LCG: Apple record profits, US shares outperform Europe in risk rebound

January 29, 2020

Investors are foreseeing an end to the coronavirus outbreak just around the corner by buying shares and other risky assets while shunning haven assets that have outperformed in the last few days. Whether its too early to do so is quite another matter. Markets tend to move before the information can be confirmed.

The latest information we have is that the toll of the virus has risen to over 130 people and the US is considering a complete ban on flights to and from China. Awful as it must be for the people in Wuhan, most of the deaths have occurred there which at least calms investor fears of a contagion.

Away from the coronavirus. Republicans are debating whether to vote to introduce more witnesses into Donald Trump’s impeachment trial. If witnesses are called, Trump’s acquittal is no longer a foregone conclusion and that could inject some uncertainty into markets. Separately the US President will be signing the new North American trade deal at the White House on Wednesday.

EQUITIES

Shares in Asia were playing catchup to the sell off after a Lunar New Year break. Hong Kong’s Hang Seng index shed 3% on Wednesday. It’s worth evaluating this week’s price moves to see where the regional strength is.

The Euro Stoxx 500 dropped 2.3% on Monday and rose 0.8% on Tuesday while the S&P 500 rallied 1% on Tuesday after a 1.6% decline on Monday. The fall was bigger in Europe than in the US and the subsequent rebound was shallower. Although some of the sell-off started on Friday after European markets were closed, nonetheless. The coronavirus reaction tells us that the stock market strength is still on Wall Street.

The gains on the Dow and S&P were powered by Apple and other tech companies. Apple shares gained 2.8% yesterday and have added another 1.5% in afterhours trading after reporting record earnings in the fourth quarter. The record sales were rekindled by demand for new models of iPhone and margins were boosted by accessories like air buds earphones over the holiday period.

FOREX

We are watching the Aussie dollar recovering from 3-month lows against the dollar and the yen as a barometer for risk-sentiment in the forex market. AUDUSD 0.675 and AUDJPY 73.5 are the make or break levels for us.

Focus will turn on the dollar today as the Federal Reserve decides interest rates. No action is expected on interest rates but Fed Chair Jerome Powell’s take on the American consumer,  manufacturing and the effect of the coronavirus will be worth listening to. In the lead up to the meeting President Trump tweeted “The Fed should get smart & lower the rate to make our interest competitive with other Countries that pay much lower”.

The main issue effecting the pound is the scope for the Bank of England rate to cut on Thursday but after that we suspect it turns back to Brexit. In a sign of the battle lines being drawn, the UK government will introduce a bill to end EU fishing rights in UK waters.

COMMODITIES

The rebound in risk sentiment is being reflected in commodity markets. On Tuesday gold slipped 0.9% as haven demand retreated while hopes for a pickup in global economic growth if the coronavirus is contained caused Brent crude oil to rise 0.6% a barrel, reversing earlier losses.

Opening Calls

FTSE 100 is set to open 11 points higher at 7491

DAX is set to open 5 points higher at 13,328

S&P 500 is set to open 9 points higher at 3285

Dow Jones is set to open 79 points higher at 28,801