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MCF Weekly Capital Market Review - February 10th, 2020

Equities rebounded last week after initial worries subsided over the coronavirus outbreak. Now there are 910 confirmed deaths, surpassing that of SARS and MERS. The novel coronavirus outbreak also has infected more people with at least 40,573 confirmed cases.[1] The epicenter of the outbreak was mainland China, and given its prominence for emerging market economies, those equities have taken the biggest hit. Oil dropped over 16% from the beginning of the year on concerns of slowing demand due to the outbreak, ending the week at $50.95.[2] The risk-off environment also pushed the 10-year Treasury yield lower to 1.59% and further compressed an already compressed yield curve.[3]

China so far is following through on the Phase One trade deal commitments, cutting tariffs in half on $75 billion of US goods.[4] Another constructive sign is the public acknowledgement in Chinese state-sponsored media of the Phase One trade deal and openness for a Phase Two.[5] Neither side has announced details regarding timeline much less the number of phases, and there are still several gaping and contentious issues to address on both sides. The US wants China to address its unfair trading practices and intellectual property theft. China wants the US to address high tariffs that remain on the bulk of its exports and US constraints on expanding Chinese technologies – 5G network participation and mobile phone manufacturer Huawei.

Almost two years ago the Trump administration began its crusade against the “unfair trading practices” of China. Xi and his negotiators appeared content to draw out negotiations, perhaps waiting for a change of administration after the 2020 election. The landscape favored such a view on April 2, 2018 when China announced its first wave of counter-tariffs.[6] At that time, betting odds placed a 32% chance on Trump leaving office before his first term expired (impeachment, for example),[7] and betting odds for a 2020 Trump re-election topped out at a 40% for 2018, reaching a low of 29% by the end of the same year. As we continue through 2020, Trump’s re-election chances now sit at 60%[8] and China faces economic headwinds from the coronavirus that imperils its 5-Year plan. Both sides have shown a recalcitrant attitude to compromise and a Phase Two deal addressing even more contentious issues has every expectation of being a long, drawn out process.

Motor vehicle sales and the PMI manufacturing index both met consensus estimates. The ISM manufacturing index improved for January after six months of weaker-than-expected results. Construction spending missed for December, contracting 0.2% month-over-month. However, the ADP employment report almost doubled payroll expectations and employers added 225,000 jobs for January, both in a nod to strong labor markets.[9]

This week will feature speeches from Fed chair Powell and releases on CPI, retail sales, and consumer sentiment.

INDEX RETURNS


[9] https://us.econoday.com/byweek.asp?cust=us

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by MCF), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from MCF.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.   MCF is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the MCF’s current written disclosure statement discussing our advisory services and fees is available upon request. If you are an MCF client, please remember to contact MCF, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Please click here to review our full disclosure.

REFLECTED INDICES

S&P Composite 1500® Index combines three leading indices, the S&P 500®, the S&P MidCap 400®, and the S&P SmallCap 600® to cover approximately 90% of the US market capitalization. It is designed for investors seeking to replicate the performance of the US equity market or benchmark against a representative universe of tradable stocks. Investors cannot invest in an index.

MSCI ACWI ex USA Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 23 Emerging Markets (EM) countries. With 1,859 constituents, the index covers approximately 85% of the global equity opportunity set outside the US. Investors cannot invest in an index.

Bloomberg Barclays Global Aggregate ex-USD Index is a measure of global investment grade debt from 24 local currency markets. This multi- currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Investors cannot invest in an index.

Bloomberg Barclays High Yield Corporate Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. Investors cannot invest in an index.

Bloomberg Commodity Indices are a family of financial benchmarks designed to provide liquid and diversified exposure to physical commodities via futures contracts. The Bloomberg Commodity Index (BCOM) is a highly liquid and diversified benchmark for commodity investments.

Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed- rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass- through), ABS and CMBS (agency and non-agency). Provided the necessary inclusion rules are met, US Aggregate eligible securities also contribute to the multi-currency Global Aggregate Index and the US universal Index, which includes high yield and emerging markets debt. The US Aggregate Index was created in 1986 with history backfilled to January 1, 1976. Investors cannot invest in an index.

Bloomberg Barclays 1-10 Year US Government Inflation-Linked Bond Index tracks the 1-10-year inflation protected sector of the United States Treasury market. Investors cannot invest in an index.

Bloomberg Barclays US Treasury 1-3 Year Index measures the performance of public obligations of the US Treasury with maturities of 1-3 years, including securities roll up to the US Aggregate, US Universal, and Global Aggregate Indices. Investors cannot invest in an index.

Bloomberg Barclays US Treasury Bellwethers 3 Month Index is an unmanaged index representing the on-the-run (most recently auctioned) US Treasury bill with 3 months’ maturity. Investors cannot invest in an index.