As of noon on Friday, global equities were little changed on the week while the yield on the US 10-year Treasury note was sent lower by 14 basis points, to 1.70%, on concerns that the rapidly spreading coronavirus outbreak begun in China could inhibit global growth. The price of a barrel of West Texas Intermediate crude oil declined $4.50 to $54.50. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), rose to 13.5 from 12.3 a week ago.
MACRO NEWS
China scrambles to contain coronavirus
At least 11 Chinese cities, including the important transportation hub of Wuhan, are on lockdown ahead of Lunar New Year celebrations, which begin today, as officials scramble to contain the spread of a deadly coronavirus. Many public celebrations have been cancelled, and travel is being curtained during one of year’s busiest travel periods. Early estimates suggest the epidemic could shave 0.5% to 1% from China’s projected 2020 growth rate of 6%. As a result, prices for commodities such as oil have fallen this week, as have most interest rates, amid dampened prospects for a global economic rebound following last year’s trade disruptions. Despite isolated case appearing in multiple countries, including the United States, officials from the World Health Organization have so far stopped short of declaring the outbreak a public health emergency of international concern.
Digital tax row temporarily set aside
France and the US have agreed to await further negotiations being led by the Organization for Economic Cooperation and Development (OECD) over the taxation of digital services provided mainly by Silicon Valley technology giants. The OECD plans to unveil a universal cross border system by the end of the year, which could allow governments to tax companies that have no physical operations in their countries. France was set to move ahead with its own digital tax, while the US was preparing to levy retaliatory tariffs before reaching a short-term truce at the World Economic Forum in Davos, Switzerland this week. The United Kingdom is exploring its own version of the tax, a factor that could complicate post-Brexit US-UK free trade talks. While in Davos, US President Donald Trump repeated that he will tariff US imports of European autos and auto parts if the European Union does not reach a trade agreement with the US. Officials from the US expressed hope that a deal can be reached before the end of the year.
ECB launches strategic review
The European Central Bank left monetary policy unchanged on Thursday but announced that it was undertaking a broad strategic review that it hopes to complete by the end of 2020. The review will examine the bank’s formulation of price stability, monetary policy toolkit, economic and monetary analysis and communications practices. It will also assess financial stability, employment and environmental sustainability. As a result of the review, analysts expect the ECB may shift its inflation target slightly higher from the present close to, but below 2%.
Brexit on track for 31 January
Queen Elizabeth II assented to the Brexit withdrawal bill this week, the final leg in journey that began three and a half years ago. European Union leaders and the European parliament are expected to rubber stamp the deal next week. Negotiations will then begin on the future relationship between the UK and the EU, with negotiators from the UK suggesting they will not attempt to closely align with existing EU rules, a potential negative for UK exporters. However, business optimism has risen sharply in the wake of December’s general election, with the Confederation of British Industry reporting the biggest jump in optimism since the measure was created in 1958.
US flash PMI shows services continue to outpace manufacturing
Activity in the US service sector improved in January, according to data released today by Markit. Its preliminary service sector purchasing managers’ index for January rose to 53.2 from 52.8 in December. The manufacturing PMI declined to 51.7 from 52.4 the prior month. In the eurozone, the situation was reversed as the services PMI declined to 52.2 from 52.8 while the manufacturing PMI rose to 47.8 from 46.3.
Political instability in Italy is once again on the rise, with Luigi Di Maio resigning this week as the leader of the Five Star Movement, a member of the ruling coalition. The party’s prospects have been dimming as it has struggled to transform itself from a group of antiestablishment agitators to a governing party. Its performance in regional elections this weekend will be closely watched.
US Secretary of the Treasury Steven Mnuchin said this week that the Trump administration is working on a second round of tax cuts, aimed at the middle class, while also noting the need for deficit reduction. The secretary expressed support for a stable dollar, in contrast with President Trump, who has often called for a weaker greenback.
North Korea says it is no longer bound by the moratorium on nuclear and missile testing it signed with the US. The government says that the US did not meet North Korea’s deadline for showing flexibility on sanctions.
The impeachment trial of President Trump in the US Senate enters its fourth day, with Democratic House managers expected to conclude their presentation today. The president’s defense will begin on Saturday and is scheduled to last three days.
EARNINGS NEWS
With nearly 17% of the of the constituents of the S&P 500 Index having reported for Q4 2019, blended earnings per share (which combines reported data with estimates for those who have yet to report) shows that earnings growth is running at a 1.9% year-over-year pace while revenues are seen rising 2.7% compared with the same quarter a year ago, according to FactSet Research. Looking ahead, Q1 earnings are projected to rise around 4.5%.
THE WEEK AHEAD
| Date | Country/Area | Release/Event |
| Mon, 27 Jan | United States | New home sales |
| Tue, 28 Jan | US | Durable goods orders, consumer confidence |
| Wed, 29 Jan | US | Fed rate-setting meeting |
| Thu, 30 Jan | eurozone | Economic sentiment indicator, unemployment rate |
| Thu, 30 Jan | United Kingdom | Bank of England rate-setting meeting |
| Thu, 30 Jan | US | Q4 gross domestic product |
| Fri, 31 Jan | Japan | Retail sales, industrial production, unemployment |
| Fri, 31 Jan | eurozone | GDP, consumer price index |
| Fri, 31 Jan | US | Personal income and spending |
Stay focused and diversified
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