Trade of the Day: Equities bounce back ahead of earnings and Fed; US Treasuries, gold and yen rally.
Quote of the Day: “Financial markets don’t want a drawn-out impeachment trial. They want certainty, especially as investors are already nervous because of the coronavirus outbreak. Some sectors are more at risk of a longer impeachment trial – and damage to President Donald Trump – than others. Sectors that would suffer from regulation by Democrats, notably pharma, energy and banks want him to win again,” said Tom Elliott, international investment strategist at deVere Group.
Stock of the Day: Ascletis Pharma rose as much as 54% after obtaining approval for ASC22 to conduct clinical trials in chronic hepatitis B patients in China. Of the 350 million individuals worldwide infected with the hepatitis B virus (HBV), one-third reside in China.
Number of the Day:. $1.5 trillion: Estimated value of stockmarkets wiped out by the coronavirus fallout, according to Bloomberg.
Tip of the Day: ”We expect stock prices to continue to fall in China and other Asian markets and, to a lesser extent, globally. We also expect lower oil prices, higher gold prices, and a likely appreciation of Japanese yen against the US dollar. The market reaction may deepen further if the virus spreads further. Investors with longer time horizons may want to stay the course and maintain their current allocations, as history has shown that health scares and their impact on markets are very short-lived. Those with a short time horizon may want to talk to their adviser about supplementing their portfolio with “safe haven” asset classes such as gold, US Treasuries and low-volatility equity factor strategies,” said Kristina Hooper, chief global market strategist at Invesco.
European equities and US futures signaled a shift in focus as they recovered from the lows struck in Asia as the Wuhan coronavirus continued its spread across the world. Although worries about the economic impact of the deadly outbreak lingered on investors’ minds, attention is now also directed at the US Federal Reserve’s comments about the rate environment and key earnings from US companies after Apple’s blowout earnings. This slight improvement in sentiment disinverted the US yield curve as the long-term yields rose above the short-term yields once again.
The MSCI Asia Pacific ex-Japan index dropped 0.9% weighed down by Hong Kong, where markets resumed business after the long weekend following the Chinese New Year holiday. The benchmark Hang Seng Index sank 2.8% as consumer cyclicals, industrials and property stocks bore the brunt of the selling. Earlier, the Nikkei 225 index rose 0.71% and Australia’s S&P ASX 200 added 0.53% as technology shares basked in Apple’s post-earnings glow.
Still there are worries that will retain attention on this contagion which has already killed 132 people and infected 6,000.
“We believe the economic impact of the coronavirus could be bigger in comparison to SARS in 2003,” said Nomiura analyst Ting Lu. “Owing to the SARS outbreak, real GDP growth plunged by 2 percentage points (pp) from Q1 to Q2 in 2003. Based on our assumptions, real GDP growth in Q1 2020 could materially drop from the 6.0% pace achieved in Q4 2019, on a scale perhaps bigger than 2pp registered (for Q2 2003) during the SARS outbreak in 2003.”
But then Lu added that a quick recovery may ensue and a V-shape rebound due to some strong pent-up demand as well as pent-up production following the potential containment of the coronavirus.
The virus could cause greater disruption to the economy because of Wuhan’s geography, the timing of the outbreak when there have been mass population movements and the long incubation period of the virus.
And with the PBoC announcing it will provide sufficient liquidity in the financial system there are expectations of more measures in the coming days.
“RRR cuts, rate cuts, various lending facilities, and open market operations all are possible options. We believe the PBoC may also roll out some targeted credit-easing measures to help corporates and households that are likely to suffer more from the virus outbreak. However, it seems unlikely that these measures would turn the economy around, as the virus outbreak may further weaken domestic demand and thus render the upcoming policy easing less effective,” said Nomura’s Lu.
European shares are trading with a firm tone as are US futures with the US Federal Reserve expected to keep interest rates on hold later in the day. “The rates market expects limited guidance on the target rate path at the January FOMC meeting. The market will instead be focused on technical and operational details,” said BofA Securities analysts in a note.” Chairman Jerome Powell would likely be asked about the latest risk-off market flow stemming from the coronavirus. We suspect he would say they are monitoring the situation closely and would only act if the fallout meaningfully alters the economic outlook.”
The Stoxx Europe 600 Index gained 0.4% and Wall Street futures were up around 0.25% ahead of earnings from Facebook, Boeing, General Electric, Microsoft, McDonald’s and AT&T.
Safe havens had a solid day with Bloomberg data showing global holdings of gold via exchange traded funds rose to a seven-year peak as investor sentiment is clobbered by volatile markets and risks of a decelerating world economy. The metal gained 0.2%, US 10-year Treasuries yield dropped 4 basis points and the yen climbed 0.2%.