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Market Direction Week Review:Newly
emboldened after signing the phase-1 trade agreement with China, President
Trump will head to India next week to negotiate trade terms with Prime Minister
Narendra Modi. About a year ago, the US ended the low-tariff status previously
granted to India, and India retaliated by imposing tariffs on US steel exports.
Like
China, India has a large population and is quickly becoming a global
manufacturing and technology powerhouse by inviting foreign investment. But
also like China, it has done so while also limiting other countries’ access to
its consumer segment. President Trump will likely advocate for reciprocal trade
agreements that involve substantial US exports, so India’s policy of supporting
domestic manufacturing, and requiring technology transfer, will undoubtedly be
problematic. Some estimates indicate as much as 50% of India’s imports are
impacted by these policies.
At
the time of this writing, over 76,000 cases of the COVID-19 virus have now been
confirmed, including over 2,200 deaths. The Hubei province in China, which is
at the center of the outbreak, reported a sharp drop in new cases this week,
leading some to question the reliability of the data being released, especially
since the methodology keeps changing. Perhaps more concerning is recent news
about outbreaks outside of China, including more than 50 cases in a 24-hour
period in the city of Daegu South Korea and more than 90 new cases in Japan; a
3-fold increase from the prior week.
On
a positive note, the number of infections in children is emerging as
uncharacteristically low. Data being analyzed by a few medical schools in the
US indicate that among the diagnosed cases, children currently make up less
than 0.2%. While the researchers cautioned that the analysis is very
preliminary, it does appear that even among those children who have been
infected, the symptoms have been very mild; no more severe than a common cold.
While
it remains debatable how fast the virus in spreading, there is no debate
whether or not the equity markets have moved on. Since the initial pullback
ended on 2/3, the SPX has risen +5.0% and the Shanghai Shenzhen 300 Index has
risen +12.3%. Below is an update of the table comparing the COVID-19 outbreak
to others in the past. While I don’t want to minimize that fact that all deaths
from this virus are tragic, and the total number of cases is fairly high, the
death rate remains relatively low. Historically viral outbreaks have not had a
significant or lasting impact on equity markets. Now 4 weeks following this
outbreak, the SPX is +1.3%; slightly better than average.
In
the immediate post-Brexit environment, the business-as-usual agreement between
the UK and the EU allows for full access only through the end of December.
However, on Wednesday (2/19) EU leadership in Brussels stated quite clearly
that following the end of the transition period, the UK will get no special
consideration with regard to financial market access. Instead, it will be
treated in the same manner as Japan and the United States.
EU
access has generally been granted if leadership believes that the non-EU
country’s financial rules are as robust as those of EU members, and that they
adequately focus on investor protection and financial stability. This could be
problematic beginning in 2021, as a large portion of equity and derivatives
trades in Europe currently take place in London and there are concerns that
other EU markets may not have sufficient capacity to handle current volumes.
Concerns over the transition have led more than 300 banks, insurers and asset
managers in the UK to establish a presence in EU countries in an effort to
minimize customer disruptions.
How
the market finished last week, the S&P 500 down 1.3%, the Nasdaq down 1.6%,
and the Dow down 1.4%.
Market Direction This Week:We track the stock
market based on our Bullish and Bearish Alerts a new Bullish Alert
recently started on 10/24/19 and we suggested to our followers they can trade any
new long positions based on are model. We will continue to provide you the
current stock market conditions as they develop. The current stock market
environment is in an uptrend (see Market Direction Mid Week Update: Trading Strategies).
We’re
now in the home stretch of Q4 earnings season. With 438 companies (87%) of the
S&P 500 reporting, EPS beat 75% and Rev beat 66%.
Coronavirus
developments, consumer sentiment surveys, the second print on fourth-quarter
U.S. gross domestic product and a slew of corporate earnings results will draw
investor focus this week.
The
mysterious infection roiled U.S. stocks at the end of last week amid a spike in
new cases. It spurred jitters over the extent of the outbreak, both in its
human impact on its effect on economic activity across the globe.
In the U.S.,
IHS Markit’s purchasing managers’ indices on Friday represented the first major
economic data report to reflect a marked impact from the coronavirus, with the
composite index for the services and manufacturing sectors dipping to the
lowest level in seven years.
Amid the
outbreak, two consumer sentiment surveys will be in focus this week. The
Conference Board is due to release its February consumer confidence index at 10
a.m. ET Tuesday. Consensus economists expect the index will rise modestly
relative to January, coming in at 132.0 versus 131.6 at the start of the year
as a strong labor market helps offset fears over the coronavirus.
The
Conference Board’s consumer sentiment index has risen for three straight months
between November and January.
“The
Conference Board’s consumer confidence index should remain elevated in
February. Jobless claims remain low and wages are slowly by steadily rising,”
Wells Fargo Securities economists wrote in a note Friday. “Low gasoline prices,
in the most simple of terms, mean more money in consumers’ pockets ... While
the virus presents a risk, we do not expect it to meaningfully weigh on
confidence in February.”
The
Conference Board’s February report comes after the University of Michigan’s own
closely watched sentiment index rose 1.1 points in February. While the two
measures do not necessarily move in perfect lockstep, their trajectories tend
to be similar.
On Thursday,
the U.S. Bureau of Economic Analysis will release its second estimate for
fourth-quarter gross domestic product. Consensus economists expect the headline
gauge of economic growth will remain unchanged, with GDP registering a 2.1%
annualized, quarter over quarter increase.
Some
economists, however, expect a mild downward revision.
“We expect
the BEA to lower its estimate for Q4 real GDP growth by 0.1 [percentage points]
to 2.0%,” Nomura economists wrote in a note Friday. “Data on residential
construction spending indicates a stronger increase in residential investment
in Q4, relative to the BEA’s estimates.”
“However,
the January retail sales report included downward revisions to December and
November data, suggesting that growth in personal consumption expenditures was
likely less than the BEA’s initial report,” the economists continued.
“Moreover, incoming data on inventories suggest a small contribution from
inventory buildup in Q4.”
The standard caveat still applies; “President Trump’s tweets still trump everything else”.
Economic Calendar: Consumer Confidence (2/25), Durable Goods (2/27), GDP (2/27), Personal Income & Spending (2/28)
Some of the major earnings announcements on deck: HD, CRM, KEYS, MAR, BIDU.
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to monitor positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we
may issue advising a change in the current market direction. Stay tuned
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