The Race is On
Happy Friday,
The good news? It's Friday. The bad news? It's only Friday morning.
Investors clearly not buying risk (except us) ahead of the weekend’s China PMI releases and who knows what else.
Given this week’s near unprecedented selloff one can be forgiven for thinking the world is ending, maybe bc machines are driving the train? Risk assets have given back Fall Risk Asset Rally gains & are O/S; safe havens, namely long duration UST, are very O/B.
Looking at economic data: various Fed Q1 US GDP Nowcasts (between 2-2.7%), European data flows (solid thru Feb), China reopening’s (Apple, Toyota, Starbucks), one could have a very different POV. The St. Louis Fed's Financial Stress Index is benign as is Chicago Fed’s Financial Conditions Index.
China/ Asia ex Japan best performing region, rest of world punished; sale of US Min Vol & Gold ETFs recently suggest we are in the panic phase of selling.
Headline risks from here: EU Schengen closing, US outbreaks, WHO pandemic announcement. A week ago G-20 whiffed on coronavirus with SPY close to ATHs - financial markets have once again alerted policy makers that they need to act.
Expect a meaningful policy response: growing expectation of a Fed cut, HK “helicopter money” drop, EM rate cuts, open discussion around fiscal stimulus in Germany & elsewhere. China is likely to tie its policy response to Q1 GDP release.
Risk asset direction likely determined by race between virus spread and attendant econ effects vs getting China back on stream/global policy response. Bloomberg Economics estimates China now operating at 60-70%. More cases are a given but with roughly 40 countries already affected & on high alert, big outbreaks should be contained. China could be 80-90% back by March end.
As BTV video shows we see more risk in long-dated UST at current prices than global equities and think investors should be building a buy list focused on Cyclical/Value segments. Much has been discounted. Global Econ entered the virus in broad recovery mode with Comp PMIs for Global, Advanced and EM economies all averaged over 52 in January. Q1 will be weak but expect sharp, stimulus supported pick up in 2H led by ex-US economies with more room to act.
Growing risk that ex-US recovery & growing US political risk (Super Tuesday next week while virus represents a real challenge- threat to a US Pres riding high post impeachment) could coalesce to stimulate outflows from still expensive US safe haven.
Get some rest - you deserve it!
TPW Investment Management Team