Markets still rattled by coronavirus fears after yesterday’s brutal sell-off

Forex
Indices

Investors fled to safety en masse yesterday as a spike in coronavirus cases in Italy, South Korea, and Iran raised fears that the outbreak was becoming a pandemic.

$1.5 trillion was wiped from global equity markets; the Dow recorded only its third ever 1,000 point drop, and the VIX ‘fear index’ spiked to the highest levels since January. Oil sank 4% and gold leapt to a seven-year high.

Today, the sell-off has paused, but the market is hugely indecisive.

Stocks, oil, volatile as markets await next major development

Since the European open today we’ve seen major indices like the DAX, FTSE 100, and Euro Stoxx 50 extend gains towards 1%, drop to multi-month lows, and rebound above opening levels. US stock market futures have gone from indicating a 200-point gain for the Dow on the open to minor losses, and back to signalling a positive open.

The FX market continues to see a shift towards the safety of the US dollar, although cable has managed to hold some gains despite easing back after rising to test $1.30 earlier in the session.

Gold is down around 0.8% and silver has suffered losses of more than 1.3% on profit-taking, but risk-appetite is clearly still absent as crude and Brent oil are struggling to hold opening levels. Like stock markets, the two benchmarks climbed on the open, then fell into the red, before recovering somewhat.

New coronavirus cases reported in Italy, Iran, Austria, Croatia, Tenerife

Markets are caught between buying the dips and pricing in further worrying developments. The first case of coronavirus has been reported in Southern Italy, and Austria and Croatia have reported their first cases today as well. The two Austrian cases are in the province of Tyrol, which borders Northern Italy, while the young man infected in Croatia had recently returned after spending several days in Milan.

Meanwhile, hundreds of people are being tested and many guests quarantined in a hotel in Tenerife after a case of the virus was confirmed there. Iran has also provided an update on the outbreak there: the number of cases is up to 95 and 16 people have died – the Deputy Health Minister is one of those infected.

We’ve also had a slew of companies warning that COVID-19 will impact their earnings. UK blue-chips Meggitt and Croda are weighing on the FTSE 100 after issuing warnings over the impact of the virus upon their businesses.

Markets may gain more direction when the US markets open, but even then uncertainty looks to be the order of the day.

US and Eurozone spending and confidence, Best Buy earnings

Week Ahead

Welcome to your guide to the week ahead in the markets.

Has COVID-19 peaked?

Markets will of course remain susceptible to news surrounding the COVID-19 outbreak over the coming week. The number of new cases recorded daily had slowed towards the end of last week, but an outbreak in South Korea reignited fears of a global spread. Over 75,000 cases and more than 2,100 fatalities had been reported by the end of the week. An acceleration of cases outside of China could prompt further flights to safety, but otherwise the market seems relatively confident that the outbreak is contained and that stimulus from Beijing and the PBoC will soften the economic hit.

US GDP, durable goods, personal spending

Members of the Federal Reserve were feeling confident about the state of the US economy during their last policy meeting, according to last week’s minutes. The FOMC thinks the outlook has gotten “stronger”, and the coming week offers plenty of data to either challenge or support that view. CB confidence is expected to have ticked higher in January, durable goods orders to have fallen –2%, and core PCE to remain stable on the month. While personal income growth is predicted to have risen, spending is likely to have weakened. A second estimate of Q4 GDP is likely to hold steady at 2.1%.

Eurozone, Germany confidence, flash inflation

The euro could be facing more headwinds this week after sliding to multi-week lows against the pound and multi-year lows against the dollar last week. Sentiment data from Germany and the bloc is expected to soften, mirroring market concerns over the health of the bloc’s economy following some poor industrial data. Flash inflation figures for the Eurozone and Germany are unlikely to make inspiring reading; even if price growth in Germany has strengthened towards the ECB target again, the wider Eurozone reading remains far behind.

Earnings: Best Buy, Bayer

Best Buy reports earnings before the open on February 27th. The stock has put in a strong performance over the last six months, rallying around 40% compared to 15% gains for the retail-wholesale sector and 18% for the S&P 500 index during the same period. Best Buy has delivered 11 earnings beats in the past 12 quarters and beat expectations by over 9% in each of the past two quarters.

Bayer also reports earnings on the 27th. The stock is up 45% from the June 2019 low of 51.90, and was last trading around 75.00.

FTSE in focus on deluge of FY results

Earnings reports will be a key driver of UK stocks over the coming days. A deluge of full-year results for 2019 from blue-chips including Standard Chartered, British American Tobacco, Rio Tinto, Persimmon, Taylor Wimpey, RSA Insurance and Meggitt provide clear risks for the FTSE 100 index over the coming sessions. A slew of reports from FTSE 250 constituents throughout the week could also affect the general sentiment around UK plc.

Heads-Up on Earnings

The following companies are set to publish their quarterly earnings reports this week:

24th Feb – 09.00 GMTGerman IFO Business Climate Index
24th Feb Associated British Foods Pre-Close Trading Statement
25th Feb – 12.00 GMTManchester UnitedQ2 2020
25th Feb – Pre-MarketHome DepotQ4 2019
26th Feb – 06.00 GMTRio TintoQ4 2019
26th Feb – 08.00 GMTDanoneQ4 2019
26th FebTaylor WimpeyFY 2019
26th Feb – Pre-MarketLowe’s CompaniesQ4 2019
26th Feb – 15.30 GMTUS EIA Crude Oil Inventories
27th Feb – 00.30 GMTAustralia Private Capital Expenditure
27th Feb – 04.15 GMTStandard CharteredQ4 2019
27th Feb – 06.30 GMTBayerQ4 2019
27th FebPersimmonQ4 2019
27th FebRSA InsuranceFY 2019
27th Feb – 10.00 GMTEurozone Sentiment Survey Results (Consmer, Business, etc)
27th Feb – After-MarketAutodeskQ4 2020
27th Feb – 13.30 GMTUS Q4 GDP 2nd Estimate, Durable Goods Orders
27th Feb – 15.30 GMTUS EIA Natural Gas Storage
27th Feb – Pre-MarketBest Buy Q4 2020
28th Feb – 10.00 GMTEurozone Preliminary Inflation
28th Feb – 12.30 GMTUS PCE Index, Personal Spending, Personal Income
28th Feb – 13.00 GMTGermany Preliminary Inflation

European equities rise as China eases

Forex

Police in Hong Kong are investigating an alleged toilet paper heist, amid a shortage due to the coronavirus outbreak. Things are bad when loo roll becomes currency.

It’s a dull old session out there today: European shares were a little indecisive at the start of play following a mixed bag overnight in Asia, but are leaning higher with stimulus from China helping to lift the mood. Basic resources stocks were among the biggest gains on the FTSE as the blue chip index moved to try to reclaim the 7500 level, last some way short at 7445.

Shares in Hong Kong and Shanghai advanced as China cut a key medium-term interest rate, while Tokyo shares slipped on growth concerns. Markets are betting this will be only a part of a wider stimulus programme to offset the economic damage wrought by the Covid-19 coronavirus – the PBOC has already been injecting liquidity and there will no doubt be more to come. China reported another 2k cases by Sunday night, taking the total to more than 70k.

US stocks finished higher for the second straight week. Markets in the US will be closed today for Washington’s birthday but have rolled into the holiday in fine fettle. Industrial productions were weak, down 0.3% in January, largely down to Boeing. Ex-aircraft production, factory output rose 0.3%. Retail sales showed the US consumer started the year in decent shape, with headline sales +0.3% month on month.

There are growing fears about the economic impact. Japan’s economy shrank at the quickest pace in six years in the last quarter of 2019 – down 6.3% as the consumption tax hike hobbled the economy far worse than thought.

Most think to hit to tourism and exports resulting from the outbreak will mean the economy contracts again in the March quarter, pushing Japan into recession. Meanwhile Singapore has slashed its growth outlook for 2020.

Oil is higher above $52, having closed last week well. Look like a base has been formed at $50, looking to cement gains north of last week’s highs at $52.2.

In FX, there are tentative signs of stabilisation and basing for EURUSD. Speculators have not been this net short since Jun 2019, with net shorts at nearly 86k, contracts so the short-euro trade is very crowded. As ever this CFTC data is a week old so I wouldn’t be surprised if the next set of data showed deeper net shorts towards 100k corresponding to the dove under 1.0880. The inverted hammer on Friday suggests near term reversal but until 1.09 is reclaimed the bears remain in control.

Sterling is giving a gallic shrug to some French fighting talk vis-à-vis Brexit trade talks. GBPUSD is steady at 1.3040, with support at 1.30 and near-term resistance seen at the 50-day moving average at 1.3070.

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