Efforts to “save the stocks” are falling short thanks to the ongoing trickle of negative pandemic news flow which, for now anyway, is offsetting the morphine liquidity drip from central banks.
As I wrote elsewhere, COVID-19 is the Sword of Damocles for risk assets. “For all intents and purposes, I think it’s fair to say we are on the cusp of [a] pandemic”, Peter Marks, head of the FDA’s Center for Biologics Evaluation and Research, told Bloomberg in an interview. Around the same time, German Health Minister Jens Spahn told reporters in Berlin that Germany is “at the beginning of [an] epidemic”.
After the bell, Microsoft warned on its personal computing segment. The language was reminiscent of Apple’s revenue guide-down earlier this month. To wit, from Microsoft:
On Jan. 29, as part of our second quarter of fiscal year 2020 earnings call, we issued quarterly revenue guidance for our More Personal Computing segment between $10.75 and $11.15 billion, which included a wider than usual range to reflect uncertainty related to the public health situation in China. Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated. All other components of our Q3 guidance remain unchanged.
You can expect more of this as corporate management teams come to terms with the impact of the worsening public health crisis on their supply chains and consumer markets. US equities are riding the worst losing streak since August, having fallen for five straight sessions.
If you’re looking for a savior amidst the chaos, you might turn to Donald Trump, who addressed the public on Wednesday evening in the US, during a disjointed press conference that featured Lincoln-esque feats of oratorical brilliance like this:
Trump: "We're very, very ready for this. Whatever it is."
— Heisenberg Report (@heisenbergrpt) February 26, 2020
Ultimately, Trump put Mike Pence in charge of the virus response. The vice president said he’ll marshal a coronavirus response team, reach out to state and local officials and coordinate with governors.
If that’s not enough to shore up your level of confidence in beleaguered US equities, you could take some measure of solace in the expected rebalance bid which should materialize thanks to equities’ dramatic underperformance in February.
According to Credit Suisse, pension funds will need to buy in excess of $6 billion in domestic equities in order to get back to their target allocation levels in the wake of the rout. That’s the most since May. Net inflows for developed market stocks should be nearly $7 billion, while selling in fixed income could exceed $12 billion.
Early Wednesday, Nomura noted that the difference between the S&P’s total return this month and the total return on bonds is in the 10th percentile going back more than a decade and a half. That would tend to point to rebalancing flows in favor of equities.
JPMorgan’s Marko Kolanovic underscored that assessment and quantified the possible impact. “Over the next two days, given the significant underperformance of equities versus bonds month to date, there should be buying of stocks and selling of bonds”, he wrote, adding that on the bank’s estimates, “the rebalancing move could produce upside pressure on equities of 1-2%, which could be enough to prompt additional buying from gamma hedgers and CTAs”.
Those “old” enough to remember 2018 might recall that the worst December since the Great Depression for US equities probably would have been even worse were it not for a historic rebalancing flow. The S&P has underperformed the Bloomberg Barclays US Aggregate Bond Index by around 4% in February.
US equity futures fell as Trump spoke on Wednesday evening stateside.
As the president took questions from the media, The Washington Post reported that the CDC has confirmed the first US case of coronavirus of unknown origin:
The Centers for Disease Control and Prevention has been informed of the first case of the coronavirus in a person who did not recently return from a foreign country or have contact with a confirmed case, according to a person briefed on the case. Officials have begun tracing the contacts of the resident to find out how the person may have been infected and who else might have been exposed.