Rising Coronavirus Tallies In China, Elsewhere Leave Investors Feeling Jittery

Key Takeaways:

• The 10-year yield fell below 1.5%, and the 30-year yield hit an all-time low below 1.92%
• Gold advanced to just under $1,650 per ounce—a level not seen since 2013
• Coca-Cola warned earnings will take a hit from the coronavirus outbreak

Wall Street’s risk-off mood appears to be continuing this morning as rising coronavirus tallies seem to have investors on edge.

Even as this earnings season continues to be generally better than expected, investors and traders seem to be focusing instead on the outbreak’s potential impact on corporate earnings as the number of cases jumped in China overnight, and South Korea and Japan are also reporting substantial numbers of infections.

From a corporate standpoint, investors were particularly worried after Coca-Cola (KO) said the outbreak would reduce its earnings. As fears mounted market participants flocked to the relative safety of U.S. government debt, pushing the yield on the 10-year Treasury note below 1.5% and that of the 30-year bond to an all-time low below 1.92%.

Other corporate news was brighter, however, as Deere (DE) reported solid earnings of $1.54 per share, well above the $1.25 third party consensus. Revenue also came in ahead of consensus. The cautious tone for 2020 struck by CEO John May didn’t seem to dampen enthusiasm for the stock. DE was up 6% in premarket trading.

Keep in mind that we’re heading into a weekend, which means the selling might be stronger than it otherwise would be as investors and traders may want to not carry as much risk over the two-day break when no one knows what the headlines will hold.

A Head Scratcher

Yesterday, the main three U.S. indices ended the day lower after recovering some ground from a sharp intraday drop. Meanwhile, there was an uptick in demand for U.S. government debt, which pressured yields; gold prices rose; the Cboe Volatility Index (VIX) moved up; and the U.S. dollar jumped.

The general pressure on stocks and rise in safe-haven investments indicated that investors were in a risk-off mood because of worries about the coronavirus outbreak. But the magnitude of sharp intraday downturn was a bit of a head scratcher, defying ready explanation.

There’s always the chance someone made a large trading mistake, but if this had been a fat-finger situation where by one big desk sold more shares than it meant to, then it seems likely that the market would have bounced back more than it did. Perhaps a combination of virus fears and pre-election uncertainty, plus a stock market that has run out of near-term catalysts to move higher, has stoked a bit of hair-trigger volatility in the market.

Whatever the selling catalyst, it seems that investors wanted to book some profits from the market’s recent strength. But it was encouraging to see that investors also wanted to buy the dip.

Another Mini-Mystery

While the Financials sector did end the day slightly lower on pressure from falling Treasury yields, bank stocks didn’t do that badly in general, and regional banks were actually up for the day.

Often banks will do worse when Treasury yields fall because it can squeeze the margin between what they can charge on loans and what they earn on deposits. But it seems that the traditional inverse relationship between yields and bank shares wasn’t entirely in place yesterday.

Sometimes, when traditional relationships seem to be out of whack and you’re not sure of the cause, it could be best to use caution.

Not Stuck in a Rut

It was notable that although the Russell 2000 Index (RUT) also took a downturn during the session it managed to recover into positive territory.

Perhaps investors were rotating some money from large names that have done well recently and into small-cap stocks. But the RUT was also helped as regional banks had a pretty good day, because they make up a good chunk of the index.

It may also be a case of investors having an increased appetite for smaller domestic companies that have less exposure to China than some large multinationals.

Manufacturing Recovery Continues: This week has been relatively good for manufacturing data, a good sign considering the sector has been beaten up and has only recently begun showing signs of a recovery. On Tuesday, the general business conditions index of the Fed’s February Empire State Manufacturing Survey rose to 12.9 when only a 6.3 reading had been expected in a Briefing.com consensus. Then, yesterday, a key index in the Philadelphia Fed’s February Manufacturing Business Outlook Survey jumped to 36.7 when 10.7 had been expected. All this is on the heels of the closely watched Institute for Supply Management’s manufacturing index earlier this month surprisingly returning to expansionary territory after five straight months of contraction.

But Will Virus Infect Factory Recovery? The coronavirus outbreak is casting a shadow of uncertainty over the domestic factory sector. As the outbreak wears on, Chinese manufacturing is hamstrung by employees who can’t get to work, and the global air and sea freight system has also taken a big hit. That means U.S manufacturers may have trouble getting parts they need, which could crimp the recovering sector. “While weakness in manufacturing appears to show signs of softening, the COVID-19 outbreak may impact manufacturing supply chains in the U.S. in the coming months,” Conference Board senior director of economic research Ataman Ozyildirim said in a statement accompanying the release of the think tank’s January leading indicators report yesterday.

Shelter From the Storm: While domestic manufacturing might take a ding from the outbreak of COVID-19, the U.S. housing market might be one place that’s better able to weather the fallout from the epidemic. Low interest rates have been one thing helping demand for housing, and the coronavirus-spurred flight to U.S. government debt could help keep rates low. Further, it seems likely that if the outbreak begins to truly dent economic growth around the globe and in the United States, the Fed would at least consider lowering its benchmark rate. The latest numbers on existing home sales are scheduled for release a little later this morning, with January sales expected to come in at a seasonally-adjusted 5.42 million, according to Briefing.com.

TD Ameritrade® commentary for educational purposes only. Member SIPC.