In this week’s market update: Markets rally despite the continuing coronavirus threat; it’s round two of the Democratic Presidential candidate race; and another 70 S&P 500 companies update on earnings.
Investors are watching developments in China nervously as the infection and death rates in the coronavirus outbreak continue to grow. But markets remain at or close to all-time highs in some cases as conviction slowly grows that the disease can be brought relatively quickly under control.
Last night the S&P500 hit another new high and this morning’s news from Asia picked up on that positive theme. Hong Kong shares rose 1.4% on Tuesday, their first gain in three days, while mainland Chinese shares were up 1%. The CSI 300 index of Shanghai and Shenzhen shares has rallied by 8% since its plunge on the first day of trading after the lunar New Year holiday a week ago. Hong Kong is up 5% over the same period.
This week is seeing the first tentative return to work after that extended lunar New Year holiday in China. Many businesses have put in place work from home arrangements, however, as the death toll rises above the equivalent for the SARS outbreak in 2003 and there remains understandable reluctance to bring large groups of people together again.
Elsewhere, some factories and businesses remained closed because much of their workforce is yet to return from family visits over the holiday period. The timing of the outbreak coincided with China’s annual New Year migration in which millions of migrant workers return to their family homes.
The total number of confirmed cases has now risen to more than 40,000 and the death toll has climbed to over 1000. The vast majority of these are still in Hubei province, close to the centre of the outbreak. Outside China, infections have largely been contained so far, with just a couple of deaths outside the country.
Markets appear to have accepted the more optimistic view that the outbreak will peak and have only a limited impact on the broader global economy which can be offset by central bank action. But investors remain on full alert. This week Nissan said it would stop production at a plant in Japan due to shortages of components, suggesting the full economic effects are not yet known.
Last week was Wall Street’s best since last summer, up 3.2%, but that performance can only be sustained if the economic impact of the flu-like virus is minimal. The jury remains out on that for now.
Closer to home, markets were under pressure thanks to the unexpected success of Ireland’s third party, Sinn Fein, in the weekend’s snap election. The nationalist party, which during the troubles was the political wing of the anti-British IRA, overtook the two more mainstream parties Fine Gael and Fianna Fail which have dominated the political scene in Ireland in recent times.
The success of Sinn Fein is just the latest in a long run of political shocks to the political establishment in recent years that includes Brexit and the election of Donald Trump. The market reaction was negative, with Ireland’s biggest banks, AIB and Bank of Ireland, both falling more than 5% on Monday. The overall ISEQ index of Irish shares was 1.2% lower.
One of the market’s hardest hit by the Coronavirus outbreak has been oil, after it was estimated that demand could drop by as much as 25% year on year in China. That would be the equivalent of a 3% reduction in global consumption.
That might not sound an enormous amount, but in a market which is already struggling to cope with excess supply thanks to the growth in shale oil production in North America it is a damaging hit to the supply/demand equation that determines the price. Since the beginning of the year oil has fallen by more than 15% to around $55 a barrel.
At that level some smaller producers will struggle to remain profitable and even the oil majors will see their profits slide thanks to the fixed costs of extracting crude. This demand shock and the consequent fall in prices has prompted OPEC, led by Saudi Arabia, and its allies such as Russia to discuss further cuts in production. That would be in addition to the more than 2m barrels a day that they had already agreed for the first half of 2020.
A falling oil price is obviously bad news for the energy sector but could provide a silver lining for companies that are big consumers of oil. This and the response of central banks, including China’s, to move quickly to support economic growth with lower interest rates, is one reason why shares have continued to rise despite the apparently gloomy headlines.
Cheaper oil has the potential to underpin earnings growth, which ultimately is the main driver of share prices in the long run. Earnings remain in focus this week, with nearly 70 companies listed on the S&P 500 due to announce results. Names in the spotlight include PepsiCo, Kraft, Heinz, Cisco and AIG.
On this side of the Atlantic there’s a steady flow of larger companies reporting too. Barclays, Daimler, Renault, Bombardier and Airbus are due to announce numbers. So too is Credit Suisse, which this week ousted its chief executive, Tidjane Thiam, after a corporate spying scandal.
Politics is never far from the market headlines at the moment, and this week will provide another batch of talking points. Last week’s focus in the US was a fiasco in Iowa, when the Democratic Party was unable to announce the result of its caucus after technical glitches in a new vote counting app. Iowa has traditionally enjoyed a high profile as the holder of the first candidate selection contest ahead of the Presidential election in November. This may be the last time it enjoys that honour.
This week, attention swings to New Hampshire, which will hope to deliver a less shambolic election. The big surprise of last week’s caucus, when it was finally announced, was the performance of Pete Buttigieg, the 38-year old candidate from Indiana who looks like posing a serious challenge to a generally old, uninspiring and in some cases politically-unpalatable field.
As in the UK, the main challenge for the opposition party is deciding how far to the left to swing in a bid to unseat the President. It is widely felt that two of the candidates, Bernie Sanders and Elizabeth Warren, are too far to the left for either middle America or Wall Street. The more middle of the road candidate, former vice President Joe Biden, has failed to garner much voter enthusiasm while Mike Bloomberg, the billionaire financial media tycoon, is only just getting his campaign underway.
On this side of the pond, political focus is on whether or not the Government gives the green light to the HS2 high speed rail link between London and Birmingham, Manchester and Leeds. The project has run over budget and time, as most big projects of the kind do, but it is felt by many to be a key part of the Government’s pledge to ‘level up’ the UK’s economy by boosting the economic fortunes of the overlooked north and middle of the country.
Further out, but starting to make the headlines, is next month’s Budget, with the government starting to test the market’s response to proposed tax reforms that many traditional Conservative voters would strongly resist - notably around pension tax relief and inheritance tax.
The new look Conservatives, put in power by a new generation of first time Tory voters in the north and midlands, are having to weigh up the interests of very different constituencies in their old southern and new northern heartlands.