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

Original source link

Why the coronavirus outbreak is delivering a fresh dose of recession fear to stock-market investors

The old saw used to be that when the U.S. sneezes, the rest of the world catches a cold.

Now, a more apropos adage for market bears may be that when an outbreak of coronavirus grinds the world’s second-largest economy to a halt, the rest of the world catches a recession.

Indeed, recession fears resurfaced on Wall Street last week, even as equity markets stood not far from all-time highs, amid volatile trade that whipsawed mostly on jitters that supply chains and economies could suffer from the spread of the infectious illness that originated in Wuhan, China, known as COVID-19.

“The [coronavirus spread] definitely injects an element of uncertainty into markets for the near term and for the longer term as well,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

Stocks sold off sharply Monday to add to last week’s decline, with the Dow Jones Industrial

DJIA, -2.65%

 down 779 points, or 2.7%, while the S&P 500

SPX, -2.56%

 dropped 2.6% and the Nasdaq Composite

COMP, -2.97%

 shed 2.9%.

Analysts at BofA Global Research said the probabilities of a recession have increased and that is reflected in the action in yields for the 10-year Treasury note and the 30-year Treasury bond, which plunged Friday to its lowest rate on record. Investors will flee to the presumed safety of U.S. government bonds, driving yields lower, with the hope of avoiding losses that can derail riskier assets in a selloff.

Read: Gold, Treasury prices soar as coronavirus fears spark global stock-market selloff and flight to safety

The 30-year bond yield

TMUBMUSD30Y, -4.90%

fell a further 9 basis points Monday into uncharted territory at 1.826%. The 10-year note yield

TMUBMUSD10Y, -7.06%,

which last week tumbled below the key level of 1.5%, wa down 10 basis points at 1.371%. Bond yields move in the opposite direction of prices.

BofA said a move for the 10-year below 1.4% could represent a tipping point for the market, one that raises the probability for a recession, particularly if the Federal Reserve continues to hold benchmark rates at the current 1.50-1.75% range.

Here’s how BofA’s analysts put it (see attached chart): “Indeed, breaking 1.4% in an on-hold context for the Fed creates a significant inversion of the curve, pushes recession signals higher…”

Source: BofA Global Research

Part of the worry for fixed-income folks is the flattening of the yield curve, which traces yields across maturities from short-dated to longer term. Once flat, there is a greater potential for the curve to invert, leaving short-end debt paying out more than longer-dated obligations.

Inversions are seen as a reliable indicator of an economic downturn or recession. And one key measure of that, the spread between the 2-year and 10-year T-note yield, stood at less than 10 basis points on Monday.

Already, the 3-month T-bill yield

TMUBMUSD03M, -1.16%

 at 1.505% trades above the 10-year rate.

Read:5 things investors need to know about an inverted yield curve

For some, the reading of services activity from IHS Markit released on Friday also elevated recession concerns, which fell 4 points to 49.4. Any number over 50 signifies expansion; below 50 points to contraction.

Tom McClellan, a prominent technical analyst, said the yield curve inversion that occurred in the summer of last year is still in force and that market participants have been too dismissive of that recession signal (see attached chart): “Generally speaking, it takes about 15 months for those effects to show up in overall economic data,” he wrote in a Thursday research note.

Recession signals

“Last year’s yield curve inversion is still yet to be felt, and that is not even factoring the additional economic slowdown effect from the coronavirus,” McClellan wrote.

Amid all this recession talk, Gold

GCJ20, +1.69%

has been on a tear. The precious metal often draws heavy bids during market uncertainty. On Monday, it extended gains, rising 1.7% to $1,676.50 an ounce after last week finishing at its highest level since 2013.

Investors couldn’t stop talking about the shiny yellow metal, even through it’s unclear if those bets will pay out over a longer term.

Even so, the Fed doesn’t yet seem inclined to lower rates to placate nervous investors. Vice Chairman Richard Clarida said the central bank is unlikely to lower interest rates given the positive economic outlook. On CNBC on Friday, Atlanta Fed President Raphael Bostic and St. Louis Fed President James Bullard appeared to be sanguine about the health of the U.S. economy, even as they watched coronavirus closely.

BMO’s Ma said that those takes may be justified because the health of the domestic economy doesn’t appear to be one genuinely signaling that a recession is afoot.

Corporate earnings for one have been mostly solid. “Q4 results came in better than expected, rising 1.6% versus the expected 2.1% decline, representing the 32nd consecutive quarter in which actuals beat end-of-quarter estimates,” said Sam Stovall chief investment strategist at CFRA Research.

However, he said the outlook was softening, noting that “2020 forecasts are now at 5.9% versus the 7.9% at the start of the year.”

Original source link

Italian stocks set to lead sharp decline for European equities as coronavirus spreads

European stock markets were poised for a sharply lower open on Monday, with investors gripped by worry as coronavirus cases surged outside of China — in South Korea, Iran and Italy — over the weekend.

Futures for the FTSEMIB Italy index

I945, -1.22%

 indicated a 3.7% drop at the start of trading for the index as coronavirus cases swept through the northern Lombardy region over the weekend, which includes the financial capital, Milan. Officials put nearly a dozen towns on lockdown as the number of confirmed cases went from three on Friday to more than 150 by Monday, with three deaths.

Intesa Sanpaolo SpA

ISP, +0.00%

 said it would close branches across northern Italy, due to the quarantine that is affecting 50,000 people.

German DAX 30 index futures

DAX, -0.62%

 pointed to a 2% drop and those for the FTSE 100 index

UKX, -0.44%

 were down about 1.7%. Spain’s IBEX 35 index

IBEX, -0.45%

 was set to lose 2.4% at the start, according to futures prices. European stocks finished lower last week amid concerns about the virus’s spread beyond China’s borders, with the Stoxx Europe 600 index

SXXP, -0.49%

  dropping 0.5% on Friday to 428.07, and down 0.6% for the week.

South Korea reported 161 new cases on Monday, bringing the country’s total to 763 cases, and two more deaths raising that toll to seven. Iran reported 43 cases and eight deaths. China reported 409 new cases, raising the country’s total to 77,150, along with 150 deaths.

“With further outbreaks likely to continue across the world, and Iraq and Turkey closing their borders to Iran after cases being reported there, financial markets could well have to get used to an extended period of uncertainty, as consumer behavior globally starts to change,” said Michael Hewson, chief market analyst at CMC Markets UK, in a note to clients.

“There is already evidence that this is happening, with Chinese tourist numbers down across the world, while the French finance minister said that tourist numbers in France were already down over 30% at this weekend’s G20 finance ministers meeting,” he said.

On Saturday, the International Monetary Fund warned the virus outbreak could reduce global economic growth by 0.1% this year, and drag China’s annual growth 0.4 percentage points lower than January estimates.

Original source link

U.S. stock futures sink on growing concern of outbreak’s economic impact

U.S. stock market futures sank late Sunday as the spread of coronavirus raised worries that global economic growth could take a hit.

Dow Jones Industrial Average futures

YM00, -1.32%

  fell about 400 points late Sunday, suggesting a steep drop when U.S. trading starts Monday morning. S&P 500 futures

ES00, -1.33%

  and Nasdaq Composite futures

NQ00, -1.73%

  also fell more than 1% each.

On Saturday, the International Monetary Fund warned the virus outbreak could reduce global economic growth by 0.1% this year, and drag China’s annual growth 0.4 percentage points lower than January estimates.

“The world economy is facing a clear slowdown and this slowdown might be reinforced by the so-called coronavirus,” French Finance Minister Bruno Le Maire said at a G-20 finance meeting in Saudi Arabia, according to the Associated Press.

But U.S. Treasury Secretary Steve Mnuchin said Sunday that it was still too early to tell how the outbreak will affect the global economy. “I think we’re going to need another three or four weeks to see how the virus reacts, until we really have good statistical data,” he told CNBC.

Still, the global spread of the virus in patients with no links to China suggests “things are about to get extremely problematic, and market conditions could get exponentially worse this week,” Stephen Innes, chief market strategist with AxiTrader, wrote in a note Sunday.

Read: Technology stocks could be on the verge of a bear market, warns investor who once ran the world’s biggest tech fund

South Korea’s Kospi

180721, -3.18%

  sank more than 3% in Monday trading as the country went on high alert to contain the spread of the COVID-19 coronavirus. More than 760 people in South Korea have been infected, with most of the diagnoses coming in the past few days. Under the new alert level, the government has the authority to order schools to be closed, stop public transportation and to cut off flights to and from South Korea.

Australia’s S&P/ASX 200

XJO, -2.16%

  dropped more than 2% in early trading, and stocks also slid in Hong Kong

HSI, -1.48%

  and Shanghai

SHCOMP, -0.34%

 . Japan’s Nikkei is closed Monday for a holiday.

Crude oil prices fell as well, with West Texas Intermediate crude for April delivery

CLJ20, -2.32%

  and April Brent crude

BRNJ20, -2.50%

 , the global benchmark, each down more than 2%.

Gold prices

GCJ20, +0.90%

  rose 1%, to $1,666.50.

See: Why the coronavirus outbreak is delivering a fresh dose of recession fear to the stock market

Authorities in northern Italy canceled some public events, including Venice’s Carnival, in an effort to reduce the spread of the virus. Italian officials said Sunday they have 152 confirmed cases, the most in any country outside Asia.

China’s President Xi Jinping on Sunday noted the outbreak news was “grim,” but said measures must be taken to get China’s economy going again, including reopening factories in low-risk areas. Experts forecast as much as a 1% reduction in China’s economic output this quarter due to strict quarantines that shuttered businesses and factories.

Chinese officials again reported fewer than 1,000 new cases Sunday, though the overall total in mainland China is nearly 77,000 infected with more than 2,400 deaths.

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

U.S. stocks slumped Friday, ending a two-week win streak, with tech stocks being hit hardest.

The Dow Jones Industrial Average

DJIA, -0.78%

  closed below 29,000, shedding 227.51 points, or 0.8%, at 28,992.40, its worst one-day percentage drop since Feb. 7. The S&P 500

SPX, -1.05%

  lost 35.48 points, or 1.1%, to settle at 3,337.75, its biggest one-day percentage decline since Jan. 31. The Nasdaq Composite Index

COMP, -1.79%

  lost 174.37 points, or 1.8%, to finish at 9,576.59, its worst single-day percentage fall since Jan. 27, according to Dow Jones Market Data.

Original source link

Don’t buy China’s story: The coronavirus may have leaked from a lab

At an emergency meeting in Beijing held last Friday, Chinese leader Xi Jinping spoke about the need to contain the coronavirus and set up a system to prevent similar epidemics in the future.

A national system to control biosecurity risks must be put in place “to protect the people’s health,” Xi said, because lab safety is a “national security” issue.

Xi didn’t actually admit that the coronavirus now devastating large swathes of China had escaped from one of the country’s bioresearch labs. But the very next day, evidence emerged suggesting that this is exactly what happened, as the Chinese Ministry of Science and Technology released a new directive entitled: “Instructions on strengthening biosecurity management in microbiology labs that handle advanced viruses like the novel coronavirus.”

Read that again. It sure sounds like China has a problem keeping dangerous pathogens in test tubes where they belong, doesn’t it? And just how many “microbiology labs” are there in China that handle “advanced viruses like the novel coronavirus”?

It turns out that in all of China there is only one. And this one is located in the Chinese city of Wuhan that just happens to be . . . the epicenter of the epidemic.

That’s right. China’s only Level 4 microbiology lab that is equipped to handle deadly coronaviruses, called the National Biosafety Laboratory, is part of the Wuhan Institute of Virology.

What’s more, the People’s Liberation Army’s top expert in biological warfare, a Maj. Gen. Chen Wei, was dispatched to Wuhan at the end of January to help with the effort to contain the outbreak.

According to the PLA Daily, Gen. Chen has been researching coronaviruses since the SARS outbreak of 2003, as well as Ebola and anthrax. This would not be her first trip to the Wuhan Institute of Virology either, since it is one of only two bioweapons research labs in all of China.

Does that suggest to you that the novel coronavirus, now known as SARS-CoV-2, may have escaped from that very lab, and that Gen. Chen’s job is to try and put the genie back in the bottle, as it were? It does to me.

Add to this China’s history of similar incidents. Even the deadly SARS virus has escaped — twice — from the Beijing lab where it was — and probably is — being used in experiments. Both “man-made” epidemics were quickly contained, but neither would have happened at all if proper safety precautions had been taken.

And then there is this little-known fact: Some Chinese researchers are in the habit of selling their laboratory animals to street vendors after they have finished experimenting on them.

You heard me right.

Instead of properly disposing of infected animals by cremation, as the law requires, they sell them on the side to make a little extra cash. Or, in some cases, a lot of extra cash. One Beijing researcher, now in jail, made a million dollars selling his monkeys and rats on the live animal market, where they eventually wound up in someone’s stomach.

Also fueling suspicions about SARS-CoV-2’s origins is the series of increasingly lame excuses offered by the Chinese authorities as people began to sicken and die.

They first blamed a seafood market not far from the Institute of Virology, even though the first documented cases of Covid-19 (the illness caused by SARS-CoV-2) involved people who had never set foot there. Then they pointed to snakes, bats and even a cute little scaly anteater called a pangolin as the source of the virus.

I don’t buy any of this. It turns out that snakes don’t carry coronaviruses and that bats aren’t sold at a seafood market. Neither are pangolins, for that matter, an endangered species valued for their scales as much as for their meat.

The evidence points to SARS-CoV-2 research being carried out at the Wuhan Institute of Virology. The virus may have been carried out of the lab by an infected worker or crossed over into humans when they unknowingly dined on a lab animal. Whatever the vector, Beijing authorities are now clearly scrambling to correct the serious problems with the way their labs handle deadly pathogens.

China has unleashed a plague on its own people. It’s too early to say how many in China and other countries will ultimately die for the failures of their country’s state-run microbiology labs, but the human cost will be high.

But not to worry. Xi has assured us that he is controlling biosecurity risks “to protect the people’s health.” PLA bioweapons experts are in charge.

I doubt the Chinese people will find that very reassuring. Neither should we.

Steven W. Mosher is the President of the Population Research Institute and the author of “Bully of Asia: Why China’s ‘Dream’ is the New Threat to World Order.”

This article was first published on

Original source link