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The nation of Italy has just quarantined the entire region of Lombardy. The global hub of fashion and finance Milan is its capital. That region holds 16 million of Italy’s 60.5 million people. I will do the math: Lombardy makes up 26.4% of Italy’s entire population.
On Sunday, the Italian prime minister signed a decree--
The decree bans entering or exiting certain areas of the country, and closes museums, gyms, schools, universities and ski resorts
The measures affect 14 other provinces in neighboring regions to Lombardy, including Parma, Modena, Padua and Venice. Note: Beginning in 2015, Italy now has 103 institutional bodies at a “2nd administrative” level
Expect the decree to be in place until April 3rd, or roughly one month at the least
Broad measures of risk appetite — think of a VIX briefly over 50 — signal a highly significant global risk event is underway.
But perhaps one much less significant than the 2008 Global Financial Crisis? The last time the VIX options volatility index was this high? The VIX topped a 62 print on November 1st, 2008.
However studious economists size up coronavirus macro matters, that high a VIX print tells stock traders one thing. The major U.S. large-cap indexes will be volatile, day-after-day, once again.
The aftermath of the collapse of OPEC+ talks on production cuts will not support stock indexes either. Last week, the Russians objected to a Saudi-led coalition’s efforts to address supply through sustained, or increased, production cuts.
In the Global Week Ahead, weak oil prices may be a continued short focus. Benchmark WTI crude oil is now trading at $41.50 a barrel. Some oil traders see the $30s coming shortly.
Here are Reuters’ five world market themes. I have kept them I order of importance to equity traders.
(1) Are Credit Default Swaps (CDS) foretelling a wave of corporate defaults?
Is it possible we may see a wave of corporate defaults at a time when interest rates are at record lows and falling?
In Europe, where many rates are below 0%, signs of stress are emerging as the coronavirus outbreak hits companies’ bottom lines. An index of credit default swaps on 75 high-risk European companies compiled by IHS Markit — the iTraxx Europe Crossover — has surged to its highest level in almost four years. The list is pretty diverse: airlines, retailers, carmakers and others all feature.
Traders who were around in the run-up to the 2008 crisis will not be happy to see the Crossover in headlines again. At that time, it was widely seen as a barometer of sentiment. The index allows investors to buy (or sell) protection on the constituent companies - essentially a bet that the cost of insuring against default will rise. The Crossover has surged to 374 basis points — still way off the 1000 bps-plus hit in 2009 but almost double end-2019 levels.
Bank CDS are rising too; clearly default risks alongside the prospect of even lower interest rates are weighing heavy.
(2) Will the ECB follow the Fed and cut rates on Thursday, March 12th?
A week is proving to be a long time in central banking — who would have thought a week ago that the Fed would step in with an aggressive emergency rate cut?
Canada and Australia have also slashed rates in the face of the coronavirus outbreak, so will central banks in Europe and Japan take similar action in coming days?
The March 12th ECB meeting will be a lively affair, no doubt.
Some ECB policymakers have cautioned against a quick move; where rates are already deeply negative — read: the Eurozone, Switzerland — further cuts may have limited impact. The Bank of England says it will gauge the scale of economic damage before taking action. And with a new BOE governor coming in, there’s an additional reason for delay.
(3) What federal governments follow central banks and offer fiscal packages?
Sure, central banks are slashing interest rates, but jump-starting the economic recovery might need large doses of government spending as well, in the form of tax breaks, infrastructure, welfare and so on.
We’ve already seen some of that, with Italy, South Korea and the United States unveiling fiscal packages and the European Union giving members the green light to combat virus damage.
Now Britain’s new finance minister Rishi Sunak will present a budget on March 11th. He was already expected to announce a stimulus package targeted at Britain’s poorer regions but the spread of coronavirus means he may have no choice but to boost public spending further. Those expectations were further raised when incoming Bank of England Governor Andrew Bailey suggested a coordinated response between the government and central bank to help small businesses caught up in the coronavirus fallout.
Will Germany — the country with the most room to engage in fiscal stimulus — follow? The pressure is on.
(4) Mainland China appears to be on the other side of coronavirus fear…
China, ironically, is less twitchy about the coronavirus these days than other parts of the world.
But after last week’s shock PMI indicators last week, there is some nervousness nonetheless before trade data emerges for the Jan-Feb period. It will certainly be weak and many reckon import growth will have tumbled to 4-year lows.
There’s enough evidence that factories are nowhere close to normalcy while empty roads and shops suggest producer prices contracted last month. Economic activity looks to have contracted in the first quarter, for the first time in decades.
But all that is history. Looking ahead, authorities will want to address the growth risks, so expect more cuts in bank reserve ratios, money market yields and benchmark rates. Beijing is also likely to speed up infrastructure projects to get economic momentum going.
Meanwhile, foreign investors are rushing into Chinese equities and rich-yielding yuan bonds as other markets tumble. But they are also questioning the shape of China’s recovery and whether that could be undermined by the global spread of the virus.
(5) Coronavirus fear and shutdowns are not helping U.S. corporate sentiment.
The U.S. Fed has done what it could and lawmakers are unleashing more spending but coronavirus cases continue to spread nonetheless in the United States, spooking markets and encouraging consumers of goods and services to hunker down.
So, the NFIB Small Business Optimism index on Tuesday should be interesting, not least because the January reading showed optimism was among the highest in the survey’s 46-year history.
Back then, owners expected increased sales, earnings and higher wages for employees. But the economic slowdown will weigh heavily on small businesses that don’t usually have much room to weather turmoil. The index often moves in tandem with the Russell 2000 index of small companies — that is down 11 percent for the year after nearing record highs last month.
Top Zacks #1 Rank (STRONG BUY) Stocks
(1) Regeneron Pharma (REGN - Free Report) : This is a $54.4B market cap Medical-Biomedical-Genetics stock, with a stiff $494 price tag. The stock is holding up, due to the possibility of it providing support to addressing the coronavirus. Eylea, Dupixent and Praluent are its major drugs.
Regeneron reported earnings of $7.50 per share in Q4, comfortably beating the Zacks Consensus Estimate of $6.90 and increasing from $6.84 in the year-ago quarter. That took the stock up 26.8%.
Now, I see a Zacks Value score of C, a Zacks Growth score of C, and a Zacks Momentum score of D, though.
(2) Taiwan Semi (TSM - Free Report) : This is a mega-cap chip stock. I see a behemoth market cap of $285.6B and a share price of $55. With mainland China seeing stabilization of the coronavirus at around 80K cases (if you believe the official data), factory workers are heading back to the plants. That should be good news for suppliers of this company.
The consensus target price is $64. So the stock looks nearly fully priced at $55. Just eight months ago, you could pick up shares for $40 each.
I see a Zacks Value score of D, a Zacks Growth score of D, and a Zacks Momentum score of C.
(3) Itochu Corp (ITOCY - Free Report) : This is a $44 a share Japanese stock, with a market cap of $33.2B.
What to like? A stock market beta of 0.57. A forward P/E of 7.3. Nobody likes Japanese stocks. So be contrarian.
I also see a Zacks Value score of A, a Zacks Growth score of A and a Zacks Momentum score of F.
Itochu Corporation operates as a general trading company.
It is involved in domestic trading, import/export and overseas trading of various products such as textile, machinery, information and communications tech, aerospace, electronics, energy, metals, minerals, chemicals, forest products, general merchandise, food, finance, realty, insurance and logistics services, as well as business investment in Japan and overseas.
Itochu Corporation is headquartered in Tokyo, Japan.
Key Global Macro
The U.S. Fed goes into it usual one-week communications blackout in front of its March 18th decisions. The ECB meeting on Thursday will be the monetary event.
Updated tracking of both consumer and producer price inflation dominates a light domestic U.S. macro calendar. But keep an eye on Mexican consumer inflation too.
On Monday, Mexico could get just such a taste of that when CPI inflation for February is released on Monday. Consensus see headline inflation at about +3.6% y/y.
The Mexican peso has sharply depreciated to the U.S. Dollar very recently during the period of COVID-19 induced risks to the global economy and is testing the NAFTA-related strains over the past few years. I see 20.11 pesos to the USD now.
On Tuesday, Italy (consensus +1.6%) and France (+1.8%) release industrial production figures.
We also get final updates on European Community employment and GDP for Q4.
Japan’s machine tool orders have been down a stunning -35.6%. We get an update.
On Wednesday, the new U.K. Chancellor of the Exchequer Rishi Sunak will bring down his government’s first post-election budget on Wednesday at about 12:30pm London time.
The U.S. MBA mortgage applications come out. These could be very interesting, shortly. The prior showed a 15.1% y/y rise. The period of data collection end March 6th, though.
The U.S. broad CPI measure should be up +2.2% y/y. The prior was +2.5% y/y. Ex-food and energy should be at +2.3% y/y.
On Thursday, the ECB meeting will be the first real test of newly minted President Christine Lagarde. Will it be shades of ‘whatever it takes’ or will Christine get to it in due course?
The ECB main refi rate is 0.0%, the marginal lending facility is 0.25% and the deposit facility is -0.50%
Expect Peru’s central bank to cut policy rates by 25 bps. From 2.25% to 2.0%.
U.S. initial jobless claims are still quite low at 219K. Consensus sees 216K. Keep a close eye of this data now.
On Friday, the release of the University of Michigan’s consumer sentiment reading for March may provide the first indication of how consumer confidence is holding up in the face of the shocks. Look for 101.0 to soften to 95.0, given the fall in stock values.
Fasten your seatbelts…
The Global Week Ahead for stock traders should be noisy. Day-after-day. And heedless of any backward-looking macro data prints.
Will you retire a millionaire? One out of every six people retires a multimillionaire. Get smart tips you can do today to become one of them in a new Special Report, “7 Things You Can Do Now to Retire a Multimillionaire.” Click to get it free >>
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Volatility Skyrockets: Global Week Ahead
Ah yes. A global coronavirus pandemic is here.
The nation of Italy has just quarantined the entire region of Lombardy. The global hub of fashion and finance Milan is its capital. That region holds 16 million of Italy’s 60.5 million people. I will do the math: Lombardy makes up 26.4% of Italy’s entire population.
On Sunday, the Italian prime minister signed a decree--
Broad measures of risk appetite — think of a VIX briefly over 50 — signal a highly significant global risk event is underway.
But perhaps one much less significant than the 2008 Global Financial Crisis? The last time the VIX options volatility index was this high? The VIX topped a 62 print on November 1st, 2008.
However studious economists size up coronavirus macro matters, that high a VIX print tells stock traders one thing. The major U.S. large-cap indexes will be volatile, day-after-day, once again.
The aftermath of the collapse of OPEC+ talks on production cuts will not support stock indexes either. Last week, the Russians objected to a Saudi-led coalition’s efforts to address supply through sustained, or increased, production cuts.
In the Global Week Ahead, weak oil prices may be a continued short focus. Benchmark WTI crude oil is now trading at $41.50 a barrel. Some oil traders see the $30s coming shortly.
Here are Reuters’ five world market themes. I have kept them I order of importance to equity traders.
(1) Are Credit Default Swaps (CDS) foretelling a wave of corporate defaults?
Is it possible we may see a wave of corporate defaults at a time when interest rates are at record lows and falling?
In Europe, where many rates are below 0%, signs of stress are emerging as the coronavirus outbreak hits companies’ bottom lines. An index of credit default swaps on 75 high-risk European companies compiled by IHS Markit — the iTraxx Europe Crossover — has surged to its highest level in almost four years. The list is pretty diverse: airlines, retailers, carmakers and others all feature.
Traders who were around in the run-up to the 2008 crisis will not be happy to see the Crossover in headlines again. At that time, it was widely seen as a barometer of sentiment. The index allows investors to buy (or sell) protection on the constituent companies - essentially a bet that the cost of insuring against default will rise. The Crossover has surged to 374 basis points — still way off the 1000 bps-plus hit in 2009 but almost double end-2019 levels.
Bank CDS are rising too; clearly default risks alongside the prospect of even lower interest rates are weighing heavy.
(2) Will the ECB follow the Fed and cut rates on Thursday, March 12th?
A week is proving to be a long time in central banking — who would have thought a week ago that the Fed would step in with an aggressive emergency rate cut?
Canada and Australia have also slashed rates in the face of the coronavirus outbreak, so will central banks in Europe and Japan take similar action in coming days?
The March 12th ECB meeting will be a lively affair, no doubt.
Some ECB policymakers have cautioned against a quick move; where rates are already deeply negative — read: the Eurozone, Switzerland — further cuts may have limited impact. The Bank of England says it will gauge the scale of economic damage before taking action. And with a new BOE governor coming in, there’s an additional reason for delay.
(3) What federal governments follow central banks and offer fiscal packages?
Sure, central banks are slashing interest rates, but jump-starting the economic recovery might need large doses of government spending as well, in the form of tax breaks, infrastructure, welfare and so on.
We’ve already seen some of that, with Italy, South Korea and the United States unveiling fiscal packages and the European Union giving members the green light to combat virus damage.
Now Britain’s new finance minister Rishi Sunak will present a budget on March 11th. He was already expected to announce a stimulus package targeted at Britain’s poorer regions but the spread of coronavirus means he may have no choice but to boost public spending further. Those expectations were further raised when incoming Bank of England Governor Andrew Bailey suggested a coordinated response between the government and central bank to help small businesses caught up in the coronavirus fallout.
Will Germany — the country with the most room to engage in fiscal stimulus — follow? The pressure is on.
(4) Mainland China appears to be on the other side of coronavirus fear…
China, ironically, is less twitchy about the coronavirus these days than other parts of the world.
But after last week’s shock PMI indicators last week, there is some nervousness nonetheless before trade data emerges for the Jan-Feb period. It will certainly be weak and many reckon import growth will have tumbled to 4-year lows.
There’s enough evidence that factories are nowhere close to normalcy while empty roads and shops suggest producer prices contracted last month. Economic activity looks to have contracted in the first quarter, for the first time in decades.
But all that is history. Looking ahead, authorities will want to address the growth risks, so expect more cuts in bank reserve ratios, money market yields and benchmark rates. Beijing is also likely to speed up infrastructure projects to get economic momentum going.
Meanwhile, foreign investors are rushing into Chinese equities and rich-yielding yuan bonds as other markets tumble. But they are also questioning the shape of China’s recovery and whether that could be undermined by the global spread of the virus.
(5) Coronavirus fear and shutdowns are not helping U.S. corporate sentiment.
The U.S. Fed has done what it could and lawmakers are unleashing more spending but coronavirus cases continue to spread nonetheless in the United States, spooking markets and encouraging consumers of goods and services to hunker down.
So, the NFIB Small Business Optimism index on Tuesday should be interesting, not least because the January reading showed optimism was among the highest in the survey’s 46-year history.
Back then, owners expected increased sales, earnings and higher wages for employees. But the economic slowdown will weigh heavily on small businesses that don’t usually have much room to weather turmoil. The index often moves in tandem with the Russell 2000 index of small companies — that is down 11 percent for the year after nearing record highs last month.
Top Zacks #1 Rank (STRONG BUY) Stocks
(1) Regeneron Pharma (REGN - Free Report) : This is a $54.4B market cap Medical-Biomedical-Genetics stock, with a stiff $494 price tag. The stock is holding up, due to the possibility of it providing support to addressing the coronavirus. Eylea, Dupixent and Praluent are its major drugs.
Regeneron reported earnings of $7.50 per share in Q4, comfortably beating the Zacks Consensus Estimate of $6.90 and increasing from $6.84 in the year-ago quarter. That took the stock up 26.8%.
Now, I see a Zacks Value score of C, a Zacks Growth score of C, and a Zacks Momentum score of D, though.
(2) Taiwan Semi (TSM - Free Report) : This is a mega-cap chip stock. I see a behemoth market cap of $285.6B and a share price of $55. With mainland China seeing stabilization of the coronavirus at around 80K cases (if you believe the official data), factory workers are heading back to the plants. That should be good news for suppliers of this company.
The consensus target price is $64. So the stock looks nearly fully priced at $55. Just eight months ago, you could pick up shares for $40 each.
I see a Zacks Value score of D, a Zacks Growth score of D, and a Zacks Momentum score of C.
(3) Itochu Corp (ITOCY - Free Report) : This is a $44 a share Japanese stock, with a market cap of $33.2B.
What to like? A stock market beta of 0.57. A forward P/E of 7.3. Nobody likes Japanese stocks. So be contrarian.
I also see a Zacks Value score of A, a Zacks Growth score of A and a Zacks Momentum score of F.
Itochu Corporation operates as a general trading company.
It is involved in domestic trading, import/export and overseas trading of various products such as textile, machinery, information and communications tech, aerospace, electronics, energy, metals, minerals, chemicals, forest products, general merchandise, food, finance, realty, insurance and logistics services, as well as business investment in Japan and overseas.
Itochu Corporation is headquartered in Tokyo, Japan.
Key Global Macro
The U.S. Fed goes into it usual one-week communications blackout in front of its March 18th decisions. The ECB meeting on Thursday will be the monetary event.
Updated tracking of both consumer and producer price inflation dominates a light domestic U.S. macro calendar. But keep an eye on Mexican consumer inflation too.
On Monday, Mexico could get just such a taste of that when CPI inflation for February is released on Monday. Consensus see headline inflation at about +3.6% y/y.
The Mexican peso has sharply depreciated to the U.S. Dollar very recently during the period of COVID-19 induced risks to the global economy and is testing the NAFTA-related strains over the past few years. I see 20.11 pesos to the USD now.
On Tuesday, Italy (consensus +1.6%) and France (+1.8%) release industrial production figures.
We also get final updates on European Community employment and GDP for Q4.
Japan’s machine tool orders have been down a stunning -35.6%. We get an update.
On Wednesday, the new U.K. Chancellor of the Exchequer Rishi Sunak will bring down his government’s first post-election budget on Wednesday at about 12:30pm London time.
The U.S. MBA mortgage applications come out. These could be very interesting, shortly. The prior showed a 15.1% y/y rise. The period of data collection end March 6th, though.
The U.S. broad CPI measure should be up +2.2% y/y. The prior was +2.5% y/y. Ex-food and energy should be at +2.3% y/y.
On Thursday, the ECB meeting will be the first real test of newly minted President Christine Lagarde. Will it be shades of ‘whatever it takes’ or will Christine get to it in due course?
The ECB main refi rate is 0.0%, the marginal lending facility is 0.25% and the deposit facility is -0.50%
Expect Peru’s central bank to cut policy rates by 25 bps. From 2.25% to 2.0%.
U.S. initial jobless claims are still quite low at 219K. Consensus sees 216K. Keep a close eye of this data now.
On Friday, the release of the University of Michigan’s consumer sentiment reading for March may provide the first indication of how consumer confidence is holding up in the face of the shocks. Look for 101.0 to soften to 95.0, given the fall in stock values.
Fasten your seatbelts…
The Global Week Ahead for stock traders should be noisy. Day-after-day. And heedless of any backward-looking macro data prints.
Will you retire a millionaire?
One out of every six people retires a multimillionaire. Get smart tips you can do today to become one of them in a new Special Report, “7 Things You Can Do Now to Retire a Multimillionaire.”
Click to get it free >>