What to Expect When China’s Markets Reopen

The Asian calendar is packed with activity data from China and the rest of Asia, though that will likely be secondary to news about the coronavirus. We’re not likely to see the full economic impact of the virus in the January data, but holiday-related slack and the timing of the holiday (Lunar New Year was in February last year, but in January this year) will distort the picture. Trade figures for January from China and Korea, as well as manufacturing PMIs [purchasing managers’ indexes] elsewhere will be in focus, following the phase one trade deal between China and the US.

With China gearing up for more stimulus to soften the impact of the virus, other Asian countries are likely to follow suit. Central banks in Australia, India, the Philippines, and Thailand all hold policy meetings next week, and we’re expecting more than just words.

—Prakash Sakpal

Treasury Trading Trends

The Weekly Speculator
by Marketfield Asset Management
Jan. 30: Long-term bonds have been the major beneficiary of the coronavirus, with the 10-year yield breaking down to reach 1.58% at Wednesday’s close, the lowest since early October. Support now stands at 1.50%, where yields bounced in October and then below that at the September low at 1.43%. We see little economic justification for the latter to be challenged, but with refinancing activity starting to push higher, bringing with it some pressure to hedge duration in mortgage portfolios, a breach of 1.50% could generate considerable follow through. Resistance stands at 1.80%, giving some leeway from the current yield should better economic data and strong earnings start to sway flows back from their current preference for safety.

—Michael Shaoul, Timothy Brackett

Support for Gold

UBS House View – Daily US
by www.ubs.com
Jan. 29: Holdings of gold ETFs, which are favored by longer-term oriented investors, now stand at a seven-year high. The precious metal has already proven its value in portfolios in 2020, with its price responding positively as equities fell in both of the main bouts of volatility in 2020: around U.S.-Iran tensions and the coronavirus. Gold also has support from fundamentals— economic growth looks to stay muted, while now negative U.S. real rates reduce the opportunity cost of holding gold, which doesn’t offer a yield. We forecast gold at $1,600/ounce by the middle of the year, versus $ 1,569 currently.

—Mark Haefele

Bank Risk and Property Loans

Daily Insights
by BCA Research
Jan. 29: Banks have decreased their overall exposure to commercial property loans to levels below their 2008 and 1989 peaks. It is worth noting that smaller banks have taken an increasingly important role in the commercial property market, as they now finance 65% of all commercial property loans. However, a stronger concentration in smaller banks represents a localized, rather than systemic, risk, as smaller banks tend to have a more concentrated geographic exposure. Conversely, large banks have significantly shrunk their commercial real-estate loan books.

The composition of the commercial property loan book has changed drastically since the Great Financial Crisis. Banks have significantly reduced their exposure to more speculative construction and development loans. Risk appetite typically increases in the latter stages of an expansion, yet construction loans remain at relatively depressed levels.

—Doug Peta, Ryan Swift

Buying Schwab, Progressive

Equity Investment Outlook
by Osterweis Capital Management
Jan. 28: Given the uncertainties and the longevity of both the economic recovery and bull market, we continue to favor leading, dominant companies, especially those enjoying secular tailwinds. Such companies are likely to grow in any macro-environment and prove rewarding investments over time. As always, we seek to invest in these companies at attractive prices due to some near-term cloud that temporarily depresses their valuations. Below are two examples of additions to the portfolio that not only fit our target profile, but that also give us positive exposure to a rising rate environment (should inflation begin to accelerate).

We purchased
Schwab
[ticker: SCHW], the leading discount broker platform in the U.S. Schwab’s earnings and stock price had suffered from a decline in rates, a flat yield curve, and fears over the demise of trading commissions. Our analysis of the company’s prospects suggested the market was being far too negative, given the probability of continued moderate economic growth and Schwab’s market dominance. While not central to our investment thesis, Schwab’s earnings would increase rapidly in a rising rate environment.

We also added
Progressive
[PGR], a dominant provider of automotive insurance in the country. Progressive’s shares have declined due to increased loss ratios (cars are getting more expensive to fix), but these cycles typically lead to higher insurance pricing and an acceleration of earnings growth. Similar to Schwab, higher rates are not part of our thesis for earnings growth, but with a large book of short duration bonds, Progressive would certainly benefit from a higher rate environment.

—John Osterweis

Job Outlook Firms

Cumberland Advisors Market Commentary
by Cumberland Advisors
Jan. 28: Perhaps the most telling information about how strong the economy is concerns the job market. On almost any measure, the job market is strong. To be sure, the December CES [Current Employment Statistics] jobs number of 145,000 was off from the 256,000 for November, but the monthly numbers tend to be quite variable. At the same time, the unemployment rate is 3.5%, which is a 50-year low; and new unemployment claims have been declining, from 252,000 for the week of Dec. 7 to 211,000 for the week of Jan. 18. Finally, job openings as reported in the JOLTS [Job Openings and Labor Turnover Surveys] series have continued to decline and now are at 6.8 million, and this figure still exceeds the number of unemployed workers. In short, the job market is strong and shows little sign of wage pressure, which suggests that there is no evidence that the market is overheating or should be a cause for concern.

—Robert Eisenbeis

To be considered for this section, material, with the author’s name and address, should be sent to [email protected].