Stampede Out of Risky Assets Intensifies

February 27, 2020

Share prices fell 2.7% in Indonesia, 2.1% in Japan, 1.2% in Taiwan, 1.1% in South Korea, 0.9% in New Zealand and 0.8% in Australia. Equities are down at least 1.5% in France, Germany, the U.K., Spain, and Switzerland, and U.S. futures point to a drop of over 1.0%. Sometime today, the cumulative decline of the DOW from its record high on February 12th appears likely to exceed the 10% threshold, confirming that the market at the least has recorded a correction within a mere ten business days.

Ten-year sovereign debt yields have fallen to record lows in several countries including the United States. Overnight drops amount to 7 basis points in Australia, 6 bps in New Zealand, 5 bps in Canada and the United States, and 2 bps in Germany, the U.K., and Japan.

The price of WTI oil slumped 2.5% to the lowest levels since early January 2019. But the price of gold rose 0.5%.

Dollar changes have been mixed but down more than up. There has been depreciation of 0.6% overnight against the euro and Swiss franc, 0.5% relative to the yuan, 0.4% versus the yen and kiwi, and 0.3% against the Australian dollar but increases of 0.8% against the peso, 0.4% versus sterling and 0.2% relative to the loonie.

Financial market volatility may not only reflect fear of a viral pandemic. The Democratic Party front-runner, Senator Bernie Sanders, has an agenda of revolution that poses many challenges to the business community. Investors worry that neither he nor Trump would be competent handling a crisis, and both men have a propensity to shade the truth. Health concerns surround both men. Sanders was born before the attack on Pearl Harbor and had a heart attack four months ago. His biological mother and father died at ages 46 and 57. President Trump will turn 74 in June and appears overweight.

Mixed messages from officials about the danger magnitude posed by the COVID-19 virus are generating confusion and distrust. What’s known is that the disease has been found in 47 different countries and that reported new cases outside of China are now exceeding those confirmed within that country. In some instances, it’s not understood how exposure might have happened. Saudi Arabia halted pilgrimages. It’s not known whether COVID-19 will naturally abate within a month or two, as is the case with the cold and flu. A wide spectrum of economic activities from manufacturing to tourism to personal consumption to anything involving contact with other people are likely to attract diminished demand because of the coronavirus, and supply chains are already being squeezed by employee illness and plant lockdowns.

Investors continue to disregard better-than-expected data.

Euroland’s economic sentiment index improved 0.9 points to a nine-month high in February. Consumer confidence, industrial sector sentiment, and the services sector rose to 5-, 6-, and 2-month highs. Business sentiment in Italy rose to an 8-month high, and consumer confidence in Sweden and Finland recorded 17- and 2-month highs. Sweden’s trade surplus in January of SEK 9.9 billion was the biggest monthly surplus in 109 months, and Swedish retail sales in January were 0.9% greater than December’s level and 2.7% above their year-earlier level.

Consumer confidence in Italy and Taiwan slid to 2- and 3-month lows in February, while Portuguese consumer sentiment that month slipped to an 8-month low.

South African producer price inflation accelerated 1.2 percentage points to a 6-month high of 4.6% in January.

Spanish consumer price inflation settled back from a 9-month high of 1.1% in January to a 2-month low in February of 0.8%.

M3 money growth in the euro area rebounded to 5.2% in January from 4.9% in December and also matched the average on-year growth posted in November-January. Loans to households and to non-financial firms in the common currency area were 3.7% and 3.2% higher in January than a year earlier.

New Zealand’s trade deficit of NZD 340 million in January was 64% smaller than a year earlier due to an 8.8% on-year rise of exports. Reflecting fear about the coronavirus outbreak, business confidence in New Zealand weakened in February to a reading of -19.4 after scores of -13.2 in January, -26.4 in December, and -42.4 in November.

Private business investment in Australia weakened 2.8% last quarter, marking the fourth straight decline in a row and greater than the declines in the first three quarters of 2019.

South Korea, with over 1600 cases of COVID-19 infection, had been expected to get a central bank interest rate cut today. But in a surprise the base rate of the Bank of Korea was left unchanged at 1.25%. To be sure, that matches the record low. Increases of 25 basis points in November 2011 and November 2018 had been reversed last year by similarly-sized cuts in July and October.

U.S. data due shortly include weekly jobless insurance claims, monthly durables and the KC Fed manufacturing survey and, most importantly, revised 4Q GDP.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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