⌛ Did you miss ProPicks’ 13% gains in May? Subscribe now & catch June’s top AI-picked stocks early.Unlock Stocks

And... Buy The Dip

Published 19/02/2020, 10:34

And... buy the dip. No one cares about corporate profits warnings anymore. Expected stimulus and expectations for looser monetary policy is the only thing driving the market. But shipping volumes are tanking as global trade contracts. There is only so much bad news =good news this market can take. Xi says China will meet its growth target for the year. But who cares when you make up the numbers anyway?

Asian equities bounced overnight after Apple’s revenue cloud threatened to dampen the mood. So far it’s just been a light shower. Hong Kong rose 0.5%, while Tokyo erased Tuesday’s 1% decline as trade data showed a narrower-than expected decline in exports. Shares in China were a bit more mixed but Taiwan rallied.

European markets are riding the wave, with the FTSE 100 opening up about 40 pts higher at 7423. The DAX is a third of a percent higher at 13,733.

Yesterday, US equities felt the burn from Apple’s warning. The Dow ended 165 points lower. Apple was just down just 1.83% at stumps. The sense is very much that the world’s most valuable company will ride this out - sticky consumers will only delay purchase of Apple (NASDAQ:AAPL) goods, not switch to Samsung (LON:0593xq) or Android.

Easy money is what’s important. To give you a flavour, corporate debt protection is at its cheapest for almost 13 years. The CDX North American Investment Grade index, which tracks the cost of protecting against US corporate defaults at 125 companies, sank to its lowest since July 2007. Roll back the maturity and lo your default risk drops. Easy, but I don’t think refinancing existing debt is what loose monetary policy is meant to achieve.

But investors probably should be more concerned about the fallout from the coronavirus. Global trade was already declining before the coronavirus hit – the latest Cass Freight Shipping Index for January was down 9.4% year on year, the largest drop since 2009. This all before the major hit to shipping and trade from the coronavirus in February. Cass notes some Chinese factories are back to work, but are not at 100% capacity, and some have pushed back reopening to Mar 1st.

Overnight Japan exports fell 2.9% in January, short of the nearly 7% drop expected but still indicating the third largest economy is in the mire. It was also a slower rate of decline than the 6.3% in December. But machine orders fell more than expected, down 12.5% vs the 9% forecast.

Divergence - that’s the word for the performance of the US and Eurozone economies. Germany’s ZEW sentiment data was another blow for the euro, which is in a slow death march lower against the US dollar. For EUR/USD it’s death by a thousand cuts. The Empire State manufacturing index finally did for the 1.08 level yesterday as we found a new low at 1.07850. This morning EURUSD briefly recovered 1.08 this morning but bears still very much in control. Not a lot of support to close the Macron Gap back to 1.05.

FOMC meeting minutes on tap today are likely to stick to the script and reiterate to the market that the Fed is ‘on side’. Inflation a little hot is better than inflation a little below target, San Francisco Fed president Mary Daly pointed out earlier this month. In particular, we will be looking at anything on balance sheet guidance and on inflation targeting. On a more general note we will look at how much the Fed is citing ‘downside risks’ the outlook – have these worsened since the end of last year? Also of course anything on coronavirus. US PPI is due later today – important leading indicator forecast at +0.1%. We’ve also got Canadian CPI numbers on tap.

One could make a case for U.K.-EU divergence too. EUR/GBP has declined 11% since August, testing 0.8280, a whisker from the Dec low at 0.82750. There is not a heap of support down to 0.80.

Sterling is eyed ahead of the U.K. CPI release at 09:30, seen at 1.6% vs 1.3% previously. The pound has been holding a pretty tight range and it will take a large surprise to jolt it out of its comfort zone.

GBP/USD remains well anchored to 1.30 - the inflation data may well come in soft again. But while that push cable lower for a time the pull of 1.30 remains strong, and the Bank of England seems minded to look through this bout of lower inflation.

Gold pushed up to $1600 again and has held gains. The spike at $1611 is the upside target for now. Very tentative signs of a long term head and shoulders topping pattern forming, with the current thrust forming the head. One more dip, one more rally then back. For now lower yields - be it from coronavirus driving safe haven flight, or monetary policy expectations is driving price action.

USD/JPY has cleared 110 but ran out of steam at 110.10 and failed to test the Jan highs a little above 110.20.

Oil is firmer, with the apparent base around $50 providing the fulcrum for this move towards $53, running short at $52.90. The drive out of the double bottom neckline is sluggish though and betrays a lack of conviction on the demand side recovering as quickly as bulls would like.


Metro Bank (LON:MTRO) is getting a new boss. Dan Frumkin, the interim CEO, has landed the poison chalice, I mean top job. RBS (LON:RBS), Northern Rock and stint in Bermuda and Latvia seem to fit with Metro quite well. It’s been a torrid old time for Metro with shares down 85% in a year, reporting errors, regulatory investigations and the troubled launch of a senior bond issue at an eye-watering 9.5% coupon. Shares fell 1.5% on the news – perhaps a fear that there are no fresh ideas?

IAG (LON:ICAG) shares are up close to 1% after Qatar Airways increased its stake to 25.1% from 21.4%.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.