The pendulum of risk swings back and forth...Hong Kong shares sunk overnight as expected as the market played catch upon reopening after the new year holiday. The Hang Seng dipped 3% before paring losses a touch to trade 2.6% weaker.
This comes after a rebound in the US and Europe as investors decided to buy the dip following Monday’s sell off. The Dow added 187 points, after shedding 450 on Monday. The S&P 500 rose 1%. The FTSE 100 and DAX both climbed 0.9%.
Ahead of the open, futures indicate a flat open for European markets as they seek fresh direction from the Fed meeting later, developments in China with the coronavirus, and a raft of corporate earnings on Wall Street. The Dow could be particularly sensitive with Boeing (NYSE:BA), McDonald’s (NYSE:MCD) and Microsoft (NASDAQ:MSFT) reporting. We also have Tesla and Facebook (NASDAQ:FB) coming up – it’s a big day for earnings.
In terms of the Fed meeting today, the key thing we’re looking for today relate to balance sheet expansion – anything that suggests the free money taps could be turned off may expose riskier assets. Markets are accustomed to the Fed riding to the rescue and using monetary policy to create an easy path higher for stocks.
Today’s Fed meeting will be important against this backdrop of heightened risks and we also need to look at whether the expected increase in the IOER by 0.05% to 1.6% will worry markets. As detailed in our Fed preview: Just tweaks, we expect no change to the fed funds rate and for the FOMC statement to describe policy appropriate. Market pricing indicates no chance of a cut. The emergence of the coronavirus in China will warrant a degree of caution in the outlook from the Fed, whilst there is little upward pressure on prices to suggest a shift in the FOMC’s stance. The signing of the US-China trade deal only confirms priors and doesn’t materially alter the outlook from last month. Recent economic data only confirms momentum has slowed but remains solid. Yesterday’s December durable goods orders ex-defence were sharply lower. Easing bias still very much place.
Coronavirus is already bigger than SARS was in China. There are now confirmed cases of the coronavirus in mainland China, including 132 deaths, according to China's National Health Commission (NHC). There’s mutterings the true number is much higher. The White House is said to be considering an outright travel ban between the US and China – this would have serious implications for trade and the economy.
Cases are rising but the questions over the coronavirus outbreak as it pertains to the Chinese – and therefore global - economy remain unanswered. Could it affect China’s ability to meet trade deal commitments for instance? There is a worry if things get really bad, not only do we see a material decline in Chines GDP growth, but this also creates headwinds for complying with the deal. Further deterioration in the yuan is among the most obvious concerns as we have seen USDCNH rally since the outbreak and threaten to go above the key 7 level. In terms of growth being affected in China, there is a clear risk to supply chains and contagion in the rest of the region as well as knock-on effects further afield. The most obvious risks are to consumption but a sustained lockdown in the major cities would also tend to lead to a loss of output that could be hard to claw back later in the year.
The swing in the risk pendulum favoured stocks and oil but sent gold bulls packing. Crude oil recovered the $54 handle to successfully close the gap from Sunday’s open. Sentiment remains dicey. OPEC and co are getting on the wires talking up prices, indicating they’re starting to really worry.
Gold has eased off highs north of $1580 to trade around $1563.
Interestingly both gold and oil have closed their respective gaps after moving sharply at the start of the week on coronavirus fears. Markets have been swift to retrace, so we now must see whether these mark reversals or whether the pre-existing trends reassert themselves.
Sterling is steady ahead of tomorrow’s knife-edge Bank of England decision. Markets see a roughly 50% of the MPC voting to cut rates. GBPUSD is well anchored at 1.30 but whatever the outcome will slip that berth. Recent comments from several policy makers at the Bank, some softer inflation data and GDP numbers, and persistent risks to the global outlook suggest the MPC may choose to act now to cut.
Meanwhile Britain has decided to allow Huawei to supply parts of its 5G network. This could be a mistake, and make doing a trade deal with the US harder. But it also be a bargaining chip. It also indicates the UK is prepared to forge its own course, which is no bad thing.
EURUSD has found support at 1.10 is holding for now. USDJPY continues to languish at 109 but there’s not much conviction on either side to see 108 or 110 first.
Equities
Apple (NASDAQ:AAPL) shares rose after hours following a thumping top and bottom line beat on its earnings. Although there are doubts about the potential impact of the coronavirus on Chinese operations and sales in the coming quarter, and Services growth was disappointing and is still slowing, record revenues and profits on blockbuster iPhones and Wearables sales will be enough to keep the bulls satisfied and justifies the stock’s ramp of the last year. Multiple expansion last year has been backed up by stunning earnings performance.
Apple (NASDAQ:AAPL) delivered record quarterly revenue of $91.8 billion, +9% from the year-ago quarter, and earnings per share of $4.99, up 19%, which was also an all-time record. Both handsomely beat expectations.
Q2 guidance is wide - $63-67bn - reflecting the uncertainty over China, but it’s still stronger than forecast. Momentum appears very strong right now.
Services revenues were up 17% year-on-year to $12.7bn, which was weaker than expected. The 17% expansion represents a continued slowdown in the growth rate that has been in evidence in recent quarters. This may give investors some cause for concern, but with Apple (NASDAQ:AAPL) there’s always something else. And with iPhone sakes returning to peak form, you can be content to overlook a miss in Services. Details on Apple tv+ are scant. Tim Cook was forced to avow it’s not a hobby, which means it is. Streaming is good for the ecosystem, but in of itself I’d suggest it’s more likely to be a cost - if done properly - than a revenue driver.
iPhone sales returned to growth, rising 8% from last year’s holiday quarter on the back of the new iPhone 11 models. That’s all before the 5G super cycle. We also saw Apple (NASDAQ:AAPL) deliver a return to growth in Greater China.
Wearables are another tower of strength. Other Products sales rose 44% and remains the fastest growing segment. At this rate it could soon overtake Services as the second biggest contributor to earnings after iPhones. I’ll stick to my view that if Apple (NASDAQ:AAPL) is doing well, corporate America is OK.