My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

What Happened Last Week, and What Matters this Week: Feb 3-7, 2020

Updated: Jul 19, 2020

The Markets: Equity markets fell globally last week, in spite of some fairly decent earnings reports (see last section). Risk-off assets fared better, including gold and US Treasuries. But oil plummeted as the Coronavirus began to severely affect travel and industry (and hence economic growth) in the world’s second largest economy, China. The concerns seem to be mainly over the ever-growing Coronavirus – see commentary below. The Chinese markets re-opened today, following the Lunar new year celebration, and the Shanghai market plummeted, down 7.7%. Here are how the major indices in developed markets have performed since the beginning of the year, compared to the price of oil (WTI) and gold, all indexed to their respective price on the opening day of 2020. Last week was particularly difficult in the global equity markets, as the graph below illustrates.


One more thing on markets – both the Fed and Bank of England left rates unchanged last week as expected. The Fed promised to “remain patient”, and the BoE expressed guarded concerns over BREXIT and its effects on the U.K. economy (see “BREXIT” below). There is quite a divergence between the downbeat forecast expressed by the BoE, and the upbeat forecast of the government (via chancellor of the exchequer Sajid Javid), which believes growth is possible of just below 3% this year. Time will tell, but at least the country is progressing.


Coronavirus: As of the release of this post according to Worldometer, there have now been 17,408 cases of Coronavirus reported in 27 countries. There have been 362 deaths, including the first outside of China (in The Philippines). The World Health Organization has classified this as a “global health emergency”, and is providing regular updates – see this link for the last update (the 13th) on February 2nd. The effect on China’s growth could be material in 2020, and since China’s economy is now four times more relevant than it was during the SARS epidemic in 2003 (now 17% of global GDP vs 4% in 2003), the effect on global growth will also be more material. In addition, as one could see from last week’s earnings announcements that investors are showing increasing concern regarding companies that do business in China, whether this means sales (Starbucks, McDonalds, Disney) or production / supply chain (Apple, Microsoft, Tesla pending (although it didn’t seem to matter at all for “Teflon Tesla”!)


US Treasuries: As investors re-orient towards a “risk off” approach, US Treasuries have rallied. The yield on the 10-year US treasury fell 37bps in January, from 1.88% to 1.51% close on Friday. The yield declined 19bps last week alone as equity markets struggled and UST’s benefitted from a flight-to-quality. For those that watch the shape of the yield curve, the 2-10 year yields narrowed in January, from 30bps at the beginning of the month to 18bps at the close of January. But for the record, the curve has not inverted although it has flattened. Let’s see what this week holds.


Impeachment: The impeachment “trial” of President Trump is drawing to a close in the Senate, and as expected, he is very likely to be acquitted on both charges put forth by the House of Representatives. If you want to know more about the U.S. and impeachment, see my blog post from January 13th, found here. There’s not really much to say about this – clearly, President Trump withheld funding from Ukraine to try to get dirt on Joe Biden’s son, but the question remains quite rightly: “is this an impeachable offense?” And lest you forget, it is politics, politics, politics! If you want to find some levity in these proceedings and have 8-9 minutes, then watch the SNL skit from Saturday – it’s on the NBC website here (need VPN if outside the U.S.). President Trump will almost certainly be taking many victory laps on his almost-certain acquittal during his State of the Union speech, set for Tuesday, February 4th at 9pm EST. But the real question is: given the market meltdown, will #POTUS blame the Fed yet again? I’d be shocked if he didn’t!


Iowa Caucus, The U.S. Presidential Election Process Begins: The Iowa caucus is today, the first state to hold its caucus for the 2020 Presidential election. It is too close to call for the Dems, although Bernie Sanders seems to be the slight front-runner. If you want to follow today’s results, you can here. For reference, Iowa is small as far as electoral college votes with 6 (out of 538), but the outcome in Iowa will set the tone for upcoming caucuses in other states as each party kicks-off its nomination process for the November 2020 Presidential election. If you want to know more about the timing and process for the nomination of candidates for both major parties, 270toWin is a good place to start.


BREXIT (glad that’s over, a new beginning perhaps??): This topic has been beat to death, so there’s not much more to really say about it as the U.K. officially exited the E.U. on Friday at 11pm GMT. Now the hard part begins – cutting trade deals, especially with the E.U., by the end of the year. Until then, not much really changes.


Earnings Last Week: Earnings were largely mixed last week, with Apple, Microsoft, Amazon and Tesla impressing, and Facebook and Boeing (amongst others) disappointing. Here is a summary of some of the results of companies that reported last week:


And here’s what a few of last week’s reporting companies look like for the month of January compared to the S&P 500, all relative to their closing 2019 price.


If you’re finding it hard to read, Starbucks (Coronavirus-related), AT&T and ExxonMobile (oil prices falling, related too to Coronavirus) are all lower YtD. The best performers (in order, from +9% to +5% YtD) have been Amazon, Microsoft, McDonald’s, Mastercard, Coca-Cola and Apple. These stocks can be compared to the S&P 500 index, which closed January about flat to where it closed December, giving up entirely its early January gains. Of course, if you really want a turbo-charged portfolio, then you would have needed to own Tesla (the top, dark blue line), which goes only one direction in spite of everything going on at the moment, and that’s up. The stock closed 2019 – just one month ago - at a touch over $418/sh, and has soared to $650.57/sh last Friday, an increase in one month of 56%. Not that’s an outlier!


This week, a number of other companies will be reporting, including Alphabet (Google), Walt Disney, Blackstone, Apollo, NXP, Ford, Royal Caribbean, Chipotle, Ralph Lauren, Prudential, Merck, Fox, Yum! Brands, Estee Lauder and Kellogg. Special themes this week seem to be REIT’s, private equity firms, insurance companies and retail.

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