•  Markets focus on the potential economic impact of the coronavirus as the confirmed cases and death toll rise.
• With data still suggesting tentative signs of stabilisation, the Federal Reserve meeting offers little to chew on.
• A busy week for US earnings but share price reaction remains muted.
• Outlook: US primary elections begin, several central bank decisions and the US earnings season continues.

Market and economic review

US earnings, central bank policy meetings and various data releases took a backseat last week, as the fear of broader contagion of the coronavirus steered market performance. Most global equity bourses suffered with emerging market equities being the most notably hit. Government bond yields moved lower and credit spreads widened. The South African rand, Korean won, Brazilian real and Russian rouble were the worst performing currencies against the US dollar, whilst the pound had a strong week in part to the Monetary Policy Committee (MPC) electing not to cut interest rates on Thursday against market expectations.

Markets focus on the potential economic impact of the coronavirus as the confirmed cases and death toll rise

As the world still tries to quantify the severity of the coronavirus and the corresponding impact on economic growth, markets have taken the opportunity to step back until further clarity is available. Staying with facts, there are currently 361 confirmed deaths and 17,205 confirmed cases. This takes the number of cases past the official recordings of SARS, which analysts have been using as a benchmark to estimate market and economic impact. For context, only 98 of those confirmed cases were outside of China (spread across 18 different countries), with only one recorded death.

The World Health Organisation has now declared the outbreak as a PHEIC (Public Health Emergency of International Concern), however this is positive news as it provides support (from global health authorities) to aid those countries with less dependable health systems. Russia has announced that the closure of its land border with China will continue through to 1 March, beyond the end of the Chinese New Year celebrations and the US State Department has advised US citizens against travelling to China.

With the spread of the virus continuing and the reactions of authorities ramping up, the coronavirus is likely to be the focal point for markets in coming weeks, until there are signs that the virus can be contained and the economic impact more accurately assessed.

A busy week for US earnings but share price reaction remains muted

It was a busy week for US earnings with 144 companies reporting (~40% S&P 500 market capitalisation). The EPS growth rate currently stands at -0.7% which is just ahead of pre-season expectations for -1.6%.

A key feature of this earnings season has been the muted share price reaction to both beats and misses on consensus expectations. Our interpretation of this is that it likely means that while equities are well owned; positioning is not yet at ‘extreme’ levels. It is also a reflection of the low levels of management guidance we’ve seen this quarter which is normally a bigger driver of share price moves than reported results. That being said, there were a number of companies whose earnings reports provided an insight into broader macro themes this week worth highlighting.

Amazon delivered a big beat on expectations, buoyed by strong sales over the holiday period. This showed further confirmation of the strength of the US consumer, something that we discussed a few weeks back when the banks reported. On a less positive front, Caterpillar, often viewed as a global manufacturing bellwether, reduced its guidance forecast for 2020. The firm highlighted continued uncertainty as the core reason with the CFO stating that “A lot of people have been deferring making capital decisions”.

With data still suggesting tentative signs of stabilisation, the Fed offers little to chew on

There was not much to draw from the Federal Open Market Committee (FOMC) meeting on Wednesday, where rates were left unchanged. There were a few dovish adjustments in the FOMC statement; the first of which was in the description of household spending which is now only rising at a “moderate” pace vs a “strong” pace as in the December statement. The second comment was a change in inflation in regards to their current policy stance, saying it was appropriate in supporting inflation “returning to” the Committee’s symmetric 2% objective, rather than “near”. Slim pickings indeed.

The UK MPC decided not to ease interest rates on Thursday, where the market expected a 0.25% reduction to 0.50%. The unexpected move resulted in the British pound more than recovering from its downward trend leading into the meeting as the market expected probability of an interest rate cut was rising.

In a relatively quiet week on the data front, US GDP for Q4 printed at 2.1% (annualised), a slight uptick from the expected 2.0%. Chinese data by way of PMIs was positive, with manufacturing printing in line with expectations at 50.0 (down from 50.2) and services improving to 54.1 from 53.5 (vs an expected print of 53.0). 

Outlook

The coming week will start with a focus on US primary elections, with the first of four Democratic primaries in February due to take place in Iowa. Polling currently suggests that Senator Bernie Sanders is in the lead, with former Vice President Joe Biden a close second. This is in particular one to watch due to the difference in policy stance between the two leading candidates, and the possible effect those policies may have on markets.

Away from politics, there are a number of data highlights to watch out for including PMIs from around the world and the US jobs reports for January. On the central bank front we will hear from the Reserve Bank of Australia, as well as decisions out of Brazil, India and Russia. 

Earnings seasons tapers off this week with 16% of the market capitalisation reporting, including the last of the tech names: Alphabet.

By Adam Kibble

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