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Beyond the Numbers

Traders May Go Bargain Hunting Following Recent Sell-Off
3/17/2020 8:56 AM

The major U.S. index futures are currently pointing to a higher open on Tuesday, with stocks likely to regain some ground following the sell-off seen in the previous session.

Bargain hunting may contribute to initial strength on Wall Street as some traders look to pick up stocks at reduced levels on the heels of recent weakness.

The Dow saw its biggest percentage drop since the stock market crash of 1987 on Monday, as traders shrugged off the Federal Reserve’s decision to slash interest rates in an effort to contain the economic fallout from the coronavirus pandemic.

Positive sentiment may also be generated in reaction to President Donald Trump’s pledge to support industries that have been hit particularly hard by the outbreak, such as airlines.

“The United States will be powerfully supporting those industries, like Airlines and others, that are particularly affected by the Chinese Virus. We will be stronger than ever before!” Trump said in a post on Twitter.

Buying interest may be somewhat subdued, however, as traders continue to worry about the economic impact of the coronavirus outbreak and the likelihood of a global recession.

Stocks moved sharply lower during trading on Monday, more than offsetting the strong gains posted last Friday in the worst day for the markets in over thirty years.

With the sell-off on the day, the Dow fell to a new three-year closing low and the Nasdaq and the S&P 500 ended the day at their worst closing levels in over a year.

The major averages saw further downside going into the close, finishing the session just off their worst levels of the day. The Dow plunged 2,997.10 points or 12.9 percent to 20,188.52, the Nasdaq plummeted 970.28 points or 12.3 percent to 6,904.59 and the S&P 500 tumbled 324.89 points or 11.9 percent to 2,386.13.

Stocks initially came under pressure as traders cashed in on last Friday's strong gains amid escalating concerns about the economic impact of the coronavirus pandemic.

Central banks around the world, including the Federal Reserve, are taking steps to provide economic stimulus to combat the effects of the virus, but the moves only seem to be exacerbating concerns about the impact of the outbreak.

On Sunday, the Fed took the unusual step of slashing interest rates by 100 basis points just days ahead of its scheduled monetary policy meeting this week.

The Fed lowered the target range for the federal funds rate to zero to 0.25 percent from 1 to 1.25 percent, noting the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the U.S.

The central bank said it expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

In addition to cutting rates, the Fed also announced a new quantitative easing program, revealing plans to increase its holdings of Treasury and mortgage-backed securities by at least $700 billion.

"The Fed's decision to slash interest rates to near-zero won't stop the economy falling into a recession, but the package of liquidity-boosting measures will help prevent credit markets seizing up, reducing the risks a deeper downturn," said Michael Pearce, Senior U.S. Economist at Capital Economics.

He added, "We expect the Fed to do whatever it takes to keep markets functioning smoothly, and to announce further QE & forward guidance to support demand should the crisis worsen significantly."

The drastic moves by the Fed have raised some concerns that central banks around the world will run out of ammunition to deal with a deepening crisis.

Stocks saw further downside in late-day trading after President Donald Trump suggested the coronavirus pandemic would not be under control until July or August.

In a sign of the economic impact of the outbreak, the New York Fed released a report this morning showing New York manufacturing activity unexpectedly contracted in the month of March.

The New York Fed said its general business conditions index plunged to a negative 21.5 in March from a positive 12.9 in February, with a negative reading indicating a contraction in regional manufacturing activity.

Economists had expected the general business conditions index to show a much more modest decrease and remain positive at 4.0.

The steeper than expected represented the largest point decrease on record and dragged the index down to its lowest level since 2009.

Despite the Fed slashing interest rates, rate-sensitive commercial real estate and housing stocks showed substantial moves to the downside on the day.

Reflecting the weakness in the sectors, the Dow Jones U.S. Real Estate Index and the Philadelphia Housing Sector Index plunged by 17.4 percent and 17.8 percent, respectively.

Banking stocks also moved sharply lower on the day, dragging the KBW Bank Index down by 16.2 percent to its lowest closing level in well over three years.

Software, energy, chemical, and steel stocks also saw considerable weakness, reflecting another broad based sell-off on Wall Street.

Gold stocks were among the few groups to buck the downtrend, with the NYSE Arca Gold Bugs Index spiking by 7.9 percent. The strength in the sector came despite a steep drop by the price of gold.

Commodity, Currency Markets

Crude oil futures are inching up $0.10 to $28.80 a barrel after tumbling $3.03 to $28.70 a barrel on Monday. Meanwhile, after plunging $30.20 to $1,486.50 an ounce in the previous session, gold futures are slipping $2.40 to $1,484.10 an ounce.

On the currency front, the U.S. dollar is trading at 106.98 yen compared to the 105.83 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is valued at $1.0980 compared to yesterday’s $1.1183.

Asia

Asian stocks seesawed on Tuesday before ending mixed after a White House adviser said the United States could pump $800 billion or more into the economy to minimize the economic damage from the coronavirus outbreak.

There were also reports that EU finance ministers are planning a coordinated economic response to contain the virus amid fears of a global recession.

The Philippines shut its markets "until further notice" after the country's benchmark PSE Composite Index plunged almost 8 percent on Monday.

Trading was suspended "to ensure the safety of employees and traders in light of the escalating cases of the coronavirus disease (COVID-19)," the Philippine Stock Exchange said in a statement on its website.

Chinese shares ended a choppy session modestly lower. The benchmark Shanghai Composite Index eased 9.61 points, or 0.3 percent, to 2,779.64 as China reported 21 new cases of coronavirus along with 13 new deaths.

All but one of the new confirmed cases were brought into the country by citizens returning from abroad. Hong Kong's Hang Seng Index advanced 200.16 points, or 0.9 percent, to 23,263.73.

Japanese shares recovered from an early slide to finish marginally higher after economy minister Yasutoshi Nishimura said the government would consider tax cuts and other measures to battle the damage from the virus outbreak.

Fund constraints also eased after the Bank of Japan offered $30.27 billion in its 84-day dollar funding operation. The BOJ's cash injection came after the world's six major central banks took a joint step to provide more cash dollars on Sunday.

The Nikkei 225 Index fell over 3 percent in early trading on fears over the coronavirus pandemic before ending the session up 9.49 points, or 1 percent, at 17,011.53. The broader Topix jumped 2.6 percent to 1,268.46.

Automaker Honda Motor rose over 1 percent, Toyota Motor surged 7 percent and Nissan Motor added 2.4 percent as the dollar gained versus the yen and the euro. Sony rallied 3.6 percent and gaming giant Nintendo soared 5.9 percent.

Japanese industrial production rose a seasonally adjusted 1.0 percent month-on-month in January, a government report showed today. Economists had expected an increase of 0.8 percent. On a yearly basis, industrial production declined 2.3 percent in January.

Australian markets rebounded from their largest fall on record. The benchmark S&P/ASX 200 surged up 291.40 points, or 5.8 percent, to 5,293.40, the largest one-day gain, after plummeting nearly 10 percent on Monday. The broader All Ordinaries Index spiked 274.60 points, or 5.4 percent, to 5,332.80.

The release of minutes from the Reserve Bank of Australia's meeting in early March showed that members feared the coronavirus would cause major disruption to economic activity around the world.

The board judged that low interest rates for an extended period of time would be required in order to meet employment and inflation targets.

Separately, official data showed that house prices in Australia were up 3.9 percent sequentially in the fourth quarter of 2019. That was shy of expectations for an increase of 4.5 percent but up from 2.4 percent in the three months prior.

The big four banks rallied 7-13 percent, while miners BHP, Fortescue Metals Group and Rio Tinto jumped 7-12 percent.

Gold miners Evolution and Newcrest soared 8-10 percent despite gold prices declining overnight. Regis Resources shares jumped 18.6 percent.

Meanwhile, Santos tumbled 5.3 percent after announcing it is reviewing all capital spending plans following the collapse in oil prices. Qantas Airways lost 5.3 percent on news it will cut its international flights by 90 percent from the end of March until the end of May.

Seoul stocks lost ground despite the Bank of Korea slashing interest rates by 50 basis points in an emergency meeting. The Kospi ended down 42.42 points, or 2.5 percent, at 1,672.44.

Europe

European stocks have given up early gains to turn lower on Tuesday as coronavirus worries offset expectations of more stimulus.

A White House adviser said the United States could pump $800 billion or more into the economy to minimize economic damage from the coronavirus outbreak.

EU finance ministers are planning a coordinated economic response to the virus, which the European Commission says could push the European Union into recession.

The G7 leaders have pledged to do "whatever is necessary" to fight the coronavirus pandemic, ranging from deploying fiscal measures to supporting efforts to develop a vaccine.

"We are committed to doing whatever is necessary to ensure a strong global response through closer cooperation and enhanced coordination of our efforts," the leaders said in a joint statement.

While the French CAC 40 Index has slid by 0.9 percent, the German DAX Index and the U.K.’s FTSE 100 Index are down by 1.2 percent and 1.3 percent, respectively.

Ferguson has nosedived after the specialist distributor of plumbing and heating products reported lower pre-tax profit for the half year, reflecting impairment and exceptional charges, with slight growth in revenue.

Airbus SE shares have also slumped. The company said that it has decided to temporarily pause production and assembly activities at its French and Spanish sites across the company for the next four days.

The move follows the implementation of new measures in France and Spain to contain the COVID-19 pandemic.

GEA Group shares have also plummeted after the company reported a loss of 170.7 million euros for fiscal 2019 compared to profit of 113.5 million euros in the previous year.

Car maker Volkswagen Group has also tumbled after it warned of a difficult year ahead due to the coronavirus pandemic.

Wacker Chemie has also shown a notable move to the downside. For 2020, the company expects to increase sales by a low-single-digit percentage.

On the other hand, Antofagasta has surged higher after the company reported profit before tax of $1.35 billion for the year ended December 31, 2019, compared to $1.25 billion in the previous year.

Dixons Carphone has also soared. The electrical and telecommunications retailer and services company has decided to close its 531 standalone Carphone Warehouse stores in the U.K.

U.S. Economic Reports

Partly reflecting a steep drop in sales by gas stations, the Commerce Department released a report on Tuesday showing an unexpected decrease in U.S. retail sales in the month of February.

The Commerce Department said retail sales fell by 0.5 percent in February after climbing by an upwardly revised 0.6 percent in January.

The pullback came as a surprise to economists, who had expected retail sales to edge up by 0.2 percent compared to the 0.3 percent increase originally reported for the previous month.

Excluding a decrease in auto sales, retail sales still slid by 0.4 percent in February after rising by an upwardly revised 0.6 percent in January. Ex-auto sales had been expected to tick up by 0.2 percent.

The Federal Reserve is scheduled to release its report on industrial production in the month of February at 9:15 am ET. Industrial production is expected to rise by 0.4 percent in February after falling by 0.3 percent in January.

At 10 am ET, the National Association of Home Builders is due to release its report on homebuilder confidence in the month of March. The housing market index is expected to edge down to 73 in March from 74 in February.

The Commerce Department is also scheduled to release its report on business inventories in the month of January at 10 am ET. Economists expect business inventories to dip by 0.1 percent.

Stocks In Focus

Shares of Regeneron Pharmaceuticals (REGN) are moving sharply higher in pre-market trading after the biotechnology company said it could begin human trials of a potential coronavirus treatment by early summer.

Coupa Software (COUP) is also seeing significant pre-market trading after reporting fourth quarter results that exceeded analyst estimates.

Meanwhile, shares of Michaels (MIK) may come under pressure after the arts and crafts retailer reported better than expected fourth quarter earnings but provided guidance that does include the impact from the coronavirus outbreak.
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