Commodity markets are telling us more about the likely economic damage from the coronavirus outbreak than either bond or equity markets. It does not seem entirely rational for US and European equities to be hitting record highs in the middle of potentially one of the most damaging economic events since the crisis.
Asian shares are mixed on Friday, with some evidence of a mild pull back in some quarters after a concerted bounce over the last couple of sessions as we head into the weekend and the US jobs report. Shanghai rose a touch and Hong Kong dipped by around half a percent. China has delayed its trade balance data for Jan.
Earlier on Thursday stock markets extended gains on Thursday, with indices in Europe and the US marking out fresh record highs as investors shrugged off the rise in coronavirus cases and focused on economic stimulus. The Dow and S&P 500 both hit new highs, as did the STOXX 600.
This morning European equities are a touch weaker, picking up the limp handover from Asia rather than the very strong handshake from Wall St. Basic resources, autos, retail and oil & gas are at the bottom of the pile on the open, reflecting the sector risk to slower Chinese and global growth as a result of the outbreak. The FTSE 100 has slipped its 7500 handle with the DAX down a little more to 13,523. The CAC has just turned positive – potentially a leading indicator as are used to seeing dips providing buying opportunities.
Tariff cuts by China and a good dose of central bank stimulus is seen as the cure for risk assets, but this placebo can only mask symptoms for so long - real economic damage and supply chain havoc is coming. On the ground it’s still rather grim. Shenzhen is now in lock down. Cases have risen to more than 31k – but the number of newly confirmed coronavirus cases decreased for the second straight day, China’s National Health Commission said. So we see an increasing divergence between how the market views the spread of the virus and how we it views the economic damage thereof.
Toyota is extending the shutdown of its China factories until Feb 16th. And where’s the muck there’s brass: Apple (NASDAQ:AAPL) supplier (hit by the outbreak already) is going to switch some production to making 2m medical face masks every day.
Burberry (LON:BRBY) is realising that reliance on Chinese consumption is a double-edged sword. In a statement today it has warned on sales and withdrawn guidance because of coronavirus. “The outbreak of the coronavirus in mainland China is having a material negative effect on luxury demand,” the company said today. No surprise but shares are down 3% because of the uncertainty over the outlook.
Currently 24 of its 64 stores in Mainland China are closed. Those still open are seeing a significant decline footfall. This is impacting retail sales in both Mainland China and Hong Kong. ‘The spending patterns of Chinese customers in Europe and other tourist destinations have been less impacted to date but given widening travel restrictions, we anticipate these to worsen over the coming weeks,’ Burberry adds. So not a good look - but not one that has come as a shock in the slightest. Luxury stocks were the first to absorb investor stresses when the virus broke. Burberry has been focused on growing domestic China sales and reported growth in the mid-teens in the 3rd quarter - so there is bound to material hit to full year numbers. Q4 will be a wreck on the catwalk by the looks of things. Hong Kong was already a disaster due to the unrest and will only be worse. At the last update, just before the outbreak hit the headlines, management guided higher for low single digit revenue growth. Depending on just how much damage is wrought in q4 it could turn negative for the year, although I think back to the flatline more likely.
Fiat Chrysler is warning one of its European plants will be forced to halt production in weeks – there is an emerging picture that supply chain disruption is going to be much greater than the market currently believes. More companies in Europe and the US will be warning about the impact soon enough.
Crude oil has failed to make good on a breakout attempt, running into highs at the 100-hour moving average at $52.20 yesterday where the rally fizzled. Failure to break out has left oil struggling and has since failed to recover $51.50 so bears look in control again and now we are seeing $51 providing resistance again. Oil has been hard hit by the coronavirus but is not showing the same disregard for the harsh realities as equity markets. Commodity markets are telling us more about the likely economic damage than either bond or equity markets.
Russia appears to be tentatively agreeing to join OPEC in cutting 2.7m bpd for the first six months of 2020, an additional 1m bpd from current levels. The technical committee recommended supply curbs of an additional 600k bpd on top of the 1.7m bpd already agreed, before Saudi Arabia pledged an extra 400k. Cuts will return to 1.7m bpd for the second half of 2020. This is a temporary solution to what OPEC hopes will be a temporary dent in global oil demand. The problem is it’s not going to be temporary as everyone hopes. For now the the market will price in the risk that oil demand takes longer to recover than OPEC and her allies believe. If 3m bpd is the lost demand just in China, just in Feb, then this measure by OPEC isn’t enough.
In FX both the euro and sterling struggling to regain poise after breaking down around some pretty key levels yesterday. Bears remain in control.
GBPUSD breached support around 1.2940 and headed towards the Dec post-election lows on the 38.2% retracement of the Sep-Dec 2019 rally at 1.29040. Little dips have often been a decent fade trade, but with dollar strength dominating this is not a Brexit headline type event you can easily discount.
EURUSD finally gave up support at 1.0990 to take out the 2020 low - knock enough times and the whole rotten structure comes crashing down. The loss of this support zone opens up a fresh move to 1.0940, the Oct 8th swing low. Trading at 1.0970 sellers are still very much in control and we may be testing fresh lows again today.
Meanwhile, USDJPY continues to push up to retake the 110 handle, which seems only a matter of time, albeit the loss of momentum is starting to cast doubt on this. Failure to breach 110 calls for retest of 108 handle.
On tap today are nonfarm payrolls at 13:30 GMT. Expected around 160k but I think that belter of an ADP (NASDAQ:ADP) report suggests upside risks - I think this is what’s behind the dollar’s move higher so even a beat could see USD pare back those gains.