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Morning Notes — Better US Data

Better US Data

January 28, 2020

Higher US yields and the firmer dollar follow better than expected US economic data this morning, while overnight Q4 earnings get a mixed response.

Tomorrow’s FOMC meeting generates previews mostly focused on future meetings and the complications of eventually ending current balance sheet expansion.

Meanwhile… China’s coronavirus continues to dominate the collective focus with the number of cases expanding to over 4,000.

Coronavirus: The coronavirus outbreak is an unexpected risk factor that could move markets further should the situation deteriorate but the market reaction now might fall short of the 2003 SARS episode due to: 1) China’s government taking serious actions far sooner than they did in 2003 and; 2) the mortality rate of the current outbreak is ~2.5% vs ~14% for SARS with the vast majority of casualties currently occurring in elderly people with pre-existing conditions. However, the average incubation period for this coronavirus is seven days, which makes it difficult to contain. As a result, the number of confirmed cases is expected to rise in the short term. Of course, rapidly rising numbers of confirmed cases could fuel a deeper fear-driven correction, but that could imply a bigger reversal once the outbreak is contained. The 2003 SARS outbreak resulted in the MSCI China Index (MXCN) declining ~14% in the six weeks before the number of confirmed SARS cases plateaued and was followed by a ~55% rebound into year-end partly due to policy support.

Thus far: Mainland China markets started reacting to the coronavirus outbreak on Thursday 1/16 with the Shanghai Comp declining about ~4% before closing for the Lunar New year holiday last Thursday 1/23. The weeklong holiday closure was extended by a one day to help contain contagion and will now reopen on Monday 2/3. The S&P 500 began responding last Thursday (1/23) and declined ~2.5% through yesterday’s close. We discussed the rising probability for a short-term 2-4% SPX pullback on 1/17 and 1/23 based on SPX price-trend deceleration and elevated bullish sentiment. The short-term forecast for a pullback had nothing to do with the spread of coronavirus but market internals often run days and sometimes even weeks ahead of the broad market. Ultimately, it’s best to add broad equity exposure only when markets reach short-term oversold levels. We’re not there yet and may not get there before market internals signal bullish trend continuation.

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