In this week’s market update: China’s coronavirus outbreak brings New Year rally to a halt; oil and commodities fall on slowdown fears; and earnings season accelerates.
The trigger for market corrections is often unexpected and the end of the recent stock market rally has been no exception. Fears about interest rates, trade wars, corporate earnings, GDP growth rates and inflation may have provided the wall of worry for the bull market to climb in 2019 but the trigger for the ongoing market wobble has come from another quarter altogether.
The spread of the coronavirus in China, and the first infections in a handful of other countries around the world, have seen markets fall sharply around the world. The financial impact in Asia has been disguised by the Chinese New Year holiday which has shut key markets and will see them remain shuttered for the rest of this week. But investors are bracing themselves for further falls when Chinese markets re-open next week and Hong Kong on Wednesday.
Outside China, Asian markets fell sharply on Tuesday, with the Korean market down 3.1% on fears that Chinese tourists will stay away. Hotel and cosmetics companies were hard hit. Singapore was down 1.9%. Japan was down 0.6% after falling 1.6% on Monday.
Since the start of October last year, the MSCI World index had risen by 14% at last week’s high. After such a rapid rise in prices, many investors were looking for an excuse to trim their holdings and the latest scare has provided it. The FTSE 100 was down 2.3% on Monday, with the German and French markets off a bit more than that. On Wall Street, the S&P500 fell 1.6%, with bigger falls for the energy and tech sectors which are most sensitive to global growth. The Nasdaq index was 1.9% down. It was the worst fall for US stocks since October.
In both Europe and America, the focus has been on companies most obviously affected by the travel clampdown and likely consumption slowdown as the Chinese authorities battle to control the spread of the disease. In Europe, British Airways owner IAG saw its shares fall heavily and Burberry, which is reliant on Chinese demand, also slid after the weekend. Other stocks in investors sights included Air-France-KLM, Intercontinental Hotels, Hermes, EasyJet and Carnival.
When the US market opened, both American and United Airlines and Delta were among the biggest fallers, along with luxury goods brand Estee Lauder and resorts like Las Vegas Sands and cruise operator Royal Caribbean.
Also under pressure have been those commodity markets most vulnerable to weaker Chinese demand, notably iron ore and oil, where the Brent benchmark slipped below $60 a barrel, down 3%, as investors moved on quickly from their recent concerns about developments in the Middle East. Tullow Oil, Rio Tinto and Anglo American were all big fallers on Monday.
Parallels have been drawn with the 2003 SARS outbreak, which caused 800 deaths from around 8,000 infections and triggered a strongly negative market reaction. Shares in Hong Kong, for example, fell by nearly 10% over a six-month period. SARS peaked 3-4 months after the initial outbreak was reported so this cloud could hang over markets for some time.
The Chinese authorities are bracing themselves for a hit to first quarter GDP as the timing of the outbreak just ahead of the New Year holiday, when millions of people travel to see family and typically spend heavily on celebrations, could not have been worse.
Shanghai, the country’s financial hub, has ordered companies to remain closed until February 9th and the manufacturing hub of Suzhou has postponed the return to work of millions of migrant workers.
Unsurprisingly, haven assets are in favour, with gold rising by nearly 1% to close to $1,600 an ounce. Yields on US Treasuries fell 5 basis points to 1.62%, pushing the price of the bonds higher. The Japanese yen strengthened while the Chinese renminbi weakened against the dollar.
Amid the flight to safety, investors are reminding themselves that in previous outbreaks, markets have rebounded quickly. The initial market falls with SARS, swine flu, Ebola and Zika were easily recovered and markets continued to rise in the three months after the peak of the infection. With SARS the 8.6% drop from start to peak in Hong Kong was followed by a 31% rebound in the following three months although it should be remembered that this occurred at the bottom of the post dot.com slump and not after 11 years of rising market.
Coronavirus is not the only thing on investors’ minds this week. There is a full schedule of company results, too, with more than 140 members of the S&P500 index due to report earnings this week. Technology is in focus, with results from Apple and Microsoft, two of the four US companies to have recently cleared the $1trn market capitalisation hurdle. Also reporting is Boeing, which has struggled amid the fallout from the grounding of its troubled 737 Max aircraft.
Amazon and Facebook are two other big tech names due to announce figures this week, with Pfizer, McDonald’s, Tesla, General Electric and ExxonMobil some of the other highlights from across the market’s sectors.
Attention will be focused on earnings after the strong rally in share prices because, in the US at least, valuations have risen to more challenging levels at which investors will need to see companies deliver on analysts’ forecasts.
Also in the spotlight this week are the central banks on either side of the Atlantic. The Fed announces its interest rate decision on Wednesday evening, with most observers expecting no change. Having reduced interest rates on three occasions between July and September last year, the Fed appears to be in wait and see mode. That said, the bar appears to have been set high for any return to monetary tightening, with an apparently greater tolerance for slightly higher inflation at the central bank to offset years of undershooting by prices versus target.
Here, the outcome of the Bank of England’s Thursday rate call is less certain. Expectations have risen in recent weeks that the Bank is preparing a rate cut back to 0.5% to counter the slowing in the UK economy last year thanks to Brexit uncertainty and in the run up to the December general election. Last week’s better than expected PMI data showed a stronger than expected start to the year for the UK economy and the odds on a rate cut fell a bit but still stand at roughly 50%.
Uncertainty about whether the Bank will cut this week has seen the pound slide from its post-election highs. It currently stands at about $1.31.
After three and a half years in which this market report has focused, at times obsessively, on Brexit, the UK’s departure from the EU will finally happen this Friday evening at 11pm UK time. It may well come as something of an anti-climax after all the drama since June 2016 but that is because the important discussions are yet to begin. The UK will enter a so-called implementation period on Friday but negotiation period is a more accurate description because it is not yet clear what will be implemented at the end of 2020 when the 11-month transition is due to come to an end. Indeed, there remains some uncertainty about whether any favourable deal really can be struck in that short time.