Monday, February 10, 2020

Week Ahead: Focus to Remain on the Impact of Coronavirus

NBHM Research Team

This week, market participants focused on the coronavirus that has been spreading in China and around the world. They also focused on corporate earnings, as more than 80 companies in the S&P500 released their earnings. In addition, they focused on Tesla, the electric car manufacturer that saw its stock price soar. The company, which sold about 365k cars in 2019 is now the second-biggest car company in the world based on its market value. On the other hand, companies like General Motors, Ford, and Volkswagen sold more than 2.9 million, 2.41 million, and 11 million respectively.

Crude oil: The price of crude oil struggled for direction as the markets waited for action from OPEC+. A joint technical team of the organisation met this week to decide the best action to respond to the spreading coronavirus disease. The meeting ended without a concrete action plan. Saudi Arabia was calling for more supply cuts. It was also calling for an extension of the supply cuts that were announced in December. These cuts are supposed to expire in March. However, Russia disagreed on the solution offered by Saudi. Russian leaders believe that Saudi has overreacted. In the coming week, we will be watching whether the cartel will respond to the disease.

S&P500: The S&P500 index rose to its all-time high of $3358 this week. This was in reaction to the positive earnings that were released earlier in the week. Companies like Twitter, News Corp, Viasat, and Lions Gate reported results that were better than expected. The index also rose as investors underplayed the impact of the coronavirus. However, things could change in the coming week as its impact starts getting clearer. Today, companies like Burberry, Honda, and Toyota announced a pullback from the country. Airlines like Cathay Pacific, British Airways, and Japanese Airlines have cancelled trips to mainland China. Therefore, as the earnings season starts to wind down, there is a possibility that market participants will start paying close attention to the disease that has not yet found a cure. The chart below shows the rally of the S&P500 index.

British Pound: This was the first full week of the United Kingdom as an independent country. The British pound declined by more than 1.20% against the USD. The main reason is that participants are worried about the upcoming talks between the country and the European Union. Boris Johnson has insisted that talks must conclude by the end of the year. The EU has rubbished this claim, saying that it will be difficult for a deal to be reached in less than a year.

Divisions between the two sides have already started. Johnson has said that UK manufacturers will not operate under EU rules. He has said that they will maintain good standards. However, the EU has insisted that the UK must use its standards if it wants to access the market. Meanwhile, there will be important data to watch in the coming week. On Tuesday, we will receive the Q4 GDP data, manufacturing, and industrial production numbers. On Wednesday, Boris Johnson’s government will read the autumn budget. RICs will release the housing index on Thursday. The chart below shows how the sterling weakened this week.

Euro: The euro index declined by more than one per cent this week. This is even after data from the region showed a sign of recovery. The German manufacturing PMI rose from 43.7 to 45.3. The Italian manufacturing PMI rose from 51.0 to 51.1. In the EU, the composite PMI rose from 50.9 to 51.3. This was mostly because of the services sector. This week, Christine Lagarde warned that the ECB would likely not have enough tools to respond to a sudden economic crisis. She said this when addressing the European parliament. This is mostly because the bank has already implemented crisis tools like low-interest rates and QE in a relatively strong global economy. In the coming week, we will receive consumer prices data from the region. We will also receive the preliminary GDP data for the fourth quarter.

Kiwi: The New Zealand dollar has been on a strong downward trend since the year started. The NZD/USD started the year at 0.6756. Today, the currency reached a low of 0.6415. This is the lowest level since November 28. This weakness can be blamed on the weakness of the Chinese and Australian economies. The two are some of New Zealand’s biggest trading partners. In the coming week, market participants will pay attention to the country’s central bank, which will deliver its rates decision on Tuesday. While the bank is expected to leave rates unchanged at 1.00%, there is also a possibility that it will cut rates in reaction to the new normal. The bank could also signal that it will cut rates later this year. The chart below shows how the kiwi has been easing against the USD.

US dollar: The US dollar index rose this week as the market received positive economic data from the United States. On Wednesday, data from ADP showed that the economy added more than 290k jobs in January. This was higher than the number released last month. The robust labour market was confirmed on Friday when the Labour department released the official jobs numbers. The economy added more than 225k jobs in January. The private sector rose by 206k, which was higher than December’s 142k. The average hourly earnings rose by 0.2%. However, the unemployment rate rose from 3.5% to 3.6%. In the coming week, we will receive the Redbook and JOLTs job openings data. Other important data to watch will be the inflation data. The CPI, which will be released on Friday, is expected to show that prices rose by 2.5%. The chart below shows how the dollar strengthened against the euro this week.

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