Wuhan Woes

Everything is on hold now as we may be on the cusp of a global pandemic due to the outbreak of a highly contagious virus (novel coronavirus 2019-nCoV) spreading throughout China. Cases are beginning to pop up across Asia, Europe and now two in the United States. Over 40mm people in 13 cities are under quarantine in China in under two weeks so there is the potential for global growth to hit the brakes until the virus is under control.

There is precedent to observe as the SARS outbreak in 2003 did impact the Chinese economy as you can see below. However, the Chinese economy had a much smaller footprint at that time and SARS only had an episodic impact to travel and global trade.

SARS Damage

Today, China is a global leader in trade and manufacturing so the odds are much higher that there will be an impact to financial markets and global trade. But by how much? How does one gauge the impact if a company like Apple says their ability to make and deliver iPhones is impacted by the virus? This virus is in early days but it is hard not to prioritize its risk over earnings, the Fed or the manufacturing slowdown we endured over the last six months. Why? Because there is no way to quantify the worst case scenario as the virus spreads. Let’s hope for the best and position for the worst.

In the Chart

The price action to close out the week reflected the growing risk to global trade while Asian markets were closed for the Lunar holiday. China’s stock market dropped 2.5% on Thursday so I expect more weakness in global equity markets to spill into next week. Below, I have included a chart with some fibonacci retracement levels from the 2018 low. They may be too conservative but a large drawdown would easily case double-digits losses.

SPX: S&P 500
SPX: S&P 500 Index

Chart of the Week!

The market value of the U.S. stock market, as measured by the Wilshire 5000, a capitalization-weighted index of about 4,000 stocks, has been bigger than the gross domestic product of the United States for several years. But last year’s surge in stock prices took the Wilshire to a valuation of $33.9 trillion, or 157.4% of the last reported GDP.

Wilshire 5000 to GDP.

Economic & Central Banking Snippets 

  • Eurozone Flash PMI stayed at 50.9 in January, lower than the 51.2 analysts expected. Rates of growth in output and new orders remained muted, but business sentiment rose to a 16-month high in a sign that the worst of the recent downturn has passed.  
  • The European Central Bank meets on Thursday when the starting gun could be sounded on the central bank’s strategic review. Confidence has risen but eurozone growth is expected to hover at just above 1% this year and most economists expect Christine Lagarde to leave monetary policy unchanged. (FT)
  • U.S. home sales hit their high mark for the year in December, a sign that favorable mortgage rates and low unemployment are starting to lure more house hunters back into the market. However, inventories remain very low so there is a limit to how much this helps with GDP. (WSJ)
U.S. Existing Home Sales

Macro Snippets

  • The Trump administration is going to crackdown on the sale of counterfeit products. Amazon and other e-commerce platforms are set to come under pressure as domestic U.S. warehouses and fulfillment centers will be open to scrutiny. The phase one trade deal also forces China to step up its efforts to seize pirated goods meant for export. (Investopedia)
  • Moody’s has downgraded Hong Kong’s debt rating to “Aa3” from “Aa2” and changed the outlook to stable from negative. The agency said the absence of an effective government response to the protests reveal Hong Kong’s institutions are weaker and under more constraints than previously estimated. The stable outlook reflects superior fiscal strength and consistent macroeconomic stability, it said. (Investopedia)
  • Union Pacific plans to run its railroad with nearly 3,000 fewer workers this year as the company pushes ahead with a new operating plan that runs fewer, longer trains. The strategy, known as precision-scheduled railroading, is sweeping across the U.S. freight railroading industry. (WSJ)
U.S. Rail
  • The International Energy Agency said it sees a surplus of 1 million barrels of oil per day in the first half of 2020. IEA chief Fatih Birol, speaking to Reuters, said that the “abundance of energy supply in terms of oil and gas” is the reason that neither the killing of a top Iranian general nor the civil war in Libya boosted international oil prices. (Investopedia)
  • Intel stock was at a two-decade high after the chip maker’s Q4 ’19 earnings beat expectations. Revenue was a record $20.2 billion, up 8% from last year, and $1 billion higher than October guidance. This was thanks to a 15% surge in data-centric revenue. EPS was $1.52. Intel expects record 2020 revenue of $73.5 billion and Q1 ’20 revenue of $19 billion. (Investopedia)
  • Earnings for some of the biggest tech giants come out next week, with Apple, Facebook, Microsoft, and Amazon all reporting.

That is all for now and thank you for being a subscriber!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.