The U.S. equity markets relinquished all of yesterday's gains after the already-high anxiety surrounding the COVID-19 outbreak was further kindled following the World Health Organization's (WHO) declaration that the coronavirus can be characterized as a "pandemic." As well, the turmoil in the oil markets continued surrounding the recent price war between Saudi Arabia and Russia. Optimism of a fiscal stimulus response by the U.S. that boosted stocks yesterday faded after last night's press conference by President Donald Trump was short on details. Meanwhile, the Bank of England deployed an emergency rate cut ahead of tomorrow's monetary policy decision from the European Central Bank, while expectations remain high that the Fed could further cut its target range for the fed funds rate after next week's policy meeting. Treasury yields and the U.S. dollar reversed course and finished higher, while crude oil prices and gold traded lower. In economic news, mortgage applications surged as refinancing activity hit a fevered pitch, and consumer price inflation inched higher. In light equity news, PepsiCo agreed to acquire Rockstar Energy Beverages for roughly $3.9 billion, and Dow member Boeing announced that it will draw from a $13 billion loan earlier than expected. Europe and Asia also finished lower.
The Dow Jones Industrial Average tumbled 1,465 points (5.9%) to 23,553, the S&P 500 Index fell 141 points (4.9%) to 2,741 and the Nasdaq Composite declined 392 points (4.7%) to 7,952. In heavy volume, 1.7 billion shares were traded on the NYSE and 4.2 billion shares changed hands on the NASDAQ. WTI crude oil lost $1.38 to $32.98 per barrel and wholesale gasoline was down $0.05 to $1.11 per gallon. Elsewhere, the Bloomberg gold spot price shed $10.92 to $1,638.48 per ounce, while the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.1% to 96.51.
PepsiCo Inc. (PEP $130) announced an agreement to acquire Rockstar Energy Beverages for $3.85 billion, in an attempt to capitalize on the rising demand in the energy drink category. PEP traded lower.
DXC Technology Co. (DXC $16) reported an agreement to sell its U.S. State and Local Health and Human Services business to Veritas Capital, for $5.0 billion in cash. DXC gained modest ground.
Dow member Boeing Company (BA $189) was sharply lower after it announced that it plans to draw down on a $13 billion loan that it secured January quicker than expected, as a result of the turbulence in the markets in the midst of the spreading coronavirus, according to a person familiar with the matter. BA did not comment on the report.
The stock markets gave back more than yesterday's recovery, and crude oil trimmed Tuesday's rebound, amid the lingering uncertainty regarding the economic and earnings impact of the spreading COVID-19—coronavirus—outbreak. Meanwhile, Treasury yields and the U.S. dollar were higher. The lack of detail regarding a fiscal response from President Donald Trump late yesterday appeared to exacerbate the uncertainty. Moreover, a World Health Organization (WHO) official declared the COVID-19 outbreak can be characterized as a "pandemic", further fueling the anxiety. As well, the oil price war intensified to amplify the uneasiness, while expectations of increased monetary policy actions among global central banks remain elevated, with the Bank of England (BoE) delivering an emergency rate cut, following last week's unexpected 50 basis point (bp) rate cut by the Federal Reserve, which is expected to announce another cut at its scheduled meeting next week, and ahead of tomorrow's monetary policy decision by the European Central Bank (ECB).
Schwab's Chief Investment Strategist Liz Ann Sonders provides a look at the recent turbulence in the markets in her latest article Manic Monday (Tuesday, Wednesday, Thursday, Friday), noting that the economic implications of COVID-19, and now the crash in oil prices, are significant enough to make a recession likely. She stresses that in the meantime, our advice to investors hasn't changed. For the past couple of years—given our perspective that we were entering the latter stages of the cycle—we have been pounding the table on diversification (across and within asset classes) as well as periodic/systematic rebalancing. Liz Ann adds that those tried-and-true disciplines are the closest thing an investor can get to a "free lunch" in this crazy business. Also, Liz Ann notes in her article, Panic is Not an Investment Strategy, why sometimes doing nothing may be the best response in the midst of rampant market volatility.
Mortgage applications surge as refinancing activity jumps, consumer price inflation ticks higher
The MBA Mortgage Application Index surged 55.4% last week, following the prior week's 15.1% gain. The decisive increase came as a 78.6% jump in the Refinance Index was met with a 5.6% rise for the Purchase Index. The average 30-year mortgage rate dropped 10 bps to 3.47%.
The Consumer Price Index (CPI) (chart) ticked 0.1% higher month-over-month (m/m) in February, above the Bloomberg estimate calling for a flat reading, and compared to January's unrevised 0.1% gain. The core rate, which strips out food and energy, was 0.2% higher m/m, in line with expectations to match January's unadjusted increase. Y/Y, prices were 2.3% higher for the headline rate, north of forecasts calling for a 2.2% gain and compared to January's unadjusted 2.5% increase. The core rate was up 2.4% y/y, above projections calling for it to match January's unrevised 2.3% gain.
Treasuries finished lower, as the yield on the 2-year note increased 2 bps to 0.51%, the yield on the 10-year note was up 12 bps to 0.88%, and the 30-year bond rate was 16 bps higher at 1.37%. Schwab's Chief Fixed Income Strategist Kathy Jones discusses the bond yield environment in her article, After the Fall: Why You Should Hold Bonds Even When Yields Are Low, noting that historically, there has been no better hedge against an equity market decline than long-term Treasury bonds.
For our analysis of how investors can deal with wild market swings, check out the Schwab Center for Financial Research's article, Market Volatility: Here's What You Should Know, as well as Chief Investment Strategist for Schwab's digital advice solutions, David A. Koenig's, CFA, latest commentary, Weathering Market Downturns: How Schwab Intelligent Portfolios Can Help. David notes that financial markets are volatile by nature, but a diversified portfolio aligned with your goals and risk tolerance—like one built and monitored by Schwab Intelligent Portfolios—can help smooth returns over time.
Europe and Asia fall as coronavirus and energy sector turmoil remains
European equities finished mostly lower, as the global markets continue to grapple with uncertainty regarding the impact of the spreading coronavirus. Expectations are running high that countries around the globe will deliver monetary and fiscal responses, as today the BoE announced an emergency rate cut, ahead of tomorrow's monetary policy decision from the ECB, and as expectations remain elevated that the Fed will announce another rate cut on the heels of last week's surprising 50 bp rate cut. Bond yields in the region were mixed, while an upward turn in the U.S. dollar pressured the euro and British pound. Leisure and travel-related stocks remained under pressure and the energy sector continued to fall amid the intensified oil price war between Saudi Arabia and Russia. Amid this volatile backdrop, the Schwab Center for Financial Research (SCFR) updated our outlook as discussed in our latest, Schwab Sector Views: Coronavirus Changes Our Views. We note that the coronavirus outbreak has affected global supply chains, consumer demand and interest rates. In response, we're downgrading Financials and upgrading Utilities. Also, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his commentary, Q&A on COVID-19: The Economy, Markets and What Investors Should Do, noting that rather than trying to call the bottom, a more effective way to think about investing right now is to focus more on the duration rather than the decline. He adds that markets may have further to fall, but they may not stay down for the rest of the year barring a severe pandemic.
The U.K. FTSE 100 Index was down 1.4%, France's CAC-40 Index fell 0.6%, Germany's DAX Index lost 0.4%, Switzerland's Swiss Market Index declined 0.5%, and Spain's IBEX 35 Index shed 0.3%, while Italy's FTSE MIB Index increased 0.3%.
Stocks in Asia finished mostly lower, despite the sharp rebound in the U.S. yesterday, with uncertainty regarding the impact of the spreading coronavirus continuing to drain conviction, while the recently-flared up oil price war between Saudi Arabia and Russia is exacerbating sentiment. The markets also focused on monetary and fiscal stimulus responses from governments and central banks across the globe, while Australia and Japan announced financial aid to cope with the virus outbreak. Japan's Nikkei 225 Index fell 2.3%, with the yen trimming some yesterday's decline, and Australia's S&P/ASX 200 Index tumbled 3.6% to bear market territory—a fall of at least 20% from a recent high—with the nation reporting that March consumer confidence fell. China's Shanghai Composite Index declined 0.9% and the Hong Kong Hang Seng Index decreased 0.6%, amid the uneasiness and as China announced just as the markets were closing that new yuan loans and aggregate financing—a measure of total credit issued—for February both came in south of estimates. South Korea's Kospi Index dropped 2.8%, though India's S&P BSE Sensex 30 Index nudged 0.2% higher, returning to action following yesterday's holiday break that came as the global markets posted a solid rebound. For guidance on investing in a volatile market environment, check out the Schwab Center for Financial Research's article, When You Have to Sell in a Down Market: How to Make the Best of a Bad Situation.
In addition to the European Central Bank's monetary policy decision, tomorrow's international economic calendar will offer PPI from Japan and industrial production from the Eurozone.
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