Traders looked past the latest surge in coronavirus cases, which overnight brought the total number of global infections above 6,000, and accelerated Tuesday's rally resulting in a sea of green across global markets, buoyed by strong results from Apple and McDonalds, while hoping that today the Fed's Powell would provide some monetary vaccine to the Chinese viral pandemic even as 10Y yield tumbled as low as 1.61%.
World stocks were sharply higher despite a 3% fall in Hong Kong's Hang Seng index, where trading restarted after the Lunar New Year holiday....
.... and traded less than 2% below recent record highs following Tuesday’s bounce on Wall Street that was aided by robust earnings from Apple and McDonalds but a huge miss by Boeing dented sentiment.
US equity futures ignored all the latest epidemic news, and rose to three-day highs, up over 12 points with the Emini trading above 3,291 last, ahead of today's Fed statement where Jerome Powell is expected to face questions about the Federal Reserve’s plans to slow its asset purchases as well as how the Fed plans to respond to the deadly viral epidemic.
Contracts on the three major American indexes edged up, in extension of Tuesday’s torrid rally. General Electric rose in the pre-market after its earnings beat the highest estimate.
European shares similarly opened firmer after Tuesday’s 0.8% rise, which was driven by banks after encouraging results from Spain’s Santander, and Swedbank a day earlier. Mining and construction shares led the Stoxx Europe 600 index higher, with 17 of 19 industry sectors in the green.
Earlier in the session, most Asian benchmarks gained, though Hong Kong’s tumbled in a catch-up with the global sell-off since that market shut for holidays. While mainland Chinese markets remain closed, Chinese equity futures traded in Singapore rebounded from two days of losses to rise 1.79%, the biggest gain in almost seven weeks.
“There appears to be more transparency, communication in terms of the virus, and that makes it easier to start assessing the economic fallout. So the markets have taken some comfort from that,” said Rainer Guntermann, a rates strategist at Commerzbank in Frankfurt. And yet, that does little to mitigate the massive impact of the coronavirus outbreak which has already surpassed the total number of SARS infections from the 2003 breakout, with the number of coronavirus fatalities now at 132 and 6,000 cases reported worldwide. This has risen fears the outbreak could inflict serious damage on Chinese growth, already at three-decade lows.
“Until the rate of cases starts to peak, markets are not likely to bounce,” said Sean Darby, global equity strategist at Jefferies in Hong Kong, ironically even as markets were bouncing.
Looking at today's main event, the Fed's meeting, expectations aren’t particularly high for any surprises according to DB's Jim Reid, who notes that rates will almost certainly remain on hold with only a technical adjustment of a 5bp upward move on the IOER according to economists. The meeting statement is expected to be mostly unaltered relative to December’s communique and with the absence of an updated Summary of Economic Projections, that leaves Chair Powell’s press conference as the most likely source of new information. As such, the focus will likely be on five topics; the outlook for the policy rate; persistently low inflation and how it relates to the policy review; funding markets and whether T-bill purchases are QE; financial stability risks; and implications for global markets. All that from 2pm ET.
In FX markets, the dollar traded higher versus most G10 peers as Treasuries rallied before the Federal Reserve policy decision. The offshore yuan was little changed at 6.9620 per dollar but held off a one-month low hit earlier this week. Australia’s currency, considered a China proxy because of trade and investment links was also flat just off three-month lows. The safe-haven yen was flat but traded above two-week highs touched on Monday while the dollar index too edged lower after approaching two-month highs.
The dollar’s next moves could be determined by the U.S. Federal Reserve’s meeting later on Wednesday where the central bank should reiterate its on-hold stance. But speculation has risen that the Fed could provide an additional boost as a result of the virus outbreak, with money markets predicting one 25 basis-point rate cut this year and a small chance of a second.
Fears of economic damage are reflected also in the U.S. Treasury yield curve where three-month yields briefly rose on Tuesday above 10-year borrowing costs — the so-called curve inversion that is seen as a fairly reliable recession signal. As calm returns to markets, the curve has returned to normal, however, and Commerzbank’s Guntermann said pricing rate cuts at this stage was “ambitious”.
Treasury 10-year yields dropped as low as 1.61%, off three-month lows around 1.57% hit on Tuesday while German Bund yields also inched higher.
In commodity markets, crude futures rose for the second day after sharp falls triggered by fears for economic growth and a fall in travel demand, with Brent crude up 1% on the day. Gold, which had surged toward $1600 an ounce on Monday, subsided to around $1560.
- S&P 500 futures up 0.1% to 3,283.00
- STOXX Europe 600 up 0.4% to 419.03
- MXAP down 0.2% to 168.98
- MXAPJ down 0.7% to 547.60
- Nikkei up 0.7% to 23,379.40
- Topix up 0.5% to 1,699.95
- Hang Seng Index down 2.8% to 27,160.63
- Shanghai Composite closed
- Sensex up 0.5% to 41,176.00
- Australia S&P/ASX 200 up 0.5% to 7,031.52
- Kospi up 0.4% to 2,185.28
- German 10Y yield fell 3.0 bps to -0.371%
- Euro down 0.2% to $1.1005
- Italian 10Y yield fell 0.6 bps to 0.865%
- Spanish 10Y yield fell 2.0 bps to 0.295%
- Brent futures up 0.9% to $60.02/bbl
- Gold spot up 0.3% to $1,571.34
- U.S. Dollar Index up 0.1% to 98.06
Top Overnight News
- China death toll from coronavirus climbs to 132 as cases soar. The number of confirmed cases in China soared to 5,974 , overtaking the official number of infections during the SARS epidemic
- The U.S. government is considering several options to combat the emergence of the coronavirus, including a ban on flights to and from China, though no decision has been made, a person familiar with the deliberations said on Tuesday night
- China pledged to provide abundant liquidity for money markets and urged investors to evaluate the impact of the coronavirus objectively, as the nation prepared for a potentially tumultuous resumption of trading next Monday
- Senate Majority Leader Mitch McConnell told his members in a closed meeting that he doesn’t yet have the 51 votes needed to vote swiftly on Trump’s acquittal without seeking more evidence, according to a person familiar with the conversation. Thw move may have been designed to put pressure on any wavering Republicans
- Boris Johnson’s government plans to reclaim control over British fisheries with a law allowing the U.K. to decide who can fish in its waters and on what terms. The legislation to be published Wednesday will end current automatic rights for European Union vessels to fish in British waters, the Department for Environment, Food and Rural Affairs said
- The International Monetary Fund expects to send staff to Buenos Aires in February for a technical mission as Argentina’s record $56 billion credit line remains on hold until the new government outlines its economic plan
- Jerome Powell will likely face questions about the Federal Reserve’s plans to slow its asset purchases as well as potential fallout from a deadly virus when he faces reporters after a policy meeting Wednesday
- Rising food costs in China have added to the country’s growing list of concerns as authorities struggle to contain the impact of a rapidly spreading viral outbreak. The China Shouguang vegetable price index, a daily indicator of the nation’s produce, surged 4.9% to its highest level in almost four years at 195.45, Xinhua News Agency reported
- U.K. house prices jumped the most in more than a year in January, according to Nationwide Building Society. Values rose 1.9% from a year earlier, the most since November 2018
Asian equity markets were mostly higher as the region found some reprieve following the rebound on Wall St where sentiment was underpinned by vaccine efforts to tackle the coronavirus, touted dip-buying and encouraging US data, while a stellar report from Apple which beat on both top and bottom lines, as well as iPhone revenue added further fuel to equity futures after-hours. ASX 200 (+0.5%) and Nikkei 225 (+0.7%) took impetus from their US peers but with upside somewhat capped as participants also digested a slew of corporate updates, while Tokyo sentiment was driven by recent favourable currency flows and a heavy slate of earnings. Conversely, Hang Seng (-2.8%) suffered a bloodbath on return from the Lunar New Year holiday and briefly slipped into correction territory with heavy losses across a broad range of industries including financials, airliners and retailers due to the coronavirus fears which prompted measures from Hong Kong to reduce cross-border travel with mainland China, while casino stocks were also a losing bet after China stopped issuing individual travel visas for visits to Macau by mainland residents in an effort to control the outbreak. 10yr JGBs were flat after the recovery in risk appetite dampened safe-haven demand, but with downside also stemmed by support at 152.50 and amid the BoJ’s presence for over JPY 1.1tln of JGBs in up to 10yr maturities.
Top Asian News
- BOJ Board Members Hint at Rising Concern Over Negative Rates
- Turkish Deals Back in Play as Economy Rebounds, Stocks Rally
- Virus Blow to China’s Economy to Be Worse than SARS, Nomura Says
European stocks trade modestly in positive territory [Eurostoxx 50 +0.3%] – following on from a similar APAC lead, with the exception of Hong Kong markets which had its first chance to react to the coronavirus developments following its Lunar New Year holiday. Sectors are mostly in the green with material names outperforming, albeit more-so a consolidation from the recent virus-induces losses. Overall, sectors do not reflect a clear risk tone in the equity-space. Individual movers are more earning-orientated; Pharma-giant Novartis (+1.3%) shares rose amid a beat on both revenue and net income forecasts, whilst also forecasting sustained long-term growth, albeit the Co’s core EPS metric missed expectation. LVMH (+0.3%) nursed opening losses of almost 2%, which was initially induced by a 40% YY drop in Hong Kong sales in Q4 amid ongoing unrest in the region; the Co. topped its FY19 forecasts and posted an improvement in operating profit. Santander (+3.5%) extended on its opening gains amid stellar earnings, with share prices underpinned by a 3% boost to its dividend. Elsewhere, Apple (+2% pre-market) earnings have provided tailwinds to the European chip-space, with AMS (+2.5%), STMicroelectronics (+1.2%), Infineon (+1.4%), Dialog Semiconductor (+1.4%) and ASML (+1.3%) all supported in the aftermath. For reference, DJ constituents Boeing and McDonalds will be reported before the bell today and carry weightings of 7.47% and 4.97% respectively.
Top European News
- Merkel Cabinet Approves Coal Exit Bill Setting RWE Compensation
- Poland’s Economic Growth Was the Weakest in Three Years in 2019
- Altice Europe Confirms Offer for Partner Communications
In FX, the Dollar remains firm almost across the board, and especially vs EM currency peers that are more sensitive to risk aversion and prone to swings in market sentiment. The DXY continues to straddle 98.000 as several major pairings rotate around round numbers in tight confines ahead of the Fed that is likely to provide clearer direction via guidance and the tone of Chair Powell’s first post-meeting press conference of the New Year. In the interim, prelim trade and wholesale inventories may offer some impetus ahead of pending home sales, while any further updates on China’s coronavirus will also be pivotal.
- JPY/SEK - Bucking the broad trend of underperformance vs the Greenback, the Yen is grinding back up towards the 109.00 level from 109.26 or so lows amidst a wider recovery in safe-haven assets, including Gold and global bonds, as the US Treasury curve flips back in to bull-flattening mode. Meanwhile, the Swedish Krona is also paring more losses vs the Euro after yesterday’s knee-jerk decline post-soft data (overall) with some momentum from an improvement in industrial sentiment over consumer confidence that dipped, with Eur/Sek probing the lower end of 10.5965-5630 parameters.
- GBP/AUD/CAD/EUR/CHF/NZD - All softer against the Usd to varying degrees, as Cable clings to 1.3000 in advance of Thursday’s eagerly awaited BoE rate call that is seen on a knife edge, while the Aussie is holding in above 0.6750 with assistance from firmer than forecast Q4 CPI metrics and supportive Aud/Nzd cross winds as the Kiwi falters close to Tuesday’s lows within a 0.6527-52 band awaiting NZ trade data later tonight. Elsewhere, the Loonie is gleaning some traction via firmer oil prices to consolidate between 1.3155-76 compared to 1.3200+ at one stage yesterday, but the Euro is still struggling to bounce from around 1.1000 after sub-consensus Eurozone M3 growth, and remains depressed vs the Franc in the low 1.0700 area even though Usd/Chf is hugging the top of 0.9750-27 extremes in wake of a fall in Swiss ZEW investor morale.
- EM - In contrast to the aforementioned general depreciation against the Dollar, the offshore Yuan is sustaining recovery momentum on hopes that the worst of the health scare may be over soon, while the Rand is keeping its head just above 14.6000 following Moody’s decision that it is too early to review SA’s credit standing and post-budget will be more appropriate.
In commodities, WTI and Brent front-month futures remain on consolidation-mode and hold onto most of their APAC gains, with prices somewhat relieved by the latest private inventory report. Headline crude posted a surprise draw of 4.27mln barrels vs. expectations for a 500k barrel build. Desks note that price action W/W suggest that markets see a substantial demand impact from the coronavirus outbreak, with airlines continuing to suspend travels to and from China. Demand side implications could be significantly impacted – contingent on the strictness of the travel restrictions and the time frame – which may prompt OPEC+ to revaluate their output cut pact. ING notes that prolonged pressure on oil prices could lead to deeper cuts by the oil-rich countries, although Libya’s current oil disruptions may help in regard to the scope of cuts Saudi and Russia could take on. Sources yesterday highlighted a slight shift in Russia’s stance, who prefers exiting the pact in March – but may be willing to stay on if Brent prices remain sub-60/bbl. That said, Russian Energy Minister Novak stated that the country's tax system may pose risks to Russia's ability to maintain oil output. Elsewhere spot gold has clambered off overnight lows as DXY pulled back from yesterday’s high, with the yellow metal on standby for significant macro developments ahead of the FOMC rate decision later today. Similarly, copper prices have experienced relatively muted price action thus far following six consecutive sessions of losses.
US Event Calendar
- 7am: MBA Mortgage Applications, prior -1.2%
- 8:30am: Advance Goods Trade Balance, est. $65.0b deficit, prior $63.2b deficit
- 8:30am: Wholesale Inventories MoM, est. 0.05%, prior -0.1%; Retail Inventories MoM, est. 0.1%, prior -0.7%, revised -0.8%
- 10am: Pending Home Sales MoM, est. 0.5%, prior 1.2%; Pending Home Sales NSA YoY, est. 10.3%, prior 5.6%
- 2pm: FOMC Rate Decision
DB's Jim Reid concludes the overnight wrap
I can’t help feeling guilty and sad this morning. Before Xmas we planted a load of new hedging and plants at the top of our drive and garden. This wasn’t cheap. Anyway when we got back from holiday in early January we found it decimated by hungry deers. We cursed them and put some basic netting/fencing around what was salvageable. Anyway when I got home from my luggage-less travels last night my wife told me that a deer had got caught up in it and couldn’t escape. It was very distressed and had a huge gash on its leg. My wife called out the RSPCA and a wildlife charity came out, cut the deer out, gave it some drugs to help with the pain but was on the brink of putting it down as it wouldn’t use its legs and just curled up in a heap. The guy said there was a small chance that it would recover but the likelihood is that a fox would probably take advantage of its lameness tonight. So without going outside with a torch at 4:45 am this morning I won’t know the outcome until after I press send this morning. I may wait until I get home to find out whether the poor thing survived and will live to eat more of my plants. Fingers crossed I go back to cursing it.
Markets have continued to be mostly occupied by the impact of the coronavirus but fears have slightly subsided and other stories (e.g. Apple earnings) are taking more airtime again. The latest update this morning being that the death toll has risen to 132 (from 106 yesterday) and the number of confirmed cases to 5,974 (from 4,515). Yesterday markets got a bit more comfortable with the virus risks (S&P 500 +1.01%) helped by news from China’s Global Times that the country is likely to have a vaccine within three months and also after a renowned Chinese respiratory expert suggested that the peak of the outbreak would be here in a week to 10 days. As we said yesterday, as sad and as worrying as this new strain is, hundreds of thousands of people die of seasonal flu every year across the globe so there continues to be a long way to go before this episode makes for a substantial proportion of these numbers.
Highlighting the impact on manufacturing from the virus, Apple CEO Tim Cook said in their earnings call that the company expects some disruption to its supply chain as factories in China that make Apple products and components will now open on February 10 instead of the end of this month.
Continuing with Apple, the company reported quarterly earnings after the closing bell that beat expectations, with an EPS of $4.99 ($4.54 expected), and revised next quarter’s guidance upwards. The stock was up +1.47% in afterhours trade after rallying +2.83% yesterday. Elsewhere, other tech earnings were lackluster with EBAY reporting decline in 2019Q4 revenues of c. 2% and also gave lower guidance for 2020Q1. The stock is down -5.25% overnight after rallying +2.06% yesterday. Along the same vein, AMD sold off -4.49% in afterhours trade, as the company failed to meet expectations on data-center sales as well as lowering their revenue guidance for next quarter.
Back to China and the country’s major banks said overnight that they will reduce interest rates for small businesses in Hubei affected by the coronavirus. Expect to see more such news from banks and the government to ease the economic hit from this outbreak.
Asian markets are largely trading up with the exception of the Hang Seng (-2.49%) which is catching down after reopening post the NY holidays. The Nikkei (+0.64%) and Kospi (+0.72%) are both advancing. Elsewhere, futures on the S&P 500 are up +0.28% and in commodities, crude oil prices are up c. +1.30% this morning.
In other overnight news, the BoJ released its summary of opinions for its latest policy decision with one board member indicating that a policy review may be needed after expressing concerns over the effectiveness of prolonged low interest rates. He said that active discussions over policy are taking place in the U.S. and in Europe so monetary policy in Japan may also warrant review. Another member said that having low rates for a lengthy period could end up weakening inflation expectations among households and companies if it prompts them to take a more cautious view about the future.
Staying with central banks we’ve got a Fed meeting tonight to preview. To be fair expectations aren’t particularly high for any surprises. Rates will almost certainly remain on hold with only a technical adjustment of a 5bp upward move on the IOER according to our economists – albeit one which is a close call still. Our team expect the meeting statement to be mostly unaltered relative to December’s communique and with the absence of an updated Summary of Economic Projections, that leaves Chair Powell’s press conference as the most likely source of new information. Our team expect the focus of that to be on five topics; the outlook for the policy rate; persistently low inflation and how it relates to the policy review; funding markets and whether T-bill purchases are QE; financial stability risks; and implications for global markets. All that from 7pm GMT.
It’s entirely possible that the micro is just as if not more important today given the busy slate of earnings. Indeed 47 S&P 500 companies are due to report and amongst the headliners are Facebook, Boeing, General Electric, Microsoft, McDonald’s and AT&T.
As noted earlier yesterday saw the S&P 500, NASDAQ and DOW up +1.01%, +1.43% and +0.66% respectively. After the S&P 500 went nearly 4 months without a 1% move in either direction, we’ve now had two such days in a row. The semi-conductor index also rallied +2.40% albeit only recovering just over half of Monday’s plunge. The VIX – which had spiked at 19.02 at the intraday highs on Monday – pulled back to 16.3 meanwhile. The STOXX 600 also rose +0.84% and DAX +0.90% (both back positive YTD) while in credit, following one of the bigger spread widening days on record on Monday, US HY spreads were -10.9bps tighter yesterday and EUR HY spreads -0.9bps tighter. Sovereign bond markets weakened in tow with 10y Treasury and Bund yields +4.8bps and +4.1bps respectively while Gold fell -0.94% and WTI oil rose +0.64%.
The reversal came despite some mixed earnings in the US prior to those tech numbers last night. Harley Davidson (shares down -3.01%), 3M (-5.72%) and Pfizer (-5.02%) were some of the big names to miss however that was somewhat offset by earnings reports from HCA (+2.75%) and Lockheed Martin (+1.11%).
Also painting a bit of a mixed picture was the US data. On the positive side the January consumer confidence print rose 3.4pts to 131.6, far exceeding expectations for 128.0, and the highest level since August. Both the expectations and present situations components improved with the latter actually the second highest reading in this expansion. However, less positive were the preliminary December capital goods orders data. In particular the core capex orders print of -0.9% mom compared to expectations for +0.2% while shipments declined -0.4% mom (vs. +0.2% expected). In addition Boeing’s problems are not helping getting a clear read on this data at the moment. For completeness the S&P CoreLogic house price index for November was a little ahead of expectations at +0.48% mom while the Richmond Fed manufacturing index improved 25pts in January to +20 (vs. -3 expected) and was seen as a bit of an outlier.
Here in the UK its worth noting that yesterday the government announced that Huawei will have partial access to build the UK’s 5G networks. Equipment will be banned from core areas and sensitive sites, while its market share in the network will also be capped at 35%. It will be interesting to see the US response to this with Pompeo in the UK for meetings with the government this week.
To the day ahead now, where the main focus will wait until this evening with the Fed meeting and Chair Powell’s press conference. Prior to that the data in the US includes the December advance goods trade balance, December wholesale inventories and December pending home sales. In Europe we’re expecting the December import price index reading in Germany, January house price data in the UK, December M3 money supply for the Euro Area and confidence indicators in Germany, France and Italy. Away from that the EIA will release its 2020 energy outlook while it’s a big day for earnings with Microsoft, Facebook, Boeing, MasterCard, AT&T, Tesla, General Electric and McDonald’s amongst those reporting.