277The median and percentile columns measure the performance of each factor in the Two Sigma Factor Lens relative to the entire history of the factor in USD, using monthly data for the period March 1995 - January 2020.

 

Market Summary

  • A number of geopolitical events rocked markets in January, but the most notable was the outbreak of the novel coronavirus in China. Here’s a timeline of major market events last month:
    • The January 3rd assassination of a top Iranian military leader contributed to a brief spike in oil prices due to concerns of a broader conflict erupting in the Middle East.1
    • On the 15th, the U.S. and China signed the phase one trade deal negotiated in December, which helped to reduce tensions between the two countries.2 
    • Markets were preoccupied during the second half of the month by a rapidly increasing number of reported cases of the novel coronavirus in China, which began spreading to other countries.3 The outbreak coincided with the Lunar New Year, negatively impacting forward-looking growth expectations for China.
    • The U.K. officially left the European Union on the 31st, kicking off trade negotiations that are expected to be finalized by year-end.4

 

Impact on the Factors in the Two Sigma Factor Lens

  • These events, most notably the coronavirus outbreak, contributed to a meaningful move away from risk assets, especially toward the back end of the month:
    • Global yields fell, boosting the Interest Rates factor.
    • Commodities ended the month negative:
      • While oil started the month higher (see the above bullet on the Iranian assassination), it lost all of its gains as news of the coronavirus greatly reduced travel and therefore oil demand in China.5
      • Gains in precious metals provided a cushion.
    • Global Equity markets were lower. 
    • The spread between Value and Momentum continued its longer term trend with Value stocks suffering as investors rotated out of cyclical stocks into more defensive, Low Risk, names.6 Momentum gained as recent outperformers continued their outperformance in the risk-off move.
    • Traditional safe-haven currencies, like the USD and JPY, gained, putting pressure on the Foreign Currency factor in the USD factor lens.


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REFERENCES

1Source: WSJ article “Tensions Rise in the Middle East After U.S. Killing of Iranian Military Leader” on January 3, 2020.

2Source: CNBC article “Trump signs ‘phase one’ trade deal with China in push to stop economic conflict” on January 15, 2020.

3Source: The New York Times article “Coronavirus Death Toll Climbs in China, and a Lockdown Widens” on January 23, 2020.

4Source: The New York Times article “U.K. Leaves E.U., Embarking On an Uncertain Future” on January 31, 2020.

5Source: Reuters article “Oil falls 2% as specter of China virus threatens fuel demand” on January 22, 2020.

6The correlation between Value and Low Risk for the 6 months ending in January 2020 is -0.4 versus its long-term historical average of +0.6.

 

This article is not an endorsement by Two Sigma Investor Solutions, LP or any of its affiliates (collectively, “Two Sigma”) of the topics discussed.  The views expressed above reflect those of the authors and are not necessarily the views of Two Sigma. This article (i) is only for informational and educational purposes, (ii) is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice, and (iii) is not a recommendation as to any portfolio, allocation, strategy or investment.  This article is not an offer to sell or the solicitation of an offer to buy any securities or other instruments. This article is current as of the date of issuance (or any earlier date as referenced herein) and is subject to change without notice. The analytics or other services available on Venn change frequently and the content of this article should be expected to become outdated and less accurate over time.  Two Sigma has no obligation to update the article nor does Two Sigma make any express or implied warranties or representations as to its completeness or accuracy. This material uses some trademarks owned by entities other than Two Sigma purely for identification and comment as fair nominative use. That use does not imply any association with or endorsement of the other company by Two Sigma, or vice versa. See the end of the document for other important disclaimers and disclosures. Click here for other important disclaimers and disclosures.

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