Weekly Market Review – January 25, 2020

Stock Markets

U.S. stocks finished lower this week. The markets were taking a pause after such strong performance since the beginning of 2020. Global markets were off, mostly on fears of the coronavirus outbreak in China spreading and the potential impact on that country’s economy as the Chinese Lunar New Year holiday gets underway. Oil prices dropped more than they have in almost a year, again as investors worried that the viral outbreak could result in lowered fuel demand. The details are still emerging as the outbreak grows, but past viral outbreaks around the world have not been shown to have a significant effect on economic and market outcomes. Analysts still warn that based on the uninterrupted flow of the recent market rally, investors should expect a higher level of volatility during the developments.

U.S. Economy

Even though the market was off slightly last week, its recent consistent run has included another 2% already this year, with an overall return of 15% since early October. That is still significant, and the market direction makes good sense. A healthy consumer, a break in the U.S.-China trade war, recent signs of early growth in the global economy and Fed policy continuing to support the rally with dovish policies are the right moves for the current market. However, the speed and continuous nature of the rally should keep investors guarded. Stocks have been gainers on two-thirds of all days since the start of November with only been down six days so far in 2020. Moreover, the market is up 13 of the past 16 weeks. The overall direction of the stock market is largely driven by economic, profit and interest rate conditions. On those fronts, the market appears to be following the current support. There is also almost no evidence of euphoria at the moment, so it’s not likely preparing for a painful downturn. Most feel the market is exhibiting a bit of complacency, so they’re looking for more volatility in the next stages.

Metals and Mining

Precious metals were flat this week despite the fact that gold caught a slight uptick based on concerns that the Chinese coronavirus could turn into a global pandemic. Gold hit its highest price for the week Thursday at US$1,566.80 per ounce as cities outside of China began reporting cases of the flu-like virus. The outbreak caused the Chinese government to quarantine 12 cities containing a total population of 35 million residents. After a World Health Organization press conference Thursday where officials eased fears that the virus may reach pandemic levels, gold eased down. On Friday, the US dollar made gains also slowing gold’s growth. Overall, precious metals have shown increased interest recently thanks to heightened global tensions and broad economic uncertainty. Those elements typically benefit the safe haven assets. So, despite the weaker performance in the sector this week, analysts say they are confident that gold and the wider precious metals are the smart investment for the coming year. After briefly breaking the US$18 threshold on Monday to trade for US$18.02 an ounce, silver spent the rest of the week locked just below US$18. After five consecutive weeks of growth, platinum’s price was bumpy this week. An ounce of platinum was trading for US$1,011.88 at 10:39 a.m. EST on Friday. The other platinum group metal, palladium, was also volatile this week, with a new high of US$2,422 on Monday. Earlier this week, analysts at Goldman Sachs predicted the price may go as high as US$3,000 an ounce before a correction. Palladium has been the darling metal of 2019 and continues to run into this year.

Energy and Oil

Demand fears driven by the spread of the coronavirus sent oil prices sliding at the end of the week with Brent falling below $60. WTI fell below $55 per barrel in early trading on Friday, and Brent was testing the $60-per-barrel threshold. With this wave of news, pessimism has returned to energy markets and there is a danger of prices sliding further. Earlier this week, Goldman Sachs put out estimates that the coronavirus in China could shave off $3 from the price of oil. However, the impact appears to uncontained at the moment. China has quarantined Wuhan and other cities. The travel restrictions were expanded on Friday, now affecting at least 35 million people. So, the virus outbreak helped drag down crude oil prices over the week. It appears Saudi Arabia is setting the stage with “all options are open” at their March meeting. That comes as its minister reiterated publicly that all options are on the table for the March meeting. That could mean further production cuts to head off another market meltdown. Aside from a short break during the 2016 market downturn, U.S. natural gas output has been growing for a decade now. That may be coming to an end soon as prices plunge below $2/MMBtu. BloombergNEF data shows that gas well completions have fallen to their lowest level since the second quarter.  Natural gas spot prices fell at most locations this week. The Henry Hub spot price fell from $1.98 per million British thermal units (MMBtu) last week to $1.89/MMBtu this week. At the New York Mercantile Exchange (Nymex), the price of the February 2020 contract decreased 22¢, from $2.120/MMBtu last week to $1.905/MMBtu this week. Tuesday’s contract price of $1.895/MMBtu was the lowest price for a February contract since 1999. The price of the 12-month strip averaging February 2020 through January 2021 futures contracts declined 13¢/MMBtu to $2.156/MMBtu.

World Markets

Stocks in Europe ended with almost no change. They recovered from earlier weakness once economic data confirmed that the German economy might be picking up steam. They were helped too when the World Health Organization stopped short of declaring the coronavirus outbreak in China a global health emergency. The pan-European STOXX Europe 600 Index ended the week up 0.08%, while Germany’s DAX Index rose 2.1%. The only major down point was the UK’s FTSE 100 Index, which was off 0.55% on the week. UK Chancellor of the Exchequer Sajid Javid said in an interview that the UK would not seek regulatory alignment with European Union (EU) rules and intends to be out of the single market and customs union by the end of the year. And at the World Economic Forum meeting at Davos, Switzerland, U.S. officials gave notice that they now plan to tackle trade relations with the European Union. U.S. Treasury Secretary Steven Mnuchin said the administration expects to conclude a U.S. UK trade deal this year.

The appearance of a new coronavirus in Wuhan, a city of 11 million people in central China, rocked Chinese markets. Similar to the SARS outbreak that took place in 2003, the Shanghai Composite Index suffered its largest single-day drop in over eight months on January 23, the last day of trading before the Chinese New Year (CNY) lunar holiday. That took 2.8% off of the index. Up to Thursday’s close of market, the Shanghai Composite Index lost 3.8%, and the CSI 300 large-cap index declined by 4.3%.

Compared to point when SARS (severe acute respiratory syndrome) broke out in 2003, the Chinese economy is much more consumer-oriented, meaning it is more vulnerable. However, there is growing market hunch about a possible short-term stimulus to be put in place, especially if the virus effects the main travel, tourist and retail consumer markets that typically get a boost from the Lunar New Year activities.

The Week Ahead

Key economic data being released this week include durable goods, new home sales, consumer confidence, on Wednesday the first Fed rate decision of the year, and the fourth-quarter GDP will be released Thursday. The corporate earnings season is really ramping up as roughly 30% of the S&P 500 companies will be reporting their fourth-quarter earnings this week.

Key Topics to Watch

  • New home sales
  • Durable goods orders
  • Core capital goods orders
  • Case-Shiller home prices       
  • Consumer confidence index
  • Advance trade in goods
  • Pending home sales index
  • FOMC announcement
  • Weekly jobless claims
  • GDP Q4
  • Employment cost index
  • Personal income
  • Consumer spending
  • Core price index
  • Chicago PMI
  • Consumer sentiment index

Markets Index Wrap Up

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