Big China Tech to return to work on Feb 10th, Part of the curve inverted, eyes on Apple, Oil’s tumble continues, Gold ETF signals potential top
US stocks are looking at a positive open, rebounding after the worst day since October. The coronavirus continues to spread as the amount of cases surge over 4,500 and the death toll rises to 106 people. The market selloff is easing as expectations grow that we could see some Chinese businesses return to normal after many tech firms announced an office return date of February 10th. Currently employees from Baidu, Alibaba, and Tencent are keeping employees at home, but we should not be surprised if this tentative return date gets pushed back.
Treasuries
Global investors favorite trade yesterday took benchmark US Treasury yields to a three-month low. The 10-year Treasury yield broke below 1.60%, the lowest level since early October. The three-month, 10-year yield curve flattened to just 3 basis points. The 3s10s curve seems destined to return to inverted territory for the first time since October. The yield curve between the less followed two-year and 5-year notes inverted yesterday but has since climbed back to positive territory.
Apple
Apple will report after the close and expectations are high for strong iPhone and wearable sales. Apple is likely to have had a strong first full quarter of iPhone 11 sales and their guidance for 2020 is likely to be strong as demand should be high for their 5G iPhone which will come out at the end of the year. A lot of the good news is already baked in Apple after the Nikkei reported the tech-giant asked suppliers to make as many as 80 million iPhones between January and June, that would be a 10% from a year ago. Apple is looking at the majority of the iPhones being made to be a part of the iPhone 11 series, while 15 million units will come from the new low-cost phone that will help them continue to grow market share in emerging phone markets. The key to a strong report will depend on if they continue to see strong revenue growth across all departments and not just iPhones.
Oil
Oil prices are attempting to show some signs of life here. With signs that we could see the return of some normalcy in China on February 10th and as Libya’s oil output is at risk of getting shutdown. The demand side impact of the coronavirus will be felt for several weeks at the very least, but it seems some optimism is growing that the virus is mostly contained in China. Some of China’s biggest tech companies announced employees could return to the office on February 10th.
Extended disruption with oil production is one risk event that should always provide a bid for crude prices. The situation in Libya is deteriorating and we could an extended military conflict see production come to a complete halt.
With travel bans firmly in place in China, demand side improvements won’t materially improve until we see the virus under control. Oil prices may stabilize here, but seem unlikely to have enough of a bullish catalyst to deliver a sustained rebound.
Gold
Gold prices are steady as Wall Street looks to rebound following Monday’s selloff. The coronavirus outbreak is triggering strong safe-haven flows that is benefiting gold prices. Investors are anticipating the coronavirus outbreak will deliver a significant economic impact for the Asia Pacific economies and that should provide gold with some underlining support for a couple more weeks.
The bullish case for gold is simple yet compelling. Gold could thrive in a low interest rate environment that is accompanied with shocks to global growth. Demand is so high for gold that holdings in gold-backed ETFs are approaching record territory. The last time holdings were around these levels was in 2012-2013, preceding the time when gold prices collapsed.
Despite some red flags with the current rally, the longer-term bullish trend for gold should remain intact. Gold may struggle in the very short-term to break above the $1,600 an ounce level, but we should not see any sustained pullbacks here.
