Prepare now for the post-coronavirus bond market, this investor says

Kevin Flanagan, WisdomTreet head of fixed income strategy, speaks on a recent podcast

Kevin Flanagan, head of fixed-income strategy at ETF powerhouse WisdomTree, has watched fluctuations in bond markets his entire career. Now he’s taking a somewhat contrarian view of how investors should be positioning. Look past the current coronavirus concerns, he counsels, and “swim against the tide” to where bond markets will likely settle after the news cycle moves on.

MarketWatch spoke to Flanagan on Friday, February 21, a day when news related to the coronavirus was walloping the markets. Business activity in the U.S. contracted for the first time in four years in February, according to a survey from IHS Markit, the 30-year U.S. Treasury bond

TMUBMUSD30Y, +0.22%

  hit its lowest point ever as investors flocked to safety, and stocks took a bruising. The sell-off continued on Monday.

The interview that follows is lightly edited for clarity.

MarketWatch: Explain your premise about how fixed-income investors should think about the coronavirus.

Kevin Flanagan: I’m using the SARS episode as a framework to try to position where rates and the economy could be when the news cycle for the coronavirus has peaked. We picked a great day to have this discussion. Today without a doubt you began to see the first signs in the US of the economy being impacted. The question is, what happens when we do have a peak in the number of cases? How quickly does that snap back? Will it be a V shaped recovery or U-shaped?

A V-shaped recovery would be what we got from SARS. GDP went from a low of 0.6% in the fourth quarter of 2002 and then snapped back to 7% the next year. The 10-year Treasury fell 105 bps during SARS. When all was said and done, we ended 25 basis points higher than the level when SARS news first hit.

MarketWatch: We’ve discussed China’s very different place in the world now than when SARS hit. The World Bank estimates it accounts for 19.7% of the world’s economy now versus 8.7% in 2003, for example. What does that mean for using SARS as a model?

Flanagan: Some of the reading I have done suggests economists are expecting production in China to get back to 100% by late March. If that’s the case you shift into the V-shaped camp. If it extends into the second quarter it could be more prolonged.

But I think this is more of a first-quarter phenomenon. Say we get (U.S. GDP growth) close to zero. I don’t think it’s out of the realm of possibility that once the second half comes and we have seen the news peak, back of the envelope, I think 4% growth is fair. And for Treasurys, the 10-year

TMUBMUSD10Y, +0.06%

  before the coronavirus was 1.80%-1.85%. If we were to recoup all that and add 25 basis points, that puts the 10 year at 2% or over.

You have begun to hear more about US-based companies seeing if there are American or other global alternatives where they could get their supplies from rather than China. If we do get a situation where supplier deliveries are disrupted, we could get some transitory inflationary pressures as well. If you need to get your supplies from US firms, they might be not as cost-effective as China.

Related: Investors are ‘too complacent’ about the possibility of a pandemic, these analysts say

MarketWatch: If there are stirrings of inflation and a stronger economy in the U.S. than elsewhere in the world, won’t we see capital flowing in, and simply depressing rates again?

Flanagan: We’ve seen that throughout this cycle. When US rates have a more visible spread versus other sovereigns, you do see money flowing in. I would look at it as a cap on rates, not as something that would push rates lower.

MarketWatch: What should investors do to prepare?

Flanagan: If we do head back toward 2% there is principal risk for moving too far out in duration. I think investors need to be thinking about that now. Often what you find is once the trend begins it can happen quickly.

We are suggesting a barbell strategy. (A “barbell” approach to bond investing involves short- and long-duration securities, avoiding medium-term bonds. That minimizes volatility as the yield curve shifts when rates are on the rise, and allows investors to capture the upside in short-maturity bonds as yields move higher.)

We think that’s a sound solution in this kind of environment, dealing with not just uncertainty, but timing uncertainties, and what it could mean for rates…. you’re not making an aggressive move. Skate to where the puck is going.

Read: Here’s the segment of the economy that may benefit from fears of coronavirus

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European stocks edge lower after Monday’s pounding over coronavirus spread

European stocks drifted lower in volatile trading on Tuesday as markets failed to set a floor after the pounding they took over the spread of the coronavirus in Italy and South Korea.

A day after a 5.4% drop that was the worst single-day percentage fall in more than three years, Italy’s FTSE MIB

I945, -1.19%

 fell 0.7% to 23259.18. Banco BPM

BAMI, -3.38%

 and Juventus Football Club

JUVE, -1.61%

each lost over 3%.

The Stoxx Europe 600

SXXP, -0.75%,

which ended Monday at its third-lowest level of the year, slipped 0.5% to 410.01.

The spread of the coronavirus in Italy is particularly worrying since the country has not identified the so-called patient zero who spread it.

South Korea now has 977 confirmed cases to Italy’s 232, according to the Covid-19 tracker from Johns Hopkins. Mainland China has 80,242 confirmed cases.

“Given the incubation period of the virus, the next two weeks will be critical in determining the extent of the outbreak, the steps authorities are willing and able to take to contain it, and the economic effect of those measures,” said Mark Haefele, global chief investment officer of wealth management at UBS, which prefers emerging market equities over eurozone stocks.

U.S. stock futures

ES00, +0.13%

 nudged higher on Tuesday following the 1,031-point annihilation in the Dow Jones Industrial Average

DJIA, -3.56%

on Monday.

The yield on the German 10-year bund

TMBMKDE-10Y, -6.94%

fell three basis points to -0.51%. Yields move in the opposite direction to prices.

Of stocks on the move, U.K. insurer Prudential

PRU, +1.48%

 rose 1.9% after the activist investor Third Point disclosed it was the company’s second-largest shareholder and called on it to separate its U.S. business, Jackson National Life Insurance, and Asian arm, Prudential Corp. Asia.

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Businesses get bigger butterflies over coronavirus and that’s not good for the economy

The hope going into 2020 was that the U.S. economy would get an adrenal rush from stronger business investment after an interim deal that tempered trade tensions with China.

Those hopes appear to have been dashed.

A spreading coronavirus in China and elsewhere is snarling global supply chains, making it harder to obtain parts for new autos, produce iPhones or cater to jet-setting tourists, among other things. The disruption is bound to hurt sales and production and make companies even more hesitant to invest in big new projects.

The first major sign of the damage the viral outbreak is causing to the U.S. economy came last week from a survey of business executives. IHS Markit said its barometer of business conditions turned negative in February for the first time in four years. A number of companies including Apple

AAPL, -2.26%

 also warned that sales could fall short of forecast.

Read: What Apple, P&G, Walmart and Co. are saying about the coronavirus outbreak

For weeks, most economic forecasters have been sticking to the view that corona-related disruptions would be temporary. Just last Friday, several senior Federal Reserve officials predicted the hit to the U.S. would be “short” one.

Even if they are right, though, a big dose of uncertainty is suddenly clouding the economic outlook. The seemingly clear skies from last month have largely been obscured. The Dow Jones Industrial Average

DJIA, -0.78%,

S&P 500

SPX, -1.05%

both fell last week and bond yields tumbled to fresh lows.

“The coronavirus is rapidly slowing the momentum of the global economy and sucking the oxygen out of financial markets,” said Scott Anderson, chief economist at Bank of the West.

Read: Economy softens on coronavirus worries, IHS Markit finds

And: Industrial output slumps in January for fourth decline in past five months

In more ordinary times, Wall Street would be zeroing in this week on the latest trends in business investment including the monthly report on durable goods when it is published Thursday.

See: MarketWatch Economic Calendar

Yet even if investment rebounded in January, and economists predict no gain, it’s already old news. Investors want to know what happened in February after the viral epidemic captured headlines around the world. Instead they’ll have to wait another month to learn the answer.

By that time, the viral outbreak could be under control and the economic outlook could turn sunny again, but don’t expect businesses to jump to any conclusions given the lack of progress so far in containing the COVID-19 outbreak.

“Clearly there are enough shockingly weak data points cropping up in China, and elsewhere to counsel caution in the face of this great unknown,’ said Douglas Porter, chief economist at BMO Capital Markets.

Another worry of business executives is the increasing likelihood that Bernie Sanders, a self-described socialist, could win the Democratic primary vote and to set up a showdown with President Trump in the November elections.

The senator from Vermont appears to have taken a clear lead over his rivals early in the race. Sanders has promised to sharply raise business taxes and increase regulations if elected.

Some companies say they’ve become more cautious in the face of “growing uncertainty ahead of the presidential election later this year,” according to chief business economist Chris Williamson of IHS Markit.

The potential nomination of Sanders as the Democratic party’s presidential candidate has caused one prominent Democratic-leaning Wall Street bigwig, former Goldman Sachs CEO Lloyd Blankfein, to say he would find it hard to vote for Sanders.

Read: Ex-Goldman boss Lloyd Blankfein ‘might find it harder to vote for Bernie’ than Trump

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Dow skids below 29,000, led lower by tech names as coronavirus worries ratchet higher

U.S. stocks extended losses Friday, with tech and energy shares leading the way lower in late-afternoon trade, as the spread of the COVID-19 epidemic from China to neighboring countries amplified worries about the impact on supply chains and global economic growth.

Tech shares were the biggest loser in the S&P 500 index, with the sector down 2.4% as investors weighed potential fallout resulting from the corornavirus.

How are benchmarks faring?

The Dow Jones Industrial Average

DJIA, -0.90%

fell 242 points, or 0.8%, to 28,977 while the S&P 500

SPX, -1.18%

 lost 37 points, or 1.1%, to trade at 3,336. The Nasdaq Composite Index

COMP, -1.94%

 was off 179 points, or 1.9%, at 9,570.

On Thursday, the Dow closed down 128.05 points, or 0.4%, at 29,219.90, after hitting an intraday low at 28,959.65. The S&P 500 lost 12.92 points, or 0.4%, to end at 3,373.23. The Nasdaq Composite Index shed 66.21 points, or 0.7%, to settle at 9,750.96, after hitting an intrasession nadir at 9,636.94.

For the week, the Nasdaq Composite is off 1.7%, while the Dow is down 1.4% and the S&P 500 is 1.3% lower.

What’s driving the market?

Shares of Microsoft Corp.

MSFT, -3.40%,

  Apple Inc.

AAPL, -2.68%

  and Intel Corp.

INTC, -1.80%

  weighed on the Dow in afternoon trade, as investors grew increasingly wary about potential fallout from the COVID-19.

Stocks also came under pressure after IHS Markit said its “flash” U.S. services purchasing managers index fell to 49.4 in February from 53.4 in January. A reading of less than 50 indicates a contraction in activity. The IHS Markit U.S. manufacturing purchasing managers index fell to 50.8 in February from 51.9 in January, signaling a slowdown in activity growth.

The spread of the contagion inside and outside of China has been unsettling the market lately, likely contributing to gains in havens like government bonds and gold, with investors showing reluctance to hold on to equities heading into the weekend.

“The coronavirus outbreak contains a significant likelihood of impact to the global economy and the potential to become a black-swan type event,” warned BofA Global Research rates strategists led by Bruno Braizinha, in a client note Friday.

“The uncertainty has been reflected in the market and has naturally led to an increase in recession probabilities.”

Read: Fed’s Brainard backs deploying untested monetary-policy plan in next recession

Economists at Standard Chartered Bank on Friday estimated that COVID-19 could affect 30% of China’s imports and 10% of its exports, prompting them to lower their gross domestic product forecast for China this year to 5.5% from 5.8%.

South Korea has reported 48 more cases, bring its total infections from the novel coronavirus to 204, and in Japan, officials from Tokyo and Osaka said they wouldn’t hold large events such as school graduation ceremonies and entrance examinations for three weeks through mid-March, in an effort to contain the viral outbreak, The Wall Street Journal reported.

Meanwhile, the World Health Organization said Friday that there are 76,767 confirmed cases of the illness and 2,247 deaths, marking another day in which the number of new cases world-wide has slowed.

The full economic impact of the disease is unclear but early indications suggest that it is already denting China’s car sales. Chinese passenger car sales data for the first two weeks of February showed a year-over-year decline of 92%, Bloomberg News reported. And in the first 16 days of the month, only about 5,000 passenger cars were sold compared with nearly 60,000 in the same period of last year, the data showed.

“Nobody has a really good handle on just what the impact is on supply chains,” Luke Tilley, chief economist of Wilmington Trust, told MarketWatch. “Individual companies can identify their supply chains, but they aren’t as easily capable of identifying the next links down the chain. That makes it hard to peg the overall impact,” he said. “It’s understandable that some investors are moving to a risk-off mode.”

Separately, Coca-Cola

KO, +0.49%

said it estimates an approximate 2- to 3-point impact to unit case volume, 1- to 2-point impact to organic revenue and 1- to 2-penny impact to earnings per share for the first quarter, citing coronavirus. China ranks as the third-largest market in the world in terms of unit case volume. Shares were up 0.5%.

In other economic data, U.S. existing home sales fell 1.3% in January to a 5.46 million annual rate.

Which stocks are in focus?
  • Deere & Co.

    DE, +7.56%

     said fiscal first-quarter to Feb. 2 net income rose 4% to $517 million, or $1.63 a share, while sales fell 4% to $7.63 billion. Shares jumped .8%.

  • Shares of Virgin Galactic Holdings Inc.

    SPCE, -10.49%

     were down 9% after a powerful rally this week. Shares remain up 17.6% for the week.

  • T-Mobile US Inc.

    TMUS, -1.19%

    shares edged 1% lower after it revised its merger terms with Sprint Corp.

    S, +5.70%

  • Shake Shack

    SHAK, -2.40%

    shares fell 2.5% after the burger chain was downgraded by SunTrust Robinson Humphrey on guidance fears.

  • Shares of Dropbox Inc.

    DBX, +20.16%

     surged 20% Friday, after one analyst called the cloud-storage company’s quarterly earnings and forward-looking commentary “potentially thesis-changing.”

  • Ebay Inc.

    EBAY, +1.83%

     shares rose 1.7% Friday, following a Wall Street Journal report said there could potentially be a sale of the e-commerce company’s classified ad business, which operates mostly outside of the U.S.

  • Shares of Advanced Micro Devices Inc.

    AMD, -6.98%

     fell 6.7% Friday, even though credit-rating agency S&P Global upgraded the semiconductor company one notch to BB from BB-, citing progress by the company in reducing its debt load. Shares closed at a record Wednesday.

  • National CineMedia Inc.

    NCMI, +15.88%

      share soared more than 16% Friday, after the company posted net income that beat consensus and voted to increase its quarterly cash dividend.

How are other assets performing?

The price of a barrel of West Texas Intermediate crude for April delivery

CLJ20, -0.85%

  on the New York Mercantile Exchange fell 49 cents, or 0.9%, to $53.38 a barrel, amid fears that cracks may be formingin the Saudi Arabia and Russia alliance over how far to cut oil production.

See: What a breakdown in the Saudi-Arabia-Russia oil alliance would mean to the market

Gold for April delivery

GCJ20, +1.58%

gained almost 1.8% to settle at $1,648.80 an ounce on Comex Friday, putting it 3.9% higher for the week, its biggest weekly gain in eight months.

The benchmark U.S. 10-year Treasury note

TMUBMUSD10Y, -3.23%

shed 5.3 basis points to 1.471% while the yield on the 30-year T-bond

TMUBMUSD30Y, -2.51%

extended its retreat to an all-time low. Bond yields fall when prices rise.

In Europe, the Stoxx Europe 600

SXXP, -0.49%

fell 0.5%, while the FTSE 100

UKX, -0.44%

lost 0.4%.

Trade was mixed in Asia overnight. The China CSI 300

000300, +0.12%

 rose 0.1%, Hong Kong’s Hang Seng Index

HSI, -1.09%

fell 1.1%, while the Shanghai Composite

SHCOMP, +0.31%

advanced 0.3%. Japan’s Nikkei

NIK, -0.39%

retreated 0.4%, while South Korea’s Kospi

180721, -1.49%

tumbled 1.5%.

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Nasdaq ekes out record finish, other stock indexes slump as coronavirus takes toll on Apple sales

The Nasdaq Composite index eked out a record finish Tuesday, even though other major stock benchmarks fell after Apple Inc. said its second-quarter earnings would take a hit from the viral outbreak in China, reigniting fears that the disease may disrupt manufacturing supply chains and have broad implications for the global economy and financial markets.

How did benchmarks perform?

The Dow Jones Industrial Average

DJIA, -0.56%

 shed 165.89 points, or 0.6%, to settle at 29,232.10, while the S&P 500

SPX, -0.29%

 lost 9.87 points or 0.3% to close at 3,370.29.

However, the Nasdaq Composite Index

COMP, +0.02%

 gained 1.57 points, or less than 0.1%, to finish at a record 9,732.74, after flipping positive only in afternoon trade. Most of the Dow’s decline was attributed to downward pressure in shares of Apple and Dow Inc.

DOW, -1.83%,

according to Automated Insights. U.S. financial markets were closed Monday for the Presidents Day holiday.

The Dow on Friday booked a weekly gain of 1%, the S&P 500 finished the period with a gain 1.5%, while the Nasdaq Composite Index returned 2.2% for the week.

What drove the market?


AAPL, -1.83%

said Monday it won’t meet its second-quarter financial guidance because the coronavirus outbreak that originated in Hubei province in China last year is affecting its suppliers’ production. “The health and well-being of every person who helps make these products possible is our paramount priority, and we are working in close consultation with our suppliers and public health experts as this ramp continues,” the iPhone maker said in a statement.

Apple said revenue in the current quarter won’t reach its target range of between $63 billion and $67 billion due to the impact of the infectious disease.

Read: Apple’s coronavirus warning wasn’t a total surprise, but magnitude rattles Wall Street

The COVID-19 epidemic has sickened more than 73,000 people and claimed nearly 1,900 lives thus far.

U.S. markets, which have been primarily focused on corporate earnings and otherwise healthy economic data, had effectively shaken off worries fueled by the disease, but some strategists warn investors may be too dismissive.

“We haven’t really heard of any peak levels, that’s what’s beginning to sink into investors’ minds,” Peter Cardillo, chief market strategist at Spartan Capital Securities in New York, said referring to the rising number of people infected with the coronavirus.

“Also, we have gold prices soaring today,” he told MarketWatch, adding that precious metal could ascend even higher than $1,600 an ounce. “There are a lot of uncertainties and those uncertainties are weighing on the market.”

Read: Why gold prices topped $1,600 and may soon hit a more than 7-year high

“You’re trying to take the information from Apple and extrapolate that to the holdings you actually own,” Robert Pavlik, chief investment strategist at SlateStone Wealth told MarketWatch. “Obviously, there was going to be some impacts,” he said, pointing to disrupted supply chains and weaker demand. “But you just don’t know if the impacts are going to be temporary or if you’re going to lose those orders all together.”

Still, in the year to date, the Dow was up 2.4%, the S&P 500 gained 4.3%, and the Nasdaq ended 8.5% higher for the period.

See: What Apple, Walmart and other U.S. companies are saying about the coronavirus

What’s more, the expected hit to U.S. manufacturing from the coronavirus has not been felt yet: a reading on manufacturing conditions in the New York area surged to a nine-month high in February, the Federal Reserve Bank of New York said Tuesday. The forward-looking new orders component of the index hit its highest in a year.

A closely watched reading about home builder confidence was also strong in February. The National Association of Home Builders’ monthly index hit 74, down one tick from January, but still marking the strongest start to a year on record. The sentiment tracker is considered an early read on the pace of new residential construction.

But the outlook for the embattled energy sector looks tougher. Dallas Federal Reserve President Robert Kaplan said Tuesday he expects this year to see “belt-tightening” and restructurings for companies in the U.S. oil and gas sector as domestic production growth is expected to decline.

Which stocks were in focus?
How did other assets perform?

The price of a barrel of West Texas Intermediate crude for March delivery

CLH20, +0.25%

settled unchanged at $52.05 a barrel on the New York Mercantile Exchange, after gaining 3% last week.

Gold for April delivery

GCJ20, +1.15%

rose 1.1% to settle at $1,603.60 an ounce, its highest finish since March 2013, as investors flocked to haven assets.

The U.S. dollar

DXY, +0.47%

was 0.4% higher against a basket of rival currencies at 99.40.

The benchmark U.S. 10-year Treasury note

TMUBMUSD10Y, -1.72%

shed 3.2 basis points to 1.555%. The 30-year bond was lower at 2.006%, after briefly dipping below the key psychological threshold. Bond yields fall when prices rise.

In Europe, the Stoxx Europe 600

SXXP, -0.38%

slipped 0.4%, while the FTSE 100

UKX, -0.69%

finished 0.7% lower.

In Asia overnight, the China CSI 300

000300, -0.49%

 ended 0.5% lower to close at 4.057.51, the Shanghai Composite

SHCOMP, +0.05%

 edged up less than 0.1% at 2,984.97, and the Hang Seng Index

HSI, -1.54%

closed 1.5% lower at 27,530.20. The Nikkei 225

NIK, -1.40%

lost 1.4% to 23,193.80.

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