China Coronavirus Outbreak Worsens, Oil Falls to Three-month Low

Posted on 01/27/2020 6:03 AM

Bolton's book and Senate impeachment trial | Traders have Phase 1 questions

In today's updates:

* Wuhan coronavirus continued to spread rapidly, including to 10 other countries
* China's XI convenes leadership to address outbreak
* WHO head is in Beijing
* Coronavirus raising major market/China 1 agreement questions
* Shawn Hackett: Phase 1 won't mean bull market for soybeans, but has trade strategy
* Court sends some small refinery exemptions back to EPA
* House Democrats will introduce their infrastructure plans this week
* Financial analyst: 'Buy Deere stock' on pent-up demand and precision ag demand
* Stakeholders call for extension of comment period proposed rule for NEPA reforms
* U.S. officials say not if, but when for new trade agreement with the U.K.
* Impeachment proceedings continue this week in the Senate
* Bolton book: Trump tied Ukraine aid to inquiries he sought
* U.S. embassy in Baghdad hit
* Poll: Bernie Sanders has seized the lead in Iowa
* Des Moines Register's editorial board endorsed Sen. Elizabeth Warren
* Trump today hosts Netanyahu and Gantz as peace plan under discussion
* IRS begins accepting 2019 returns today
* Fed’s balance sheet has stopped expanding
* Fed mulls what to do for the next recession

Markets: Stocks and oil are starting the week firmly lower as the coronavirus spreads, the populist leader of Italy’s League party suffered defeat in a key regional election and the U.S. embassy in Iraq came under fire. While China's markets are closed, stock futures are down over 5% today and the offshore renminbi dropped sharply as well. The outbreak uncertainty is pressuring industrial commodity markets. For example, iron ore in Singapore is down 6%. Crude oil and copper are showing growing downturns — the crude oil market had its worst week since July. Gold is at a multi-year high. As for commodities, U.S. soybeans continue to weaken, but managed money outright long positions in wheat surged last week, defying historical trends — but analysts note that wheat appears to be overbought, and sellers are entering at resistance.


Coronavirus update:

  • Link to outbreak update filed Sunday.
  • China leader Xi Jinping convened leadership to address outbreak. A top Chinese health official warned on Sunday that the virus’s spread was accelerating despite a lockdown affecting 56 million people. Today, 2,744 cases had been confirmed and the death toll had risen to 80 — with all but four in Hubei province. The government extended the Lunar New Year holiday by three days in an effort to limit travel.
  • Most of the nearly 3,000 people who have contracted the virus live in China, but it has spread to 10 other countries. Five cases have been confirmed in the U.S. How exposed is the United States to the Wuhan Coronavirus? Here is the number of visitors from Asia via Fitch Ratings:
    Fitch and China visitors
  • The head of the World Health Organization (WHO), Tedros Adhanom Ghebreyesus, is in Beijing. The WHO has not yet declared the Wuhan virus a global emergency. “The epidemic is now entering a more serious and complex period,” said Ma Xiaowei, the director of China’s National Health Commission. “It looks like it will continue for some time, and the number of cases may increase.”
  • Hit on Chinese economy growing. China was counting on consumers to underpin its already slowing economy. Now, authorities are advising people to stay home, and many residents are too frightened anyway to eat out, shop, see movies or travel. Hong Kong could be especially hard hit as the city banned visitors from Wuhan, threatening more negative impacts for an economy already in recession after months of protests battered tourism and retail sales.
  • Traders and others want to know the market impacts of the ongoing coronavirus situation. One interested observer asked the following:
         1. Are all driving vehicles in Hubei and nearby provinces completely stopped? I read Hubei province is stopped.
         2. How many crushing plants and meal production in Hubei have stopped operating?
         3. How many pigs, poultry, etc have stopped eating, slowing feed consumption?
         4. Do they start importing soymeal and or/grain rations with meal to fly into animal production facilities? From where… which countries?

    Another industry contact asked: Would all of these be considered a Chinese purchase from the U.S. under phase 1?
         — A Chinese company or SOE buys U.S. ag product but delivers cargo to Viet Nam?
         — A Chinese company or SOE buys U.S. ag product and it arrives at Chinese port but is then transshipped to Viet Nam before unloading?
         — A Chinese company or SOE buys U.S. ag product and it is landed on Chinese soil but then transshipped to Viet Nam?
         — A Chinese company or SOE buys U.S. ag product and it is landed on Chinese soil?

Phase 1 deal won't create a bull market for soybeans, but here's one way to play it. That's the headline of an article in Barron's (paywall/link). “The strategy would be to buy on the breaks,” says Shawn Hackett, president of Hackett Financial Advisors. “You have to be opportunistic is the point.” Buying on the dips and selling on the rallies might be far more profitable than a buy-and-hold strategy, the article notes, with Hackett added that traders should consider buying active-month soybean futures when they dip close to $8.50 and then sell as they near $9.50. “That’s a dollar, which is a nice trade,” he says. Alternatively, traders could buy call options on futures contracts when the soybean price dips nearer to $8.50. These contracts pay out when the price of soybeans rallies. Futures contracts for soybeans were recently fetching about $9.17 a bushel on the CME.

Court sends some small refinery exemptions back to EPA. EPA has to reconsider small refinery exemptions (SREs) issued for the 2016 compliance under the Renewable Fuel Standard (RFS), according to a decision from the U.S. Court of Appeals for the 10th Circuit. The court ruled that exemptions granted to Holly Frontier’s Woods Cross and Cheyenne refineries and CVR Energy’s Wynewood refinery, stating the agency overstepped its authority as the refiners had not previously been granted SREs. The court said the statute states that any SRE granted to a refinery has to be in the form of an “extension” after 2010, yet the three refineries were given exemptions for the first time in the 2016 compliance year. "Because an 'extension' requires a small refinery exemption in prior years to prolong, enlarge or add to, the three refinery petitions in this case were improvidently granted," the court said. "We remand these matters to the EPA for further proceedings consistent with this opinion."

The matter of SREs continues as a focal point as EPA has pledged to follow the recommendations of the Department of Energy (DOE) relative to granting the exemptions, and said in their final proposal for 2020 biofuel and 2021 biodiesel levels under the RFS that they would account for them by using a three-year average of what DOE recommended on SREs over the 2016-2018 period. The final rule has yet to be published in the Federal Register.

House Democrats will introduce their infrastructure plans this week, Speaker Nancy Pelosi (D-Calif.) said earlier this month. The plan will tie together priorities from the Transportation and Infrastructure, Ways and Means, and Energy and Commerce committees, according to an outline of the surface transportation portion (link). The surface transportation bill, which typically covers highways and railroads, will propose authorizing about $20 billion per year over current spending levels, according to the outline. As for paying for Infrastructure: Democrats will look to pay-fors to the Ways and Means Committee. That panel has a hearing on the topic scheduled for Wednesday.

One financial analyst says to buy Deere stock... here's why, from Todd Ahlsten of Parnassus Investments as told to Barron's. “Deere is clearly known for the iconic green tractor. It has one of the widest moats in terms of brand and network globally in the agriculture business. This goes right into our ESG dynamic: Their precision ag business, which helps farmers plant, use water, and spray more efficiently, is increasingly valuable. Equipment is about 6% of a farmer’s budget; 17% is seeds and fertilizer. Deere has artificial-intelligence data on about 165 million acres of land. That penetration will go up. Their ability to monetize precision farming, through a network of tractors, will generate tremendous value over the next decade... On average, farmers’ fleets are at their oldest in more than a decade. There will be an upgrade cycle at the same time as a precision ag adoption cycle. You already have the incumbency. We think they’re a titan.” Link (paywall) to Barron's article.

Stakeholders call for extension of comment period proposed rule for NEPA reforms. A 180-day extension of the 60-day comment period on the Trump administration’s notice of proposed rulemaking (NPRM) on the National Environmental Policy Act (NEPA) reforms has been requested by the Council on Environmental Quality. Given that the proposed rule would impact how “every single agency in the federal government considers the health and environmental impacts federal decisions,” the group said the 60-day comment period and two public meetings scheduled by EPA are “woefully inadequate” for the plan the group says would impact more than 50,000 decisions made each year by the federal government.

They called for additional public meetings to be held in both rural and urban areas versus the two proposed by EPA to be held in Denver, Colorado, and Washington, DC.

U.S. officials say not if, but when for new trade agreement with the U.K. The U.K. is scheduled to leave the European Union on Friday. Treasury Secretary Steven Mnuchin said the U.S. hopes to complete a new trade agreement with the country by the end of this year. “The U.S. and the U.K. have very similar economies. I think this will be a very important relationship,” Mnuchin said.

U.K. trade

Other items of note:

  • Impeachment proceedings continue this week in the Senate, with the president’s lawyers wrapping up their defense by Tuesday. Once the opening arguments are completed, senators will have up to 16 hours to ask questions — in writing. Debate over whether the Senate should subpoena witnesses or documents is expected to start on Friday. Portions of former National Security Advisor John Bolton’s draft book manuscript — circulated among various associates who described the draft to the New York Times — could stymie Republicans’ plans for a quick trial. Bolton’s book reportedly describes Trump’s decision to withhold aid to Ukraine in detail and reveals the involvement of other top officials, including Attorney General William Barr and Secretary of State Mike Pompeo. If witnesses are called, the trial would extend into next month.

  • U.S. embassy in Baghdad hit. Five Katyusha rockets were fired at the fortified Green Zone in Baghdad Sunday night, one directly hitting the U.S. Embassy building, Iraq’s security forces reported, while local media said U.S. helicopters were seen evacuating injured people. While the U.S. said it did not comment on injuries, it noted there have been 14 attacks on U.S. personnel in Iraq since September. Such attacks by Iran-linked militia groups have increased since the U.S. airstrike this month that killed Iran’s top commander Qassem Soleimani and Abu Mahdi al-Muhandis, the head of Iran-backed militia Kataib Hezbollah.

  • Bernie Sanders has seized the lead in Iowa, a New York Times/Siena College poll found. Pete Buttigieg and Joe Biden trail him, and Elizabeth Warren lost ground.

    Iowa poll

  • The Des Moines Register's editorial board has endorsed Senator Elizabeth Warren for the Democratic presidential nomination. The editorial board announced the decision Saturday, saying, "At this moment, when the very fabric of American life is at stake, Elizabeth Warren is the president this nation needs." The editorial board argues Warren’s policies are not radical and she “will push an unequal America in the right direction.” The Des Moines Register's editorial board endorsed Hillary Clinton for the Democratic nomination in 2016.

  • If you are confused regarding how the Iowa Caucus works, you are not alone. Bloomberg has a good primer at this link.

  • Trump hosts Netanyahu and Gantz. Today U.S. President Donald Trump is scheduled for back-to-back meetings with Israeli Prime Minister Benjamin Netanyahu and opposition leader Benny Gantz at the White House. There, U.S. officials are expected to release details of Trump’s delayed Middle East peace plan, though it is unclear when the plan will be made public.

  • IRS begins accepting 2019 returns today; filing due date for individual returns is April 15.

Markets. The Dow on Friday fell 170.36 points, 0.6%, to 28,989.73, declining below the 29,000 level that it crossed for the first time earlier this month. The S&P 500 tumbled 30.07 points, 0.9% to 3,295.47, its steepest one-day drop since October. The Nasdaq Composite lost 87.57 points, 0.9%, to close at 9,314.91.

For the week, the Dow dropped 358.37 points (1.2%) and the S&P 500 index fell by 1%, their worst declines since August, while the Nasdaq dipped by 0.8%, its worst showing since late September.

S&P Break

The crude oil market had its worst week since July as the widening coronavirus outbreak threatened to disrupt travel. U.S. oil futures fell 2.5% to $54.19 on Friday, in their fourth consecutive day of losses.

The Fed’s balance sheet has stopped expanding since the beginning of the year and contracted by some $25 billion in the week ended on Wednesday. While the central bank has said it would continue to purchase $60 billion of Treasury bills a month, it’s winding down its repo operations and letting its holdings of agency mortgage-backed securities mature without being replaced. That and other topics will be on traders focus when Fed Chair Jerome Powell gives a press conference this Wednesday afternoon, following the two-day policy meeting of the Federal Open Market Committee (FOMC). Most think the central bank won’t change its federal-funds target range of 1.50% to 1.75%.

The Fed mulls what to do for the next recession. As part of their contingency planning for the next recession, Federal Reserve officials are looking at a stimulus scheme the U.S. last used during and after World War II. From 1942 until 1951, the Fed capped yields on Treasury securities — first on short-term bills and later on longer-term bonds — to help finance war spending and the recovery. At issue is how the central bank should manage a faltering economy when short-term interest rates are already low. In the past three downturns, the Fed cut its benchmark rate by around 5 percentage points. The rate today is in a range between 1.5% and 1.75%, leaving less room to counteract a downturn, the Wall Street Journal reports (link).

Treasury Yields


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