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.

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.

Preview: Apple Q3 Earnings

Earnings season is in full swing and there’s a big name on the calendar this week.

Apple will announce its Q3 earnings after the market close on Tuesday, and it looks like it could be a mixed bag.

The tech giant saw revenue fall in the first two quarters of this fiscal year and a profits warning from Tim Cook at the start of the year. While guidance suggests that things are improving, this report could throw a few surprises our way.

“What we know: It’s tough in China, iPhone sales are not what they were, Services growth is strong,” said Neil Wilson, Chief Markets Analyst at MARKETS.COM.

“What we don’t know: if things have improved in China as was hinted at in the Q2 release and what the outlook for the rest of the year looks like. Q3 is always a bit dull, so as is often the case, the guidance for the rest of the year is key.”

The year so far

The Q2 report three months ago had its ups and downs, however Apple did report in-line earnings and upbeat guidance for the next quarter.

Guidance for the fiscal third quarter of $52.5bn-$54.5bn was particularly impressive, and well ahead of forecasts.

While Apple’s Q2 results overall were a boost to the tech sector, iPhone revenue came under pressure as it dropped 17% to $31.1 billion. Greater China sales were down 22% from the year previous, but the report hinted that things were improving, with sales picking up as the quarter progressed.

Overall revenues were down 5%, in line with consensus. EPS came in at $2.46.

Services revenues climbed to an all-time high of $11.45bn, up 16% from the year ago period, as the tech giant switches much of its attention (and investment) away from products towards services and software.

“Of course, this is very strong,” Wilson said. “But we did note at the time some mild concern that the growth rate is slowing from the fiery levels we saw last year when we got +30% prints.”

What to expect

This report will include earnings for Q3, but also the outlook for the upcoming two quarters. These will be interesting given the worries about the iPhone. Following the Q2 report, Tim Cook admitted that consumers were slower to upgrade to a new handset. This is likely to be further impacted by the guidance for the 5G refresh.

Apple’s recent acquisition of Intel’s smartphone modem business for $1bn suggests they are committed to making improvements that consumers want. However, 5G is not expected until 2020, so the iPhone 11 refresh due this autumn will likely only have small tweaks – something consumers are increasingly unwilling to give up their existing handset for.

It’s quite likely, therefore, that consumers will wait for the release of the 5G models next year, putting further pressure on iPhone sales.

In terms of what to expect about services, Wilson said: “Not only are we looking at the absolute growth rate here, but also the impact on margins for the company as a whole and the shift in the balance. Apple Services margins came in at 63.8% in Q2. For the group, management guided gross margin to be between 37% and 38%.

“However, Services makes up about 20% of Apple’s revenue, up from 16% a year before – at what point can Apple start to guide its margins higher? This could be an area for an upside surprise, if not now then perhaps heading into the year-end. A slowing in the Services growth rate from the 16% in Q2 would be a concern.”

We’ll also be on the lookout for data about the new services launched in March – News Plus, Apple Arcade, and Apple TV Plus. At the time, Cook was keen to stress that these new ventures are not hobbies and the tech firm had serious ambitions to succeed in these new markets. The Q3 report should provide some early indicators.

Finally, we’ll also be looking for any insight into how Apple thinks the ongoing trade war with China will pan out. Cook had been more positive in Q2, but the White House has insisted that there will be no tariff relief for Apple products made in China. And, the third quarter report could include scope for further acquisitions, if the recent Intel deal is anything to go by.

In terms of estimates, Wilson said: “Consensus estimates forecast revenues to remain flat year-on-year in Q3 at $53.4bn, with EPS seen at $2.10 against $2.34 a year before.”

A closer look at share price

The profits warning at the start of the year saw Apple shares take a hammering, but shares have rallied close to 50% since then.

“Breakout to $211 and beyond? Bulls looking for a break north of $211 but this could offer resistance. Sustained rally beyond $211 starts to bring all-time highs in view again. If there’s disappointment, the support trend line comes in around $185.”

Key financials

On our platform, you can see the key financials for Apple ahead of the earnings report.

Forget earnings – Lyft set to release Q1 loss report

LYFT caused quite a stir when it held its IPO in March. The offering was quickly oversubscribed (as is Uber’s), and shares eventually hit the market at $87.24 – well above the company’s $72 per share offer price.

Initial public offerings tend to start with a bang – stock often rockets higher before settling down; as Lyft’s did when it closed its first day of trading at $77.75. It only took one more session to drop below its $72 offer price, and the rout has continued ever since. At the time of writing, Lyft is trending 30% below its offer price, languishing sub-$60.00.

More pain incoming for Lyft stock?

It seems that owning a piece of a unicorn that is yet to make a profit but is valued at over $26 billion quickly lost its shine. Tech IPOs are always exciting, because everyone hopes to end up holding a piece of the next Facebook, but so far Lyft looks more likely to follow in the footsteps of Snap Inc, which has never come anywhere close to reclaiming 2017’s starting price and is currently 62% below it.

Profitability is the key issue. Ride-hailers like Uber and Lyft may have disrupted the traditional taxi market, but so far they are burning through cash fast. In its IPO filing, Lyft revealed that it made a net loss of $911 million in 2018, up 23% from 2017. However, revenue was growing faster, with 50% growth to $2.2 billion recorded last year.

Markets will be looking to see whether Lyft can continue the rapid pace of revenue growth, while those losses need to be reined in. A slower pace would be a good start, but really markets want to see that number reversing as the company hopefully moves towards profitability. Will management offer any guidance regarding a timeline for that?

The stock will live and die on those expectations; growing market share or increasing revenue per ride will mean nothing if the company keeps piling up the losses.

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