Trade of the Day: Stocks give up gains ahead of G7 statement; US Treasuries, yen benefit from safety bid on report G7 may not contain a fiscal or monetary stimulus plan.
Quote of the Day: “A globally transmitted risk warrants a globally coordinated response. We are sure that in case today’s G-7 statement underwhelms with no explicit calls for policy easing, G-20 policymakers, comprising of the largest economies of the developed and emerging markets, will not hesitate to undertake wide-ranging coordinated actions to deal with the Covid-19 outbreak,” said Taimur Baig, DBS Chief Economist.
Stock of the day: China’s online medical stocks surged after the State Medical Insurance Administration clarified that general and chronicle disease patients who have had online consultations are entitled to reimbursement under medical insurance schemes. Alibaba Health rose as much as 12.7%.
Number of the Day: More than 10,000. The number of coronavirus infected cases outside China as of Tuesday.
Tip of the Day: “We raise our FY20/21e earnings by 3.0/0.4%, 13/15% ahead of consensus given: i) Covid-19 outbreak should lead to faster penetration into FMCG and household categories which have higher gross margin but also higher fulfillment costs. ii) Management reiterates focus to shift to improvements in fulfilled gross margins (up 88bps in FY19) and likely can further improve for FY20e. iii) Losses from new business (logistics and technology initiatives) should narrow thanks to better unit economics. Maintain Buy, raise DCF-based TP (discounted cash flow-based target price) to USD50 from USD40,” said HSBC equity analysts referring to Chinese e-commerce giant JD.com’s share price.
Financial markets continued to be optimistic ahead of a G-7 joint communique at 1200GMT later today where it is expected the group’s finance ministers and central bankers will announce steps to battle the coronavirus outbreak. Sentiment received a setback following a report this would not contain a fiscal or monetary stimulus plan.
This caused a sell-off in the Japan’s Nikkei 225 benchmark which fell 0.69% after Australia’s S&P ASX200 rose 0.69% on the initial optimism. The MSCI Asia Pacific ex-Japan index rose 0.73% after the Shanghai Composite rose 0.74% and the CSI 300 added 0.53%. This offset the fall in the Hang Seng index which retreated marginally after gains in healthcare and utilities were offset by selling in insurance and telecom sectors.
Expectations of central bank support remains elevated with the Reserve Bank of Australia cutting interest rates and joining the other central banks in showing their support for their faltering economies.
“The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target,” said Philip Lowe, RBA Governor. “It will continue to monitor developments closely and to assess the implications of the coronavirus for the economy. The board is prepared to ease monetary policy further to support the Australian economy.”
The risk to the global economy cannot be understated with the Organisation for Economic Co-operation and Development warning the contagion could halve global growth to 1.5%. Containment measures and loss of confidence would hit production and spending and drive some countries into recession, including Japan and the euro area, it warned. “The coronavirus presents the global economy with its greatest danger since the financial crisis,” it said in its latest Interim Economic Outlook.
Western markets remain positive with the Stoxx Europe 600 index up 2.4% and S&P Futures rose 0.5%. Some of these expectations are excessive, and there may be regret for the bullish investors.
“For many, the joint statement will not go far enough, and there will be doubts about the effectiveness. This disappointment will dampen the market reaction somewhat,” said Nigel Green, the chief executive of financial advisory deVere Group. “However, in general, the markets are looking for a reason to return to being bullish – which has been their default position for an unusually long time. This teleconference between G-7 finance ministers and central bankers will likely provide some of the reassurance they seek.”
US President Donald Trump has continued pressuring the Federal Reserve with his demand for a rate cut. Bond futures are pricing in a 100% chance of interest rates being 0.5 percentage point lower by the March meeting, and a more than 70% chance that rates will be 0.75 percentage point lower than by April, according to the CME FedWatch tool.