funds. Sentiment on the Euro currency also weakened sharply, moving to extreme bearish levels last seen in late September 2019. So far EURUSD level is hovering around 1.09, the weakest level since May 2017. Current positioning is net short with RSI turning in oversold levels.
Euro positioning (histogram) vs EURUSD (black)
The Swiss Francs is still overbought in PPP terms, with positioning having recently turned net long and EURCHF falling to 1.065 level, the lowest since April 2017.
Swiss Franc positioning (histogram) vs EURCHF (black)
A final note on wealth disparity from an article on the FT. As we discussed several times in our previous updates the wealth disparity in US is getting bigger and bigger. Buoyed by higher growth and rising valuations, the wealthiest households, 1% of the whole American population, now accounts for 56% of Equities owned by US households, up from just 46% thirty years ago.
Since 1990, the top 1% has bought $1.2 trillion of equities and mutual funds compared with $1 trillion of net selling by the remaining 99%. Based on the Federal Reserve’s Distributional Financial Accounts (DFAs), the concentration of household equity ownership among the wealthiest households is at an all-time high.
And it makes sense because rich people have extra liquidity, put money on the market and see their shares flying.
Reduced household equity demand and elevated equity allocations across the other type of Investors support the idea of limited upside to equities.