The Monday Report (On Tuesday) – 28 January 2020

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By Greg Peel

Friday

Aloha!

Not a great summer break for some, but life goes on. Back on board now for 2020 to acknowledge the best January run to date for the ASX200, breaking 7000 for the first time.

As is typically the case with such psychological milestones, volatility became heightened last week as the momentum and FOMO traders met those deciding a round number is a good place to sell. The index was up over 60 points on Wednesday for reasons unclear, down over -40 points on Thursday after two big construction companies were trashed, and up over 30 points on Friday at lunchtime.

Those 30 points had evaporated by the close, ahead of a long weekend locally and the beginning of the week-long Chinese holiday.

While the Australian market seemed uncertain how to react to the building coronavirus issue on Friday, the situation clearly escalated over the long weekend. In short, the SPI futures fell -32 points on Friday night and another -89 last night to suggest an opening for the ASX200 of -121 this morning.

More Chinese cities have been put in lock-down as the death toll mounts. Mind you, there is no lock-down on leaving Wuhan by car. Buses have been banned from entering Shanghai. WHO is yet to declare a global emergency, but one feels that can’t be far off. Markets are not waiting around.

The comparisons are being made with the SARS epidemic in 2002-03. While coronavirus and SARS may have similarities, the glaring difference is that in 2003, China was still a backwater populated mostly by subsistence peasants, with rapid industrialisation and urbanisation just beginning. Despite GDP growth of 11% in 2002 and 9% in 2003, China was still a way off from being the world’s greatest consumer of everything, and that includes international tourism.

Wall Street began to price in the potential implications of coronavirus last week, while in Australia the market is indicating a mixed impact. Healthcare stocks, and CSL ((CSL)) in particular, are understandably popular, while mining stocks are not. Healthcare rose 0.7% on Friday and materials fell -0.9% as investors assume a hit on the Chinese economy.

Energy (flat) hung in there on Friday, but as oil prices fall further that will not be the case today.

The banks helped financials up 0.3% despite Insurance Australia Group ((IAG)) posting the worst individual index stock performance on the day (-5.4%) after downgrading guidance due to the recent hail storm. 

Meanwhile, last week’s villains Downer EDI ((DOW)) and Cimic Group ((CIM)) bounced 6.0% and 3.0% respectively after analyst calls of “oversold”.

With Australia Day now behind us we can officially declare the local market “back to work” this week. Cleary the coronavirus will remain the point of focus in the short term.

This week also brings the first trickle of earnings reports ahead of the season proper ramping up next month. So all is soon to be revealed.

Friday Night

The US earnings season is in full swing on as well, and Friday night’s star was Intel (Dow), up 7.5% on its earnings report. Boeing rose 1.8% after the FAA suggested it was “possible” the Max could be recertified by mid-year, which doesn’t sound like much but as the highest nominally priced stock in the Dow, has a disproportionate impact.

Thus the Dow fell only -0.6% when the S&P and Nasdaq both fell -0.9%. The Nasdaq actually hit a new all-time high from the open, before turning tail, although all three indices closed off their intraday lows.

The Dow was down as much as -300 points before closing down -170, with WHO’s decision to not yet call coronavirus a global emergency providing the impetus for recovery.

But investors have not wasted time in bailing out of the likes of airlines, casino operators and luxury goods retailers, among others. The impact on international travel had oil down another -2% on Friday night. General caution has the safe havens back in focus, with gold up ten dollars and the US ten-year bond yield down -6 basis points to 1.68%.

US indices would have fared a lot worse if not for the likes of tech giants Apple and Google. Both are up 10% this month. Market-watchers are becoming increasingly concerned by the implications of such a lack of breadth in the stock market, with Big Tech now also acting as if it too were a traditional safe haven. How far can they go?

In economic news, a flash estimate of US manufacturing PMI has suggested a reading of 51.7, down from 52.4 in December and below 52.5 expectations. The services estimate nonetheless rose to 53.2 from 52.8. While manufacturing has improved from a period of contraction last year, it’s still a stumbling start. The so-called “phase one” trade deal might have brought some tariff relief, but there’s still a long way to go in an election year.

And Trump hasn’t even started on Europe yet.

Monday Night

Apple fell -3% last night. While Apple is exposed to China through its supply chain, the fall was more emblematic of corona-fear morphing into a more general “risk off” trade across the board. The selling began in a more sector-specific fashion but last night all S&P sectors closed in the red.

President Xi has extended the Chinese New Year holiday through to Sunday. Many Chinese businesses have told their employees to work from home for at least a week beyond that. Standard & Poor’s is at this stage estimating a hit on Chinese GDP of -1.2 percentage points.

Perhaps most concerning is a revelation yesterday from the mayor of Wuhan that some five million of the city’s eleven million inhabitants had left before the travel bans were enacted. Add to that the conclusion from health experts that the coronavirus is contagious during its incubation period, rather than when symptoms have begun to present, and it is easy to appreciate why markets have become fearful.

SARS was only contagious when victims were clearly ill. But market commentators are also making comparisons with SARS from another perspective.

Wall Street similarly fell during the SARS epidemic of 2002-03. Once SARS was contained, the market rebounded sharply. But in 2002, Wall Street was in the midst of a -50% bear market post the Tech Wreck and 9/11. In contrast, before last night, Wall Street was up 32% year on year.

To that end, and on the assumption coronavirus will also ultimately be contained, commentators are suggesting this is the pullback an overbought US stock market needed to have, and that a buying opportunity is beginning to present at lower levels. The flipside is that any rebound eventuating will not be as sharp.

For now, picking the level to re-enter the market is dependent on just how bad the corona situation becomes, and that is the big unknown.

Wall Street is currently in the midst of reporting season but corona has now brought with it a fateful twist. For example, Starbucks reports tonight but it has been deemed the most exposed US “restaurant” stock to the fact no one in China is leaving the house, given the company’s footprint in that country. Also exposed, but somewhat less so, is McDonalds.

Starbucks will report its December quarter numbers and would have offered guidance, but clearly that guidance will now be moot, while at the same time it is no doubt too early for Starbucks to quantify just what impact the coronavirus will have on the March quarter. Hence for many a US company yet to report, those reports may not be at all instructive.

Commodities

Selling in the oils continues at a steady pace – another -2.5% last night – while selling in base metals has clearly accelerated.

The iron ore price is unchanged but that’s misleading because China is on holiday.

Gold was up another ten dollars last night, to make twenty since the ASX was last open, as the US ten-year yield last night crashed -8 basis points to 1.60%.

Weak commodity prices – a reflection of the anticipated hit on Chinese GDP – have weighed on commodity currencies. The Aussie is down -0.8% at US$0.6760.

As noted, the SPI Overnight closed down a net -121 points, or -1.7%, over two sessions.

The Week Ahead

As to what all this will mean when the RBA meets next week is now anyone’s guess. In isolation, the market had reduced the odds of a February rate cut to very little last week given the strong jobs number and housing market resurgence. To that end this week’s December quarter CPI release on Wednesday had been seen as largely irrelevant unless wildly outside expectation.

The December quarter PPI will follow on Friday while NAB’s monthly business confidence survey is due today as are private sector credit numbers on Friday.

China is now closed until further notice. Presumably this means the PMI numbers for January due this Friday will not be published.

The Fed will release a policy statement on Wednesday night amidst no expectation of any change.

A first estimate of eurozone December quarter GDP is out on Friday.

The local resource sector quarterly production report season wraps up this week, as a handful of companies jump the start of the February reporting season.

Oil Search ((OSH)) posts its quarterly today, Evolution Mining ((EVN)), OZ Minerals ((OZL)) and Regis Resources ((RRL)) tomorrow and Fortescue Metals ((FMG)) on Thursday.

IGO Ltd ((IGO)), the artist formerly known as Independence Group, provides both a quarterly production report and earnings result on Thursday, while Credit Corp ((CCP)) reports earnings today, with GUD Holdings ((GUD)) and ResMed ((RMD)) reporting on Friday.

The Australian share market over the past thirty days…

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