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Episode 17: Super Tuesday and the US 10 year

Episode 17 - Part 1

Super Tuesday – Votes, Viruses, and Volatility

Published on: March 3rd, 2020 • Duration: 6 minutes

In this episode, we talk about the highly anticipated Super Tuesday. Markets are looking for certainty, and Botta discusses how multiple contenders for the nomination like Bernie Sanders and Joe Biden could sway markets into predicting the possibility of a brokered Democratic convention and how the Election will play out. We then turns your attention to Continental’s upcoming earnings report and how the numbers can give investors a glimpse into the construction sector. Finally, we follow up on the previous episode’s thoughts on buying the dip.

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06:00
  • This is Before and After from Refinitiv. I'm your host, Johanna Botta. This week, we'll be covering the all-important Democrat Super Tuesday. We'll also be discussing the German automotive manufacturing giant Continental. And in the After section we'll be reporting on 'Buying The Dip'. 

    This Tuesday, March 3rd could be the day that Trump's opponent in the 2020 Precedential Election gets sorted out. 1,341 delegates from over a dozen states are up for grabs on Super Tuesday. That's a fifth of the total delegates, and therefore really sets the momentum for the winner. Oddly, there is a pattern to U.S. stock behavior both leading up to and after the event. Since 1996, the S&P500 has traded down an average of 0.7% the week before Super Tuesday. And often a rebound is imminent as the result, is sorted. In 2012, the S&P500 dropped 2% in the five days leading up to Super Tuesday. Then Mitt Romney was the clear winner and the market ran up 4% the following week. But this is no ordinary market with Coronavirus fears providing all the news catalyst the markets would ever need or want. And so we might not have as clear cut a case with this Super Tuesday, but it is nonetheless worth analyzing the different scenarios of victors and market reactions. The knowledge we get from the Super Tuesday market tells could prove to be valuable for the rest of 2020's election campaign, of which this is just the beginning. After winning the Nevada Primary, Bernie Sanders was riding high, but Joe Biden could be back in the running after scoring a thundering victory in South Carolina's Democratic primary. And so the reality of a much less clear outcome seems to be gaining traction ahead of Super Tuesday. As the Democratic kingmakers shudder at the thought of Democratic socialists being their nominee. It's become a team affair to derail Bernie Sanders. The odds of the primary season not proving conclusive with a clear cut winner seems to be rising. Odds on Predictit, a political futures market, had the yes contract for the question, "Will the Democrats have a brokered convention in 2020?" at 54%. A brokered convention would be the worst case scenario for the markets in terms of no resolution being negative. Also a super rare occurrence as the last one happened 70 years ago. For that to happen, it would mean that no single candidate gets a majority of delegates. This becomes an increasing possibility as more options stay in the race, which is what is happening now with Bloomberg's late emergence, Pete Buttigieg dropping out of the race, and Biden's surprise victory in South Carolina. Bernie Sanders needs a decisive victory for the market to take the brokered convention uncertainty into the market. The market is looking for something predictable to latch on to, and a decisive Sanders victory could be a spark. He's also viewed as the easiest win for Trump in the general election, which should be a relief to those afraid of Bernie's anti-Wall Street stance, which includes stock transaction taxes. Anything less than clarity, and Super Tuesday would just add more uncertainty in a year where there's almost no guessing next week, much less what's in store months from now. 

    This week, we'll get a very important earnings report from the German tire maker Continental. The auto industry has been one of the key pain points for global manufacturing, and Continental is a bellwether for the industry, as it's completely global and customers in a very central player in Europe. It manufactures tires and auto parts for cars, trucks, motorcycles, as well as construction vehicles. So baked into that earnings report will also be a snippet of the construction industry. With over 500 locations in 60 different countries you can see the strategy is truly one dependent on globalization to function. Continental earns half its revenue in Europe and the other split between North America and Asia. For this report, we're looking at 1.59 a share, a number which has been set low and would be by far the lowest earnings per share. The first quarterly EPS below 2 since November 2016. 2019 was challenging as Continental expects the decline in the global production of passenger cars and light commercial vehicles to be about 6% year on year. All the bad news is most likely priced in. Coming off a horrible auto market compounded by supply disruptions and the Coronavirus Black Swan, the collapse of Continental AG's stock has been spectacular, down 61% from highs made an early 2018. 

    This last week was as harrowing as any market environment since the Great Financial Crisis. Many are looking to get long and it's premature to do an After for 'Buying The Dip', but on Friday, after our last episode, J Powell made a strong statement to support the market, and the S&P rallied at 2% off the lows in the last hour of trading right after the statement. Of course, Central Banks can't cure the disease and invigorate people to spend money and leave their houses, but in the short run, sometimes all that is needed is a reassurance that the powers that be will do what it's in their arsenal to help the situation. Over the weekend, many economists upgraded their case for a Fed cut of 50 bps in March, and perhaps a coordinated one before the meeting should the markets continue to meltdown. 

    So there it is, Super Tuesday and Continental in the Before, and BTD in the After. Refinitiv data throughout. This has been the Tuesday episode of Before and After. Please subscribe and hit the notification bell to ensure that you're alerted to all of Refinitiv's future market updates. Have a great week and we'll see you on Friday. 

Episode 17 - Part 2

Is the US 10 year now more spectacular than the collapse in equities?

Published on: March 6th, 2020 •

In this episode, we take a look at the U.S. 10-year and speculates about whether this is more striking than the collapse in equity markets from the spread of coronavirus. Will coronavirus move the U.S. market from a state of disinflation to deflation? We then talk about the upcoming U.S. Non-farm payrolls—investors will need to look and see if this strong datapoint has been affected by coronavirus at all. Finally, we discuss the results of Super Tuesday.

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05:52
  • This is Before & After from Refinitiv. I'm your host, Johanna Botta. This week, we'll be looking at the U.S. 10 Year Bond Yields and the all-important U.S. Non-Farm Payrolls. And in the After section, we'll be reporting on Super Tuesday. 

    Before we break 1% in the U.S., 10 Year, is 0% the end game? Well, obviously, we have now broken 1% with a low of 90 basis points earlier this week. But despite the spectacular collapse of equity prices worldwide, you could argue that the move in the U.S. 10 Year is even more of a spectacle and has more long term consequences and ramifications than the Coronavirus stock sell-off. This long term chart of the U.S. 10 Year and the German 10 Year Bund, show how the two bond yields diverged over the last five years after tracking for decades. Now, the U.S. Treasury Yield looks to play catch up as the 10 Year challenges the 1% level. But does that mean that the U.S. 10 Year will like the Bund one day in the not so distant future break 0% and offer negative rates? Well, they certainly won't be the only bonds with negative yields, as over 14 Trillion of investment grade debt is priced below zero worldwide. So what are these yields screaming at us? Perhaps they're saying that the economy will not grow as people had expected before the virus. Is the Coronavirus Black Swan the impetus to push the U.S. from disinflation to the sort of deflation we have seen in developed markets such as Japan in the last decade? Earlier this week, the market had a hyper-bounce on Monday as expectation of emergency coordinated central bank action, including a 50 Basis Point Cut from the Fed would be announced. And the market expectation was proved correct as the Fed announced 50 BPS. the next day and Canada swiftly followed with a 50 BPS cut of its own. U.S. Yields have been gyrating around 1%, but are still way off German Bund Yields, which are at around negative 60. What is interesting is that although the equity markets were rallying, the 10 year treasury yield made a bottom in yields for the day and bonds sold off as stocks were bid to the moon. Further cuts from the Fed are quickly becoming priced in by the market, but how quickly? And will the collapse of Treasury yields force the Fed's hand by creating a cascade and stocks? Sort of a self-fulfilling, vicious circle. 

    This Friday, we will perhaps begin to see how February's Coronavirus scare has affected the U.S. hiring through the form of Non-Farm Payrolls. U.S. jobs reports were the last bastion of economic strength that hasn't succumb to what was already a global economic malaise before the breakout. However, it's not realistic to assume that the economy can keep adding 150,000 jobs a month, while the GDP grows sub 2% and likely lower for the first half of 2020. Last month was a massive beat coming into 225,000 non-farm jobs added. Could that be the end of an era in this unmitigated job expansion of the last several years? The next report is expecting 175,000 added in February, although this is a backwards looking data point. Beware, because the risks to the downside are higher than they have been. In light of the 50 Basis Point cut this week from the Fed, all economic data must now be viewed from the prism that bad numbers are bad for the markets. The silver lining that further cuts will come is less important than the actual real carnage in the economy. This Friday set of employment numbers represents the first big numbers post cut. However, it's the market reaction that matters at this point. Bottom line, a deep sell off and by deep, I mean 2% or more in the S&P, would be a good guidepost to how the market will receive negative economic data. It will also serve as a good read on what the Fed tantrum crowd would be looking for as the next accommodative steps. 

    Politics is truly a strange game. Just when everyone, including us, counted Joe Biden out, he returned on Super Tuesday to capture the majority of delegates. This came after notable candidates like Pete Buttigieg dropped out to endorse Mr Biden. Biden won 9 states to Sanders 4 on Super Tuesday. Mike Bloomberg's campaign crashed and he now is also out of the running. Political futures market PredictIt priced Biden as a likely Democratic nominee at just over 71% in the wake of Super Tuesday. And the stock futures ripped higher, up over 2% in the pre-market. Now, with the current volatility, these types of bounces can happen based on technical factors as well. We know that Biden at face value is likely to be kinder to Wall Street and the financial community. So that at least is probably a reason for optimism. But just as Super Tuesday flipped things on a Dime, this is hardly over and we need to pay attention. Going forward, though, it's safe to say that one should play the Biden bid bullish and Bernie bearish. 

    So there it is. U.S. 10 Year and Non-Farm Payrolls in the Before, and Super Tuesday in the After. Refinitiv data throughout. This has been the Friday episode of Before and After. Please subscribe and hit the notification bell to ensure that you're alerted to all of Refinitiv's future market updates. 

    Have a great weekend and we'll see you on Tuesday.