Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.
Global equity markets recovered their poise last week and painted a positive picture as investors shrugged off concerns over the potential impact of coronavirus. Further supportive fiscal policy action from the Chinese authorities helped offset fears on any drag on economic growth as a result of the virus. Aside from that, investors struggled with a bit of “information overload” amid a slew of fourth-quarter (Q4) corporate earnings reports in the United States and Europe.
Coronavirus Concerns Continue
The outbreak of coronavirus remains a key talking point for investors, with some uncertainty over the true extent causing some unease. Although the number of new cases is showing signs of a decline, the overall death toll continues to rise. However, markets have taken some reassurance from the supportive measures announced by the Chinese authorities.
Some observers are questioning the accuracy of Chinese data. Notably, Larry Kudlow (Director of the US National Economic Council) stated: “We are a little disappointed that we haven’t been invited in, and we’re a little disappointed in the lack of transparency coming from the Chinese”.
The Chinese authorities have announced several measures to try to counter the negative economic impact.
- Rate cuts: The People’s Bank of China (PBOC) cut the rate on medium term lending facility to 3.15% from 3.25%. Earlier this month, the PBOC unexpectedly lowered the interest rates on reverse repurchase agreements by 10 basis points.
- Several regions (Wuxi, Shanghai, Xi’an and Zhejiang) have rolled out easing measures for the real estate sector, in order to cushion the liquidity/operation shocks due to coronavirus disruption.
- The China Banking and Insurance Regulatory Commission (CBIRC) announced it will raise the tolerance of non-performing loans as the banking system is guided to extend the loan repayment, especially for small to mid-size enterprises (SMEs).
It was interesting to see comments from China’s President Xi Jingping over the weekend that the country “still needs to deliver this year’s economic and social targets”. The inference from that, is that we can probably expect further stimulus. Separately, it was just announced that Macau will open its casinos on Thursday after a prolonged shutdown—does this suggest the Chinese authorities feel they are getting on top of the virus?
Coronavirus Impact from a European Perspective
In terms of understanding the coronavirus impact on European equities, we are still in unchartered territory. Several companies have mentioned a potential impact (e.g. AstraZeneca last week), and it was interesting to see it factored into European Central Bank (ECB) commentary this week.
Policymaker Pablo Hernandez de Cos stated: “After some improvement in the balance of risks to the euro-area growth outlook, since some of the uncertainty surrounding international trade seems to be receding, the coronavirus outbreak in China has compounded other geopolitical factors and vulnerabilities in emerging markets, keeping this balance of risks on the downside”.The head of the International Monetary Fund (IMF), Kristalina Georgieva, said over the weekend that a more coordinated global response could be required. She suggested there needed to be a synchronized global response to the risks facing the world economy and called for a “more aggressive swing in structural reforms.” In an interview with Bloomberg TV, she also praised China for its “very aggressive” steps to contain the coronavirus impact.
UK Government Reshuffle May Signal Looser Fiscal Policy
UK Prime Minister Boris Johnson announced several changes to his Cabinet last week, with the biggest surprise being the departure of the Chancellor of the Exchequer, Sajid Javid. Javid resigned after refusing to Johnson’s request that he sack all his advisors and allow them to be replaced with a new joint team of advisers for both the prime minister and the chancellor. He is replaced by a relative unknown, 39-year-old Rishi Sunak, who just a few months ago was a junior housing minister. Sunak is known for supporting lower taxes and increased infrastructure spending.
Now the market focus is the increased changes of higher fiscal spending, and the sterling rallied on the heels of the news. More supportive fiscal policy might be crucial in underpinning confidence in UK assets as the United Kingdom enters challenged trade negotiations with the European Union (EU). Over the weekend, French Foreign Minister Jean-Yves Le Drian suggested the two sides will “rip each other apart.” These talks will be a key focus for UK assets in coming months.
The Week in Review
European equities traded broadly higher last week (except for the United Kingdom) as fears around the spread of the coronavirus continued to fade. Sector performance was mixed, with real estate and utilities outperforming while oil, gas and media were relative underperformers. European value stocks were up slightly whilst European momentum names continued their recent outperformance. Market catalysts were rather scarce as corporate earnings remained in focus. So far, 58% of Eurostoxx 600 Index companies beat estimates. Nonetheless, softer European macro data as well as the UK government reshuffle did garner some attention.
European macro data does remain a concern for investors, and last week the softening continued. The Citi European Economic Surprise Index fell to its lowest level since November 2019. German GDP increased 0.1% in Q4 2019, a surprise given industrial production was shown to have slumped 7.3% in the same quarter. The GDP report is in line with a trend of lacklustre economic performance in Germany since the start of 2018.
Weaker industrial production was also reported across the continent, with eurozone industrial production down 2.1% on the month in December, meaning Q4 industrial production was down 5.7%. Manufacturing output in the eurozone was also particularly weak. January purchasing managers index (PMI) data fared better, up 1.2% on the month, which may point to improving economic performance in 2020. However, the impact of coronavirus is not yet clear, so many investors probably won’t be feeling too bullish based on that figure alone. The euro currency also closed last week at its weakest level against the US dollar since April 2017.
US equities were also broadly higher as Q4 earnings season began to wind down stateside. The focus was on the coronavirus and on the economy both domestically and abroad. In terms of earnings, with 75% of S&P 500 Index reporting, 71% of them have beaten consensus estimates so far, tying in with a “better-than-feared” earnings picture. Sector performance in the United States was similar to Europe, with real estate stocks outperforming, whilst energy underperformed.
There was also some focus on US presidential primary race, but little in the way of market reaction. The campaign trail continues to heat up in the lead-up to the November general election.
Bernie Sanders is now the front runner for the Democratic party. Interestingly, we have seen the “moderate” Joe Biden fall away from the race, which could have some implications for markets.The United Kingdom has been cited as a blueprint for how the far-left option dramatically failed to overcome the right-wing vote in a recent election. With President Donald Trump’s approval ratings hitting new highs, it remains doubtful that a candidate as far left as Sanders would be able to attract the more centrist votes to overcome Trump in November. Nonetheless, the less market-friendly option of Sanders could remain a risk to markets in the coming months.
Asian equities were mixed last week. Chinese markets re-opened after the extended New Year holiday and played some catch up. PBOC initiatives and the reduction in tariffs on US goods to help fight the effects of the coronavirus outbreak, and helped support equities. In terms of sectors, health care stocks remained strong amidst the continuing spread of the virus. The energy sector was the relative underperformer in the region, with oil prices weak once again.
Australian equities underperformed broader Asian markets with Reserve Bank of Australia (RBA) Governor Philip Lowe saying that he hoped interest rates would remain unchanged over the year. (The current central bank rate is 0.75%.)
Ultimately, this meant that with very little likelihood of a rate hike, the probability of a rate cut was reduced. Lowe noted that the risks of a rate cut “have slightly tilted to outweigh the benefits”. This also came amidst a downgrade from the RBA on the country’s GDP and inflation forecasts.
A quiet start to the week, with a US bank holiday and school holidays in England impacting volumes on Monday. Looking ahead, coronavirus news seems likely to be a market driver, and in terms of macro data, Friday’s global PMI stands out.
- US Democratic debate on Wednesday.
- EU leaders’ summit on Thursday
Key economic data
- Monday: Japanese GDP
- Tuesday: US Empire Manufacturing Survey and HAHB Housing Market Index; Eurozone New Car Registrations; UK Unemployment data; German ZEW Business Survey
- Wednesday: US Building Permits and Housing; UK CPI and PPI
- Thursday: US Philly Fed Business Outlook and Leading Index; Eurozone Consumer Confidence; UK retail sales
- Friday: US Existing Home Sales; European Manufacturing and Service PMIs; Japanese Manufacturing and Service PMIs and Japanese CPIs
- FOMC meeting minutes and flurry of Fedspeak on Wednesday.
- Publication of ECB Monetary Policy Meeting on Thursday.
- US and Canadian markets closed on Monday.
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