February 29, 2020 / 12:58 AM / a month ago

Investors look to China data, U.S. infection spread after punishing week

NEW YORK, Feb 28 (Reuters) - The worst weekly selloff since the financial crisis plunged U.S. equities into correction territory and knocked trillions off their market capitalization. Investors are now struggling to discern what Monday will bring.

Many believe the next few days will reveal critical information on whether the outbreak is accelerating in the United States, the degree to which the government is prepared to deal with an epidemic, and the economic damage it has already wrought on other countries.

"Right now the market is saying that this is unbounded. We don't know what the limits are and we don't know where it's going to peak," said Graham Tanaka, chief investment officer at New York-based Tanaka Capital.

One key insight comes Friday night U.S. time, when China is due to release its Purchasing Managers' Index, a widely-watched measure of economic activity.

The February data will provide the first real look at how a period of mass shutdown and restrictions on movement impacted the economy at the epicenter of the coronavirus outbreak, said David Joy, chief market strategist at Ameriprise Financial.

China's last report showed a reading of 53 for January, well above the 50 level that separates growth from contraction. Joy expects the number to be far weaker for February. The question is how weak.

"If it's a number below 40, that would be significant in terms of a reflection of just how weak economic activity has been recently in China," said Joy. Above 40, he said, "would tell me that, 'Boy, things are tough but maybe not disastrous.'"

Others are looking to the United States, where the outbreak and efforts to prepare for its possible spread have become political during a presidential election year.

The White House has played down the crisis and described the high level of news coverage as a ploy to hurt President Donald Trump's efforts to secure a second term.

"The next line in the sand is if we see cases expand in the U.S.," said Jack Janasiewicz, portfolio manager and strategist at Natixis Investment Managers Solutions.

Signs that Japan could cancel its 2020 Summer Olympics--after years of preparation and some $12 billion in investment--would be another unwelcome development, Janasiewicz said.

The International Olympic Committee has said it is committed to holding the Games on schedule.

Tanaka, of Tanaka Capital, said he is closely watching the U.S. response, including whether the government has been able to secure more kits to test for the virus.

Employees at his firm are prepared to work from home should any patients be found in New York City itself, he said.

He has trimmed his position in shares of Tesla Inc and sold all his energy sector holdings as crude prices plummeted. But he continues to hold airline stocks JetBlue Airways Corp and Alaska Air Group Inc despite concerns about travel demand.

Others are looking to the government bond market, a popular destination for nervous investors. Yields on the U.S. 10-year Treasury note, which move inversely to prices, hit an all-time low Friday.

Nervousness over coronavirus appeared to register in the bond market before it was felt in U.S. stocks, which stood at a record high earlier in February.

"The bond market is what brought us here, and the equity market has caught up with a vengeance," said Quincy Krosby, chief market strategist at Prudential Financial. "If the 10-year Treasury yield is higher before the open, if we see yields edging higher in Europe, that would suggest that (concerns have) eased a bit." (Reporting by David Randall, Lewis Krauskopf and April Joyner; Editing by Ira Iosebashvili and Daniel Wallis)

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