Weekly market update : New unknowns in 2020

Monday February  3

Weekly market update

Despite good corporate earnings, financial markets experienced strong clearings in the past few days as traders regained risk aversion due to the spread of the Chinese coronavirus, which is expected to weigh on the global economy.

Indexes All the major clues lost ground over last week. In the United States, despite the fine performance of large caps (Apple, Microsoft, Amazon), the Nasdaq100 recorded a loss of 0.7%. The Dow Jones lost 1.6% and the S&P500 1.3%. Volatility resurfaced, as did the VIX, which returned to its highs since October. In Europe, the CAC40 fell by nearly 3.5%, while the Dax and the Footsie posted weekly losses of 4.1% and 3.8% respectively. For the peripheral countries of the euro zone, Spain lost 1.1% and Portugal only 0.5%. In Asia, the Nikkei lost 2.6%, the Hang Seng dropped 5.7% over the last three sessions, while the Shanghai Composite has been closed since January 23 for the Lunar New Year, and only reopened today with a big drop. The VIX is a bellwether of fear The volatility observed on the S&P500 rises above its 200-day moving average.

Commodities Oil markets are heading for another week of declines, still impacted by the economic consequences of the spread of the coronavirus in China. The Middle Kingdom is the world's largest importer of hydrocarbons. Operators fear that the confinement of Hubei province could weigh on world crude oil consumption. WTI is slightly up after losing 3% last week and now reaches USD 51.1 Gold continues to be sought for its safe-haven nature and is at USD 1,574. Silver's path remains divergent from that of the gold metal and loses ground at USD 17.7. Palladium and platinum experienced profit-taking at USD 2,310 and USD 975 respectively. Depression persists in the base metal compartment. Pressure remains high due to the health crisis in China. Copper falls to USD 5,621 (see graph), lead falls back below USD 1,900 and aluminium is trading at USD 1,720. Strong correction in copper prices

Equities markets Last week, there was a common point between the CAC40 and the Dow Jones. For each of the two indices, the leader in terms of capitalization was publishing results. It is clear that both companies have satisfied their shareholders with historic results. A true tradition that made Bernard Arnault say, during the presentation of the results: "Sorry to repeat myself! France's flagship luxury goods company has just passed the symbolic 50 billion euro mark in annual sales, i.e. +15%. As for the Cupertino-based company, the first quarter of 2020 has broken a record, with a quarterly turnover of 92 billion dollars. But it is especially on the profitability side that the surprise comes, with an EPS of USD 4.99, or 55 cents more than expected. All lines of sales are experiencing significant advances: services (+17%), smartphones (+7.6%) and connected accessories (+36%). For the past two years, both stocks have benefited from a cash flow that is being invested in priority over large companies in order to benefit from the liquidity of their stock market. French-style luxury goods remain very popular and the Apple planet is doing well. The two giants therefore remain unstoppable, unless a destructive virus comes to stop the good prospects over the coming months. Doubts therefore persist to this day, especially since these groups are highly dependent on China, where some of the consumers of LVMH and many of Apple's production sites are located. Ratio between LVMH and CAC40, and between Apple and the S&P500 Over the last decade, these ratios validate the hegemony of large caps.

Bond market Given the imponderables surrounding the spread and knock-on effects of the coronavirus, high-yield securities in the euro area government bond universe appear to remain an attractive option for many investors. These "safe haven" securities offer limited risks, even if yields are half satisfactory. As a direct consequence of these shifts, bond yields have fallen across the entire spectrum. As a result, the amount of debt with negative yields has jumped by $1.2 trillion since last week and the trend is not expected to slow in the near term. As a result, the 10-year Bund yield reached its lowest level (-0.40%) since early November, when it was still not 100% certain that the "Phase 1" agreement between the US and China would be signed. The French OAT has followed the same path, with a benchmark returning to negative (-0.14%). Italy benefited from this trend, as did Spain, with both countries seeing their debt financed at 0.94% and 0.26% respectively. Still in southern Europe, Athens received 19 billion euros in subscriptions for its 15-year debt issue. Greece benefited from the general appetite for government debt and the upgrade of its rating to BB by Fitch. Its interest rate is in the historic low range at 1.11% and 1.9% on the 15-year bond. For its part, the Swiss 10-year bond saw its yield fall significantly to -0.75%.

Forex market As the United Kingdom exits the European Union and despite the status quo of the BOE, the pound sterling is showing firmness, so the test of the negotiations is about to begin. In the meantime, the GBP/USD pair is stabilizing at 1.31, as is the GBP/CHF pair at 1.27. For its part, the euro remains in equilibrium against the dollar between USD 1.10 and USD 1.11, with still little volatility. Low European interest rates are a factor in this stagnation. In a market still preoccupied by the Chinese virus, safe havens are getting a bit ahead of the game. This is the case for the yen, which is rising against most of the major currencies. As a result, Forex traders have positioned themselves on the Japanese currency, pushing the EUR/JPY to 120. The course also duplicates itself against the greenback at 109 JPY, gaining 150 basis points. In Australia, after trade tensions and fires, the outbreak in neighbouring China now poses a serious threat to growth. The Australian dollar has seen some easing, with the AUD/USD pair at 0.67. The Australian dollar has also seen some easing against the greenback, as the AUD/USD pair at 0.67.

Economic data Last week was busy with macroeconomic publications on both sides of the Atlantic. In Europe, the IFO index disappointed. It came out at 92.9 (vs. 95 expected and 93.9 previously). Also in Germany, the government is forecasting growth of 1.3% in 2021 and has raised its forecast to 1.1% for 2020. The government expects strong domestic demand, supported by tax cuts and wage growth, as well as buoyant public spending, to offset weaknesses in industry. This is a major event. The UK will officially left Europe. The divorce agreement provides for a transitional period until December 31 and the market does not expect major changes in the immediate future. In the United States, as expected, the US Central Bank has kept its key rate between 1.5% and 1.75%. In its report, the Fed estimates that consumer spending is moderate and investment remains weak. According to the Fed, it is still too early to judge the economic impact of the viral pneumonia epidemic. In Asia, China's manufacturing activity declined in January, with the official PMI manufacturing index falling to 50, down slightly from 50.2 the previous month. In contrast, the service sector is doing well, with non-manufacturing PMI rising from 53.1 to 54.1.

New unknowns in 2020 The markets are focusing on the global spread of the viral factor, which is expected to peak in about 10 days. The impact on the economy remains obvious, as the possibility of China being half closed to business for an extended period of time would not give a good economic signal. Indeed, a slowdown in economic activity in a country that accounts for 1/6th of global GDP (double the 2000 level in the days of the Sras) and a third of global investment will inevitably have an impact on world growth if the epidemic continues. In this disturbing climate, corporate earnings are thinking more cautiously and in this field, it is clear that large companies are pleasing their shareholders, with chronic successes for digital giants such as Apple and Microsoft. At the same time, the first results of January's PMI surveys send a rather reassuring message, if not exhilarating. One more light in this context of many unknowns.