LCG: Market Wrap February 19th

LCG: Market Wrap February 19th

Financial markets
Beursvloer (01)

A small decline in the number of coronavirus cases combined with a determination on behalf of the Chinese government to ward off the economic damage is seeing an uplift in market mood. We aren’t putting too much stock in the official China figures, which appear to paint a picture rather than reflect reality. But if Beijing ups stimulus measures then those economic effects are real.

Prospects for a rebound in sentiment follow a flight to quality on Tuesday that saw a decline across global equities, 7-year highs in the price of gold and the euro swiped down toward 3 year lows.

EQUITIES

European share look set for a higher open on Wednesday after a rise in Asia, while futures point to a higher open on Wall street.

Apple shares fell after the firm warned it would miss iPhone sales targets because of the disruption to supply chains and sales caused by the coronavirus. Apple’s warning is not being ignored but investors can live with it if the disruption is only temporary.

Apple shares led a fall in technology shares. But a brief intra-day high in the Nasdaq Composite index would imply investors are taking the warning in their stride. The Dow Jones saw a third day of losses while the S&P 500 closed lower but ended off its lows.

Things look a little less stable in Europe. The DAX index tumbled 0.8% after terrible ZEW figures showed a fatigued German investors base.

Stock markets have recovered all the initial fallout from the coronavirus on the expectation that the economic fallout would be limited in geography and duration . But record highs demonstrate a market that is downplaying risk too easily.

FOREX

The euro making a beeline to 3-year lows versus the dollar is renewing calls for parity. Markets had been waiting for the hard European economic data to catch up with bottoming in surveys after the trade war-induced contraction. Now surveys have tanked again it could spell a recession. With the benefit of hindsight, the best argument against euro-dollar parity on prior occasions was the resilience of the Germany economy. This time Germany is in a rut and that makes the case for parity more compelling.

UK inflation data is out today. CPI is expected to pick up to 1.6% y/y which reflects the rising economy activity since the election. Rising inflation is less welcome when wage growth is tailing off because of the squeeze on disposable income. Yesterday average earnings narrowly missed estimates, rising at 2.9% instead of the 3.0 expected.

COMMODITIES

The comment in yesterday’s note that “We think another test of 1600 per oz is on the cards” proved unusually prescient when gold rallied $20 to hit the target in a few hours. After making a new record closing high, in which it closed ear highs of the day, a moved beyond the $1611 intraday high from January is within reach. If stock markets are already at record highs, its hard to see how sentiment can improve so immeasurably to knock gold as a haven. The trajectory for gold looks northwards.

Discussions at various levels between Saudi Arabia and Russia on the idea of a further production cut are supporting oil prices. That’s even as uncertainty about the impact on fuel demand from the corona virus persists. Putin is sensibly holding out. OPEC risks being an output cutter of last resort for the price of oil.

Opening Calls

FTSE 100 is set to open 40 points higher at 7422

DAX is set to open 64 points higher at 13,745

S&P 500 is set to open 8 points higher at 3378