Correction Territory for U.S. Equities as Coronavirus Fears Dominate

Posted on 02/28/2020 7:05 AM

Coronavirus continues to hit financial markets | Senators urge Trump to grant RFS waivers

In today's updates:

 

* Investors, others slash risk exposure due to rising uncertainty re: coronavirus
* Will the correction turn into a bear market?
* Comparisons to other epidemics may be more apt, even if dated
* History of corrections going back to World War II
* Goldman Sachs predicts companies in S&P 500 would generate no profit growth
* Dems send letter to Fed chairman re: coronavirus situation
* Monetary policy can't fix supply chain issues
* Congressional Democrats' coronavirus aid plan
* Volatility measure surging
* Global officials are struggling to measure exactly how quickly the virus is spreading
* Recovery in the U.S. freight transport market is looking further away
* FT: Record number of force majeure certificates handed out by China Council
* NYT: Health workers may have been exposed to virus without proper precautions
* No coronavirus emergency in California, but state will expand testing
* Covid-19 continues to expand its reach
* Japan's Abe promises to prevent damage to Japanese economy from coronavirus
* EPA's Wheeler addresses refiner exemptions in congressional testimony
* Senators lobby Trump to fight for biofuel exemptions
* Democratic leaders willing to risk party damage to stop Bernie Sanders
* South Carolina holds a crucial Democratic primary on Saturday
* The heart of the Democratic presidential nominee contest
* Bloomberg campaign overture to former Dem presidential candidate Andrew Yang
* USDA announces hurricane crop insurance option
* Cotton AWP moves lower
* API releases report warning against fracking ban plans by some Dems

Markets: On the seventh day … markets kept falling. The coronavirus market downturn continued today, as Asian markets closed sharply lower and European stocks tumbled at the start of trading. In Asia, Japan’s Nikkei 225, South Korea’s Kospi and Australia’s S&P/ASX 200 all ended the day down more than 3%. U.S. investors may be wary of holding on to stocks over a weekend that could bring more scary news. The consensus estimate for first-quarter domestic growth has slipped to 1.5%, according to data from FactSet on Thursday, from 1.7% at the end of 2019. Bottom line: Just a few weeks ago, economists and investment bank analysts expected the coronavirus outbreak to have minimal impact on the U.S. economy; now they are warning that an outright recession may be on the horizon.

Note this: The RSI measure shows all three U.S. indices in oversold territory. Also, the U.S. market outperformance vs. the rest of the world is rapidly narrowing. Meanwhile, according to BCA, Treasuries are overbought and expensive. If the coronavirus situation worsens in the U.S., municipalities' and states' finances will be stretched.

China to release key economic data. Analysts are expecting a significant, coronavirus-related falloff when the Chinese government announces its most recent PMI survey results tomorrow.

Zinc, copper, and nickel have seen the largest inventory rises and price drops so far this year on a percentage basis.

Despite the sell-off in risk assets and falling bond yields, gold is no longer rising.

Leap-year your real birthday?
From USA Today: “Every four years, give or take a couple, we tack an extra day onto February. You have Julius Caesar to thank for that (link). And businesses are taking advantage of 2020's extra day by offering specials and freebies. The day is even more rewarding if you have the rarest of birthdays and were born Feb. 29. Several restaurants will offer birthday freebies for the group known as Leaplings, Leapsters or Leapers.”

 

Coronavirus update:

  • Investors, others slash risk exposure due to rising uncertainty about the coronavirus's effects on business and the economy. The virus, which has now spread to 47 countries, has put pressure on businesses and supply chains around the world and has driven stocks down for a sixth day and into correction. The Dow shed nearly 1,200 points by session's end, a drop of more than 4.4%. The S&P 500 was also off by 4.4% and the Nasdaq Composite dropped 4.6%. It took the Dow just 10 sessions to tumble from its all-time high into a correction. Through Thursday’s close, the Dow was down more than 11% week to date (down 3,223 points) while the S&P 500 had lost 10.8%. All 11 sectors of the S&P 500 are in negative territory for the year. The S&P 500 is 12% below its record close on Feb. 19. Its six-session skid since the record marked the fastest-ever descent into a correction from an all-time high, according to Dow Jones Market Data.

Correction

 

          S&P declines

  • Will the correction turn into a bear market? Economists expect a slowing wouldn’t last longer than several months and would likely be followed by a sharp rebound. But remember, some of those same “economists” initially thought the coronavirus would be a short-lived story.

    Comparisons to other epidemics may be more apt, even if dated: A severe influenza pandemic similar to the one that began in 1918 could cause U.S. economic output to decline by 4.25%, while a milder pandemic, like ones that occurred in 1957 and 1968, could reduce output by 1%, according to a 2006 assessment prepared by the Congressional Budget Office.


    Bear markets in history
     
  • History of corrections going back to World War II:

    Corrections in history

    Average decline for corrections is about 13.7% and they last around four months
    — unless bear markets surface, characterized by a dip of 20% or more. Those typically last longer.

     
  • Analysts at Goldman Sachs predicted companies in the S&P 500 would generate no profit growth this year as a result of the crisis, because of a “severe decline in Chinese economic activity,” disruption in the supply chain for American companies and a slowdown in the U.S. economy. "We have cut our 2020 global growth forecast to 2.8% (from 3.2%). This would be the lowest reading since 2009," economists at Bank of America added, saying it would also be the first time since the financial crisis that it was expected to be under 3%. "Cases of the new coronavirus disease are rising quickly outside China, and the odds of the outbreak turning into a pandemic have now doubled — from 20% to 40%," according to a report from Moody's Analytics.
     
  • Democrats on the House Financial Services Committee sent a letter on Thursday to Fed Chairman Jerome Powell, asking for more information about whether an outbreak of the virus in the U.S. could cause a recession and what tools the central bank had to combat a supply shock to the economy. Central bank policymakers said on Thursday that they were closely monitoring viral developments, though they did not yet signal a coming cut. “It really depends on: What are the medium-term implications for the U.S. economy?” Loretta Mester, the president of the Federal Reserve Bank of Cleveland, said in an interview. “If people are temporarily staying home, not traveling, not interacting and purchasing things, that could be a short-term hit. Or it could develop into something broader — and that’s the kind of calculus you have to do when you’re thinking about monetary policy.” Meanwhile, House members today will receive a briefing on coronavirus from Trump administration officials, including FDA Commissioner Stephen Hahn and Director of National Institute of Allergies and Infectious Diseases for the NIH Anthony Fauci.
     
  • Monetary policy can't fix supply chain issues as companies can’t get hold of the goods they need. While investors expect the Fed will step in and cut rates to help cushion the economic effects of the coronavirus epidemic, most think it will be psychological without much help — it could alleviate the financial burden on companies experiencing supply and sales disruptions. Auto-part suppliers were also warning that manufacturers might struggle to get parts. This is a similar situation in other business sectors. Futures markets put about 90% odds on the central bank cutting rates at least two times before the year is out. In early January, before news about China’s outbreak began hitting the headlines, those odds were at less than 25%.
     
  • Congressional Democrats' coronavirus aid plan. House Speaker Nancy Pelosi (D-Calif.) and Sen. Chuck Schumer (D-N.Y.), the Democratic leader, called for Congress and President Trump to fashion a spending bill meant to “address the spread of the deadly coronavirus in a smart, strategic and serious way.” A response should include interest-free loans for “small businesses impacted by the outbreak.”
     
  • Volatility measure surging. The CBOE Volatility index, or VIX, jumped to 44.32 today, the highest level since October 2011. The VIX, which is based on options on the S&P 500, tends to rise when stocks are falling and decline as markets rise.

    Vix chart
     
  • Global officials are struggling to measure exactly how quickly the virus is spreading. Some countries including China and the United States have altered how they do testing for the virus. The CDC has revised its guidelines to give clinicians across the U.S. more power to test people suspected of carrying the new coronavirus. Under prior rules, clinicians only tested suspected COVID-19 patients if they had traveled recently from China or had been in contact with someone known to be infected.
     
  • Recovery in the U.S. freight transport market is looking further away. Analysts expect supply-chain disruptions from the coronavirus outbreak to prolong a slump in domestic shipping demand that began last year, the Wall Street Journal reports (link), although freight carriers could see a bump once production in China rebounds and companies rush to restock depleted inventories. The impact of China’s slowdown on U.S. shipping markets, the article notes, “shows how even companies focused on domestic business are closely tied to global supply chains.” The sharp decline in shipping volumes through U.S. West Coast ports is rolling across distribution networks, with intermodal rail transport down sharply so far this year and trucking rates weakening on tepid demand. UBS cut its earnings outlook for the current quarter for both United Parcel Service Inc. and FedEx Corp. “More downbeat reports are likely until there are clear signs of a rebound emerge,” the article concludes.

    Cassie index
     
  • The Financial Times reports that a record number of force majeure certificates have been handed out by the China Council for the Promotion of International Trade, a quasi-governmental body. The group said today it has given out 3,325 certificates covering contracts worth a combined 270 billion yuan ($38.5 billion) since the beginning of February. The item noted there are concerns the action could “undermine Beijing’s credibility.” They quoted an unnamed Commerce Ministry adviser as saying it was bad practice for local governments to promote force majeure because it would lead foreign buyers to “look elsewhere” for suppliers. But the item also pointed out that legal experts indicated they key in the situation are the specific terms written into each contract.
     
  • NYT: Federal health workers may have been exposed to the coronavirus without proper precautions and were able to travel freely, a whistle-blower said. The whistle-blower, described as a senior leader at the health agency, filed a complaint saying that the team was “improperly deployed” to two military bases in California to assist the processing of Americans who had been evacuated from coronavirus hot zones in China and elsewhere. Link for details. The whistleblower alleges she was improperly reassigned after raising concerns with HHS Secretary Alex Azar's office. Link to Washington Post article.
     
  • No coronavirus emergency in California, but state will expand testing: Gov. Newsom. In his first news conference to address the coronavirus issue, Gov. Gavin Newsom (D) sought to calm concerns and reassure Californians that the state will be prepared if coronavirus spreads. The state is working with federal officials to expand the testing of possible patients, and there are currently no plans to declare a statewide emergency.
     
  • COVID-19 continues to expand its reach. South Korea’s tally of coronavirus infections exceeded 2,000, due in part to widespread testing. Italy reported over 200 new cases and three European countries reported infections for the first time. More than a dozen countries have reported their first cases over the past 48 hours. Today, that includes patients in New Zealand and in Nigeria, which is the first confirmed case in sub-Saharan Africa. Iran cancelled Friday prayers in mosques in big cities.
     
  • Japanese Prime Minister Shinzo Abe told the country’s parliament he was willing to take policy action in order to prevent damage to the Japanese economy from the coronavirus situation. “If developments change, we will ensure to take steps as needed to prevent the virus from becoming a huge downside risk to Japan’s economy,” Abe said. The government has sufficient reserves for emergency spending needs, he commented. “But I am aware of views that if the virus spreads, it could have a huge impact on the economy. We are therefore watching developments carefully.”
     
  • More impacts of coronavirus:

    — Airlines, airports and hotel operators are feeling the brunt of the growing virus crisis, with companies putting lucrative corporate travel on hold, industry groups canceling major events and leisure travelers reconsidering their vacation bookings.

    — Europe’s travel industry is headed for its worst stock rout since the financial crisis more than a decade ago.

    — Sales of domestic hygiene products have risen if not surged. The Trump administration is considering invoking special powers through a law called the Defense Production Act of 1950 to rapidly expand domestic manufacturing of protective masks and clothing to combat the coronavirus. "We will have the ability to tell corporations, 'No, you change your production line so it is now 80% of the N95 masks and 20% painter masks," White House sources told Reuters. The biggest producers of face masks in the United States include 3M and Honeywell.

    — Companies around the world are assessing the outbreak's impact on their balance sheets, with the decline in shipping slicing freight operators’ revenues and potentially hitting liquidity.

    — South Korea is distributing more than $13 billion in emergency funds for businesses and consumers, similar to an earlier $15 billion plan in Hong Kong. And China is relaxing its rules on how banks deal with bad loans, giving borrowers and lenders more of a cushion as economic activity grinds to a halt.

    — Alaska is pitching itself as an alternative tourist destination to Asia; and Hong Kong found a pet dog with a “low level” of the virus.

EPA's Wheeler addresses refiner exemptions in congressional testimony. The Fiscal Year (FY) 2021 budget proposal for the Environmental Protection Agency (EPA) was the topic of a hearing before a House Energy & Commerce subcommittee hearing today, but lawmakers focused on a host of issues, including US biofuel policy.

     The recent 10th Circuit Court decision which ruled that three small refinery exemptions (SREs) under the Renewable Fuel Standard (RFS) ran counter to the law and was one area of questioning EPA Administrator Andrew Wheeler faced as he testified. The three-judge panel said a refinery must have consistently received exemptions to be eligible for them.

     But some senators said that ignores federal law saying refineries may seek relief “at any time,” and it conflicts with longstanding EPA practice and is at odds with a 4th Circuit ruling.

     “We have the 10th Circuit decision,” Wheeler said in comments on U.S. biofuel policy. “We are working with the Department of Justice and closely looking at that as well as other court decisions” relative to the RFS. “It is a very litigated area,” he added.

     Reports have indicated that EPA is poised to dramatically scale back the use of SREs based on the 10th Circuit Court ruling. While Wheeler did not specify that would be the outcome, his statement that they would “comply” with the 10th Circuit Court decision will likely up expectations that the reports could be met with reality.

     Impacts. Asked if the decision would mean reports that the agency would dramatically scale back the use of SREs, Wheeler said he did not have an announcement to make, but said, “we will make sure with comply with the 10th Circuit decision.” Pressed further, Wheeler would only pledge that the agency will be issuing guidance relative to the court ruling and said that guidance would be coming “soon.”

     When questioned on whether Congress should step in with legislation to clarify the situation, Wheeler said he was “not at liberty to ask for legislation.”

     GOP senators send letter to Trump. If the Trump administration doesn’t appeal a court ruling invalidating waivers exempting some refineries from biofuel-blending requirements, dozens of those facilities will be put “under severe financial strain” and thousands of jobs would be jeopardized, some Republican senators warn in a letter to President Trump (link to letter). If the ruling is allowed to stand and applied nationwide, it is believed only two small refineries would still be eligible for hardship relief, say the senators, led by Sen. John Barrasso (R-Wyo.).

     Regarding the prospects for after 2022 when the RFS authority expires, Wheeler said the agency was currently more focused on matters like the 10th Circuit court decision. However, he acknowledged they have focused a little on the post-2022 RFS situation.

Other items of note:

  • Democratic leaders willing to risk party damage to stop Bernie Sanders. New York Times' interviews with dozens of Democratic Party officials, including 93 superdelegates, found overwhelming opposition to handing Sanders the nomination if he fell short of a majority of delegates. Link to NYT article. Meanwhile, House Speaker Nancy Pelosi (D-Calif.) insisted that Democrats would unite around their nominee and encouraged party members to “keep our eye on the ball” of defeating President Trump.
     
  • South Carolina holds a crucial Democratic primary on Saturday. It’s the first state in the contest that has a large black population (black Democrats cast more than 60% of the primary vote), with Joe Biden leading polls and possibly slowing Bernie Sanders’ momentum. It’s the last vote until Super Tuesday (Mar. 3), when the candidates compete across 15 states in a single day.
     
  • The heart of the Democratic presidential nominee contest. Former New York City Mayor Mike Bloomberg released details of a recent cardiac exam and challenged Sanders, who had a heart attack last year, to do the same. Bloomberg is specifically calling on Sanders to release his “left ventricular ejection fraction” — or the amount of blood his heart pumps with each contraction. It is a key piece of data cardiologists would use to assess his health. Bloomberg’s doctor said his rate of 60% to 65% was “normal.”
     
  • Bloomberg’s presidential campaign has made overtures to former Democratic presidential candidate Andrew Yang. Bloomberg’s campaign has courted his endorsement and floated the possibility of Yang becoming the former New York City mayor's running mate.
     
  • USDA announces hurricane crop insurance option. A new crop insurance endorsement, Hurricane Insurance Protection — Wind Index (HIP-WI), has been announced by USDA’s Risk Management Agency (RMA). HIP-WI covers a portion of the deductible of the underlying crop insurance policy when a county, or county adjacent, is within the area of sustained hurricane-force winds. HIP-WI provides coverage for 70 different crops and is available in counties in the vicinity of the Gulf of Mexico and the Atlantic, as well as Hawaii. The past few hurricane seasons have shown that more coverage is needed in these areas and that prompt payment for losses is important not only for the impacted producers, but also for their rural communities. The coverage provided by HIP-WI can be combined with the Supplemental Coverage Option (SCO) and the Stacked Income Protection Plan (STAX) when acreage is also insured by a companion policy.
     
  • Cotton AWP moves lower. The Adjusted World Price (AWP) for cotton fell to 57.93 cents per pound, effective today (Feb. 28), down from 59.03 cents per pound the prior week. USDA also announced that Special Import Quota #19 would be established March 5 for the importation of 55,557 bales of upland cotton, applying to supplies bought not later than June 2 and entered into the not later than Aug. 31.

Markets. The Dow on Thursday dropped 1,190.95 points, 4.42%, at 25,766.64. The Nasdaq lost 414.29 points, 4.61%, at 8,566.48. The S&P 500 fell 137.63 points, 4.42%, at 2,978.76.

     Dow close

     Demand for U.S. Treasurys pushed up prices and drove down yields: The yield on the 10-year Treasury note, a closely watched barometer of investor outlook, fell to a record low of 1.29%.

     API releases report warning against fracking ban plans by some Democratic presidential hopefuls. Bans on the use of hydraulic fracturing – fracking – proposed by some presidential candidates – would extract a large cost on the U.S. economy over the next 10 years, according to a study released by the American Petroleum Institute (API). The report said there would be a cost of the U.S. economy of $7 trillion over 10 years with millions of jobs linked to the practice eliminated as a result. "The US energy revolution ... is dynamic and game-changing for the U.S. economy and energy security. Yet, banning fracking and halting federal natural gas and oil leasing has been proposed," API said. Plus, API argued, it would lead to more U.S. dependence on foreign energy sources, something that would boost costs for U.S. citizens.


 

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