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Feb 4, 2019

Markets: China Fears Loom Over Stocks After January Surge

The Wall Street Journal.
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Markets
Good morning. I'm Amrith Ramkumar, getting you set for the week ahead in global markets.
Stock futures are flat, after the Dow posted a sixth consecutive weekly advance following strong January hiring data. We'll be keeping an eye on comments from central-bank officials this week, as well as some economic data releases rescheduled after the government shutdown.
Google parent Alphabet reports earnings after the market closes today, and GM and Walt Disney are among the big names on deck later in the week.
But first, our Ira Iosebashvili and Saumya Vaishampayan explain why fears about Chinese growth could curtail the stock market's rebound.  
 

Markets in a Minute

Markets Data
 

Overnight Developments

 

China Jitters Linger Despite Upbeat Start to 2019

By Ira Iosebashvili and Saumya Vaishampayan, markets reporters
Investors are identifying China as a key threat to the stock-market rebound, a month after warnings of a slowdown in the world’s second-largest economy rattled markets across the globe.
U.S. stocks posted their best January in decades, even after fears of spillover from a China slowdown slammed shares of Apple and other companies in the opening days of 2019. While signs the Federal Reserve would slow its pace of interest-rate increases fueled a subsequent rally, investors remain worried that China’s deccelerating economy and its trade conflict with the U.S. could derail those gains.
Chinese demand is crucial for tech behemoths, global automakers and industrial firms, and a sharper-than-expected slowdown would ripple far beyond the country’s borders. Apple’s stock recovered to post a 5.5% climb in January, but remains 28% from its highs.

U.S. industrial giants such as Caterpillar and 3M, as well as tech companies like chipmaker Nvidia, have all notched recent gains even after reporting a drag from China’s slowing economy.
Among investors’ worries is whether the Chinese government will be able to navigate slowing growth without a policy misstep that exacerbates its woes.

Case in point: the devaluation of the yuan in 2015, which authorities said was an attempt to make the currency more market-driven, fueled fears about Chinese growth that rocked markets and triggered months of destabilizing capital outflows from China. Investors will be awaiting signals that a possible meeting between President Donald Trump and Chinese President Xi Jinping will take place at the end of February.
Recent history suggests they have reason to be concerned. China fears were central to several major market drops in the last few years, when episodes of elevated concern about the stability of the country’s financial system shook prices for stocks, commodities and emerging-market assets.
While the Fed’s shift has eased fears that tightening monetary policy could squelch U.S. growth, the possible halt to rate increases has also highlighted concerns that the U.S. economy may be in a fragile state and more vulnerable to a China slowdown.
Many are also worried that China’s central bank may have less capability to deploy the massive stimulus programs that had slowed economic declines and eased investor worries in past years.
“Broadly, we are very cautious,” said Louis Lau, director of investments at Brandes Investment Partners. “We see an economy that is running out of options.”

Market Facts

  • Even with stocks steady, investors drained $15 billion from U.S. equity funds in the week ended Wednesday, according to a Bank of America Merrill Lynch analysis of data from fund tracker EPFR Global. The retreat pushed total outflows from U.S. stocks to $82 billion over the past three months, representing about 2% of the market's assets, the bank said. Investors sought safer assets, putting $9.4 billion into bond funds during the most recent week, the most since January 2018.
     
  • The last time the Nasdaq had a January as strong as it did this year was in 2001, when it rose 12%. It then fell 22% in February of that year for its third-worst month ever, according to Dow Jones Market Data. The tech-heavy index edged lower 0.2% on the first day of February Friday, after rising 9.7% in January.
     
  • On this day in 1994, without any warning, and just as investors were pouring billions of dollars into bonds, the Federal Reserve raised short-term interest rates for the first time in five years. By year-end, the Fed had hiked short-term rates by 2.5 percentage points—and Treasury bonds lost 7.8%, their worst return since 1967.

Key Events

U.S. factory orders for November are expected to rise 0.1% from the prior month. The figures will be released at 10 a.m. ET.
Cleveland Fed President Loretta Mester is scheduled to speak at the 50 Club of Cleveland Annual meeting at 7:30 p.m.
 

Must Reads

One force helping boost the stock market is faith that the Fed will leave short-term interest rates unchanged for now. PHOTO: JOHN TAGGART/BLOOMBERG NEWS
The bond rally suggests the stock rebound could reverse. U.S. stocks and bonds are rallying together, an atypical pattern that some investors worry suggests the January rebound in equities is fated to run up against a painful reversal.
Junk debt is back. Junk-rated bonds and loans are flying off the shelves again, easing recent worries that a credit-market freeze could harm the economy.
Investigators are expected to probe Deutsche Bank efforts to shed a loan to a Russian bank. Congressional investigators expect the House Financial Services Committee to examine Deutsche Bank’s efforts after the 2016 election to shed a loan it made to VTB Group, a large Russian state-owned bank.
China casts a shadow over the world’s largest index provider. MSCI last summer added stocks in China to one of its most prominent global benchmarks after it came under heavy pressure from the Chinese government.
Australia is adding muscle to regulators after a bank probe. Australia plans to hand financial regulators new powers of enforcement following a year-long probe into misconduct in the country’s banking industry, which long had a reputation for being among the world’s safest for investors.
Sanctions on Venezuela's crude are hitting the oil market in a vulnerable spot. The deepening turmoil in Venezuela is exacerbating a shortfall of dense crude oil, leaving fuel makers in the lurch and underscoring the limitations of U.S. shale.
 

What We've Heard on the Street

“The Federal Reserve just told us it isn’t planning any more rate increases. The job market may have something to say about that.”
—Heard on the Street columnist Justin Lahart
 

Stocks to Watch

Ford: The auto maker posted a 7% increase in January U.S. sales, a promising start to a year in which investors expect Chief Executive Jim Hackett to show results from his turnaround plan.
Goldman Sachs: The Wall Street firm could withhold millions of dollars in pay from former chief Lloyd Blankfein because of the scandal around a corrupt Malaysian investment fund.
Spotify: The music-streaming company is in talks to purchase podcasting giant Gimlet Media, a move that would give a boost to its narrative-audio ambitions, The Wall Street Journal reported.
Symantec: The cybersecurity firm rose 9% Friday, its largest one-day increase since Nov. 9, after raising its annual forecast and adding to its share buyback authorization.
Anadarko Petroleum: U.S. crude-oil prices closed at their highest level since Nov. 19 on Friday and have rebounded so far this year on signs of steady demand and curtailed supply from large producers. The rally has boosted energy companies like Anadarko.
Papa John’s: Investment firm Starboard Value is making a $200 million investment in the troubled pizza chain and its CEO is becoming chairman.
Correction: Shares of 1-800-Flowers.com surged 20% Thursday to $15.95, their highest close since January 2002. Friday's stocks to watch incorrectly said the closing price was $2.61.

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