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China Rallied Overnight To Pare Back A Little Of Monday’s Collapse

Published 04/02/2020, 10:42
Updated 25/12/2023, 10:05

China rallied overnight to pare back a little of Monday’s collapse as we saw a broad return to risk-on across Asia as fears of the coronavirus sweeping the region eased back a touch and investors hunted on the bargain shelf. Support from the PBOC is helping stabilise things, whilst there does not yet appear to be a serious escalation in the rate of new cases in China – up to 20.4k as of Feb 4th, which is up just 700k from the 19.7k reported Feb 3rd, and down on the 2.5k increase in new cases from Feb 2nd to Feb 3rd.

Tentative signs of a plateauing in new cases will be supportive of risk. China’s A50 was up near 3%, while the Shanghai Composite rose 1.34%. Hong Kong, down 9% in two weeks, rallied 1%. Europe looks firmer too, with the FTSE 100 looking to break 7400 again and the DAX clear of 13100. European shares rallied on Pavlovian dip-buying yesterday. The FTSE 100 and DAX both gained about half a percent to ease above of important support levels at 7300 and 13000 respectively.

US stocks also bounced, with the S&P 500 up 0.7% to claw back a portion of Friday’s losses. The Dow added 143pts. Investors are completely conditioned to buy the dips - but again rallies still lack real conviction - for the time being. What this shows is that the market still wants to rally – you can say that there’s plenty of reasons for a pullback – and there are objectively many reasons to take risk off the table – but the market still seems to want to go up. If we go the rest of the week without any real escalation in cases in Europe and/or the US then the market will undoubtedly mount a fightback - to 29k for the Dow and 3300 for the S&P 500. We are entering a key phase of the outbreak now in terms of how we measure the economic damage and whether it produces a material reduction in equity valuations.

Better US manufacturing data helped improve sentiment around US assets, though we can only make tentative assertions about where it goes next, given the uncertainty over the coronavirus.

Tesla (NASDAQ:TSLA) shares jumped 20% in its biggest one day gain for 7 years. Argus Research raised its price target to $808. If you want to see what a short squeeze is, this is about a severe as it gets. What we wonder is who will be the buyers once the shorts have finally capitulated? There is a problem in a short squeeze in as much as it is not sustainable forever - it lasts only as long as the shorts have positions to give up. The next driver for Tesla will be FOMO.

Google (NASDAQ:GOOGL) parent Alphabet (NASDAQ:GOOG) rallied 3.5% but then handed it all back in after-hours trading following a slightly disappointing earnings update. Non-advertising revenues were a little light with net revenues up 18.5%. Growth in the non-ad business slowed from 39% year-on-year in the third quarter to a more modest 22%. Smartphone sales were a problem because of a strong year-ago quarter it seems. For the first time we go a breakdown of revenues from YouTube and cloud computing. YouTube revenues were up 36% to $15bn, while cloud revenues $53% to $2.6bn. Moonshot losses rose to $2bn whilst there were also 2% of FX headwinds on revenue growth. A messy set of results in some ways but brightly speaking the core ad business remains a golden goose that gives Alphabet a phenomenal ability to generate cash.

Oil is the bearing the brunt for now. Oil is in a proper bear market after steep falls Monday. WTI took a $49 handle to trade about 24% below its Jan 8th peak. Brent is down a similar margin.

What initially was thought to be a temporary hit to the market now looks demand destruction proper. This kind of oil demand shock has not been seen for over a decade. The longer the lockdown in China and travel restrictions globally the greater the impact. OPEC and allies are worried and are bringing forward the March meeting to this month. There is talk of OPEC+ adding 500k bpd to cuts of 1.8m bpd, but they’re just getting crushed by this market. Too much uncertainty to see a turn yet - traders are getting burned trying to call the bottom.

The push below $50 opens up a retest of $47 and thence a move into the low $40s. However, $50 is an area of key long term support and we’d need to see another sustained drop under this level before being confident of further downside.

FX markets are relatively calm with majors holding tight ranges, but the dollar is mildly bid. GBPUSD has found support at 1.30 wanting, retreating to 1.2980 this morning. Support seen between this level and 1.29750, before the route to 1.2910 is open. The pound is suffering because of no deal fears stalking the markets once again, like a horrible recurrence of the nightmare that was 2019. Sterling will be increasingly sensitive to headline risk around EU trade talks going forward.

EURUSD has struggled to maintain any momentum as bulls faltered in the push to 1.11. The pair has retreated to 1.1050. USDJPY has driven off the lows to eye 109 again, wrestling currently with the 50-week moving average at 108.870.

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