Coronavirus reprieve running out of steam?
Global risk sentiment has decided to cap gains during Asia across the board, with Coronavirus running at breakneck speed in terms of infection levels, deaths and travel precautionary measures. Overnight, we saw S&P 500 and Nasdaq futures close Monday’s gap down, but ultimately fail to move higher as CoV news flow intensified.
CSI 300 and Hang Seng has been the exception, plunging 3% – 3.5% upon return from Chinese New Year celebrations. Walking into the open, FTSE and DAX point marginally higher according to European futures. But still look fairly susceptible to a step down back into weekly lows.
Looking at macro recession hedges, Gold inches higher to US$1,670, while USDJPY almost reclaims the 108 handle. And so, even though markets have finished in the green, there’s certainly still a strong sense of fear lingering in the air and explicit reticence to fully allow any risk-on move to evolve.
The Fed’s January rate decision will be a welcomed distraction, but ultimately should fall on deaf ears given little risk of change. Though, it’s worth monitoring whether Powell adopts a dovish tone in light of nCoV uncertainties, and how the Fed treat an IOER hike.
In the thick of company earnings
If there’s anything that can take the focus away from Coronavirus fears – it’s most likely going to be in the shape of US reporting season. Right now, markets are in the thick of earnings and have already caught some majors report, with several more still to come.
The hopes of equity bulls were seen resting on the shoulders of Apple (AAPL), the 1.39trn market-cap tech stock. And of course, Apple didn’t disappoint, finishing 1.5% higher in extended trading following record Q1 revenue numbers fuelled by strong iPhone and wearables demand. While risk sentiment ostensibly appears to be hanging on judging by today’s positive session, markets continue to probe the extent of nCoV’s impact on companies with substantial exposure to China and the region.
From Apple’s conference call, Tim Cook noted that Apple’s supply was by no means immune to the worsening spread of the virus. Supplier factories saw delayed re-openings, regional stores had reduced hours and some channel partners had closed storefronts. Although, Apple has supplier alternatives, so crisis averted. In fact, multiple brokers have raised 12m price targets on the stock including JP Morgan.
However, away from the safety net of Apple, for the likes of major global coffee chain Starbucks (SBUX), which can’t just whisk away thousands of brick and mortar stores from China as it pleases, the outlook is far more disconcerting. Almost half of Starbuck’s China stores are currently closed – likely to be a material earnings disruption in the first half of 2020. While only one business, it’s clear there are plenty of others in the same position – uncertain about just how strong the economic ripples of nCoV’s spread are in the region.
Up ahead, there’s plenty to look forward to with giants Boeing (BA), Mastercard (MA) and General Electric (GE) set to report before market open. Boeing’s price action over the past week has been fairly indifferent to the expected tourism and travel impacts felt by the Coronavirus given more pressing concerns at hand. How the incumbent aerospace firms deals with the disastrous grounding and remediation costs of its 737 MAX will look to dictate Boeing’s share price. For now, investors are bracing themselves for a substantial drop in profits.
Sterling awaits close call
GBPUSD remains fixed to 55d-MA as traders await top of the radar event risk in the BoE’s highly divisive rate decision on Thursday (12pm GMT). Sentiment currently appears extremely split as to how the BoE will react according to futures, with roughly a 50-50 percent chance assigned to a 25bps rate cut.
There are clearly arguments for the BoE to go either way if markets take stock of January’s evidence. After markets were presented with dovish inclinations touted by multiple MPC members, there was a clear case of needing to undertake stimulatory action to prop up the UK economy. But, following the release of less than disappointing UK employment, optimistic CBI surveys and last week’s pivotal UK Flash Mfg PMI beat (52.9 vs est. 51.1) – the BoE might just think its enough of a “significant improvement” to take a rate cut off the table on January 30.
Sterling overnight implied volatility, while still some 4/5 of the level seen during the UK election, has spiked to 16% in the options market. This goes to show just how contentious the BoE meeting is as markets imply a +/- 100bps move with 68% confidence over the next day.
AUDUSD helped up
AUDUSD gains +0.16% in Asia to trade around 0.6775, coming up from November lows, after chances for a 25bps rate cut at the RBA’s next meeting on Feb. 4 was slashed in half following better than expected headline Q4 CPI figures. Market pricing currently assigns a ~12% (3bps) likelihood the RBA cut in Feb, down from ~25% (~7bps).
The Aussie yield curve has pushed back a full rate cut to July compared to June, prior to the inflation print. This adjustment continues to build into the RBA narrative of wait-and-see following last week’s decent, yet still contentious, employment print.
While the CPI beat (1.8% y/y; est. 1.7%) decreases the imminent need for the RBA to take action in Feb, Australia’s domestic concerns – bushfire costs, bearish risk sentiment and weak consumption – should continue to dictate stimulatory requirement in H1CY20.
