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The commentary in Market View was issued recently by investment management and research firms and market newsletter writers. Comments have been excerpted and edited by Barron’s but should not be considered the views and recommendations of Barron’s.
Will S&P 2800 Be the Floor?
Daily Insights
by BCA Research
Feb. 27: BCA Research’s Global Growth Sentiment Indicator tries to capture how pessimistic or optimistic investors’ expectations are of global growth. It includes sentiment on copper and bonds, as well as the earnings-revision ratio for cyclical relative to defensive equities.
The end of the selloff in stocks is close, but we are not there yet. The Global Growth Sentiment Indicator is showing that pessimism is prevalent, but it has not hit the levels historically associated with a bottom in sentiment. This suggests that the
S&P 500
index could have a bit more downside before bottoming, especially as the price/earnings ratio for the U.S. equity benchmark still stands at 18. Moreover, transport stocks—often a bellwether for the overall market—continue to fall abruptly. Thus, in the absence of a turnaround in the number of new cases of Covid-19 outside of China, the S&P 500 can fall toward 2800 before finding a firmer footing.
—Mathieu Savary, Aneel Samra
Dollar’s Gain, Euro’s Pain
Forex Economics and Strategy
by National Bank of Canada
Feb. 27: The Covid-19 epidemic threatens to throw global economic growth off the rails. We expect the U.S. dollar to remain strong, if not strengthen, over the near term as its haven properties, which helped the greenback last year amid concerns surrounding the U.S./China trade war, continue to offset the impact of unfavorable interest-rate differentials.
As if the slowdown in global trade wasn’t taxing enough on the euro-zone economy (which is a major exporter), it now has to face Covid-19. With its relatively high global-value-chain participation, an already feeble euro zone will be among the worst hit by virus-related production shutdowns. The zone’s tourism sector will also struggle, as visitors cancel travel plans amid the virus scare. In light of the increased likelihood of intervention from the European Central Bank, we have lowered our targets for EUR/USD, with the euro now expected to reach $1.03 by year end.
—Stéfane Marion, Krishen Rangasamy
Hedge Funds Purge Equities
Americas Daily Research Summary
by Nomura Instinet
Feb. 25: We think it is looking very likely that the main culprits in panic selling of developed-market equities were fundamentals-focused hedge funds. Recently, equity exposure for hedge funds overall has plummeted, with the main driver being equity long/short funds and global macro hedge funds unloading long equity positions. Discretionary investors had been picturing a V-shape recovery in the global economy and corporate earnings, but confronted with the surge in Covid-19 infections, many are now being forced to drastically change their strategies. While the selling could be an overreaction, the situation is suggestive of global macro hedge funds and long/short funds turning to trades that prepare for a global recession.
—Masanari Takada
Chinese Shoppers Fade
China Flash
by Mercator Institute for China Studies
Feb. 26: Globalization “made in China” is coming under pressure. The weakness of Chinese consumer demand in the first quarter of the year was shocking. Sales figures for iPhones or cars, for example, were disastrous—so bad, in fact, that later improvements probably won’t make up for them. Global companies reliant on China will have to brace for sizable revenue slumps in 2020.
Another cause for concern are the potential long-term effects of economic paralysis that will be clearly felt into the second quarter. There is a real danger that “clogged arteries” caused by supply-chain failures will lead to seizures in entire industrial sectors like the electronics industry. Small and medium-size enterprises are particularly vulnerable.
—Mikko Huotari
Savvy Mortgage-Backed Move
Blog: Investing Insights at William Blair
by William Blair
Feb. 25: The decline in the federal-funds rate has led to lower interest rates on new and refinanced mortgages. That’s great for consumers, and they’re taking advantage of the boon. The Mortgage Bankers Association’s weekly indexes show that applications to refinance an existing mortgage are up sharply this year, and applications to purchase a home are strong and steady.
Mortgage-backed-securities, or MBS, investors aren’t quite as thrilled, because they face two primary risks: prepayment risk (getting your money back rapidly and being forced to reinvest at lower rates) and extension risk (earning below-market income for a longer period than expected).…
Moreover, the effect of these refinancings is the creation of net new supply of MBS. We believe that net new supply will range from $220 billion to $300 billion in 2020, and the fixed-rate coupons will range from 2% to 3%. This significantly increases the interest-rate risk and market-value volatility of approximately 80% of the MBS market.…
We mitigate prepayment risk by employing U.S. agency-specified pools that are composed of mortgage loans from borrowers that have taken out small balances to purchase their homes. We believe that targeting low loan balances is an effective strategy because a borrower may decide that the savings on the monthly mortgage payments at a lower rate may not be enough to justify the expense to refinance.
—Paul Sularz
South Carolina Voter Concerns
Special Commentary
by Wells Fargo Securities
Feb. 24: South Carolina holds the fourth nominating contest of the Democratic presidential primary, on Feb. 29. The primary may very well set the tone for Super Tuesday, which follows just three days later on March 3.…In 2016, Donald Trump won South Carolina 54.9% to 40.8%, or 1,143,611 to 849,469. Only 16 of the 46 counties voted for Hillary Clinton, but that included the state’s second-largest (Richland, part of the Columbia metro area) and the third largest (Charleston) counties.…
South Carolina often serves as a barometer of how well candidates can do in racially diverse states, and its larger metro areas tend to have a much higher proportion of college-educated residents and are more ethnically and racially diverse. Its high proportion of manufacturing jobs and exposure to the automotive industry means that trade and industrial policy will be important to voters, while it also has a lot of hourly paid workers who will be interested in minimum-wage laws. While South Carolina’s future is more closely tied to international trade, there are still plenty of residents who remember how Nafta and the expansion of trade with China decimated the state’s textile industry. Many of these residents live in the state’s rural areas, as well as much of the upstate.
Additionally, South Carolina’s growing status as a retiree destination means that health-care policy will remain important to many voters.
—Mark Vitner
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