Equities fell on news of a coronavirus outbreak in China, with confirmed cases later in the surrounding region in addition to the US, Canada, France, and Australia. The virus has claimed 81 lives so far with over 3,000 confirmed cases. The strain of the virus is new and unknown, but it belongs to the same family as SARS (severe acute respiratory syndrome) and MERS (Middle East respiratory syndrome). SARS infected around 8,000 individuals with about 800 deaths; MERS infected around 2,500 individuals with about 850 deaths. The World Health Organization (WHO) is yet to rule a public health emergency due to its restrictive nature; so far it is mostly fatal to older men with prior health problems.
In the US, we’re two weeks into Q4 earnings season with 77% of companies beating earnings expectations so far. Despite the positivity, the markets were overshadowed by the concerns of the coronavirus outbreak. All major equity indices were down, especially US Small Caps and Emerging Markets. As expected in times of uncertainty, core bonds and Treasuries were up. Oil was down over 7% last week and largely responsible for the drop in commodities. The coronavirus outbreak is still new and its impact remains a giant unknown. Market participants can expect further disruption as countries grapple with its containment and effect.
Of note were equities in Hong Kong, with the Hang Seng equity index down 2.81% on Tuesday alone. Hong Kong has been a quagmire of protests since June with pro-democratic protestors originally fighting against a controversial extradition bill, perceived as a veiled attempt of Chinese hegemony over Hong Kong self-governance. As a result of continued protests, Hong Kong experienced a sharp contraction of 2.9% for Q3 2019 GDP and will likely enter recession (two consecutive quarters of negative GDP growth) when Q4 numbers are released. Moody’s downgraded Hong Kong’s credit rating from Aa3 to Aa2 in addition to changing its outlook from “stable” to “negative.” Moody’s cited the government’s failure in creating a tangible plan to address the concerns of Hong Kong citizens, reflecting weaker institutional capacity.
The International Monetary Fund (IMF) updated 2020 global growth projections to 3.3%. Emerging market growth is projected at 4.4% which is 0.2% lower than the estimate from October. Advanced economies were also projected lower at 1.6%. Still, the 2020 year is expected to experience higher growth than 2019. European assets should have a tailwind for the year as Brexit enters the transition period on January 31. The European Parliament must approve the Brexit deal negotiated by Boris Johnson, then the UK will negotiate trade rules and enforcement with its prior EU partner. Johnson has already ruled out an extension (which will likely hold given the Tory majority of 80) and businesses face fewer uncertainties as trade details are hammered out.
Housing continues its hot streak in December with existing home sales above upper consensus estimates. PMI for January was moderately positive, with the strength in services outweighing the weakness in manufacturing.This week will feature releases on new home sales, consumer confidence, and personal income and outlays. The Federal Reserve will also have its first press conference of 2020; market participants are expecting no change in interest rates.
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S&P Composite 1500® Index combines three leading indices, the S&P 500®, the S&P MidCap 400®, and the S&P SmallCap 600® to cover approximately 90% of the US market capitalization. It is designed for investors seeking to replicate the performance of the US equity market or benchmark against a representative universe of tradable stocks. Investors cannot invest in an index.
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