Markets finally got sick (no pun intended) of hearing about mysterious, deadly respiratory illnesses on Friday.
Reports of a second (and third) case of Wuhan virus in the US were as good an excuse as any for some profit-taking on Wall Street, where equities tumbled the most since October, and bonds extended gains.
The S&P was on track for its first daily loss of 1% or more since October 8 (see top pane below). By the time the closing bell sounded, the benchmark managed to escape down just 0.9%, so the streak of sessions without a 1% loss is intact – for now. Volume was around 30% above average Friday.
Friday also marked a rare stumble for big-cap tech, which many believe is ripe for a correction after surging to some of the most overbought levels since the dot-com bubble.
To say US stocks are overdue for a pullback would be to understate the case. Forward multiples are stretched and there’s more than a little ambiguity around whether EPS growth will rebound after what will likely be a second consecutive quarter of declining profits.
Meanwhile, 10-year yields finally fell below the knee-jerk lows hit in the frantic minutes around Iran’s counterstrikes on US interests in Iraq earlier this month. At one juncture, yields fell as much as 6.4bps to 1.668%.
Treasury futures touched session highs when US Senator John Barrasso said the CDC was on the verge of confirming a third US case of coronavirus. That came shortly after reports indicated a Chicago resident had fallen ill in the second case stateside. There will invariably be more.
The yen naturally rallied, but by comparison is nowhere near the flash lows hit in and around the Iran strikes (bottom pane).
Crude logged its largest weekly decline since December of 2018, with Brent off more than 6%. It wasn’t so long ago (less than two weeks, in fact) that market participants were pondering a dramatic oil spike tied to Mideast turmoil. As Friday’s protests in Iraq attest, the tumult is still a work in progress, but crude’s rally is most assuredly not. It seems like CTAs may be piling on in crude too, possibly accelerating the declines.
Equities pared losses later in the session, but the writing is on the wall here – stocks have had enough of the pandemic headlines.
Bonds have spent the entirety of January proving just how reluctant they are to selloff, something we’ve been over in these pages on too many occasions to count. Between falling crude prices (which weigh on breakevens) and the safe-haven bid (witnessed in and around the Iran drama and now the Wuhan outbreak), long-end yields are sitting near 2020 lows. With the Fed on hold (i.e., with the front-end anchored), shocks will continue to arrive at the long-end, presaging either bear steepening or bull flattening – lately, it’s been the latter, much to the chagrin of the reflationists.
With a veritable melt-up in equity land having failed to help bond yields extend the Q4 move higher, there’s virtually no chance that something as innocuous as Friday’s marginally positive PMIs out of Europe is going to do the trick – or at least not when “deadly respiratory illness” is still making headlines and dominating every story above the fold.
H-Man, the recent events suggest this market will respond to anything, in a big way, that is negative. The issue is whether that “big way” event has any sticking power. If it doesn’t stick, the market bounces back up. As you have noted, killing a general and impeachment have done little to move the market. The “virus” on the other hand may have sticking power. A Black Swan event no one saw on the radar. If the virus turns into a head cold, time for the bounce up. The virus turns into a pandemic, hang on.