Chinese stimulus to combat the anticipated hit to economic growth due to the coronavirus, helped global markets rally this week, after almost all gains for the year were erased by the close of play last Friday. Further to this, a pledge from the Chinese to halve tariffs on US imports, as well as reports of a cure for the virus soon being on hand, supported market pricing, after Chinese equities had plunged by 9% on Monday, having been closed the previous week for the lunar new year holiday. The release of leading US economic indicators showing signs of stabilisation, helped confidence further, with US equities going on to hit new record highs.
As of 12pm London time on Friday, US equities rose by 3.7% over the week, whilst US technology stocks increased by 4.6%. European equities were up 3.2%, with UK equities having risen by 2.3%, being held back by growing concerns over impending Brexit negotiations. Japanese equities rose 2.8%, whilst the Australian market only managed to rise by 0.1%, being held back by weakness in energy stocks, as the oil price extended its losses, taking it into bear market territory, defined as a fall of 20% or more from its recent high in early January. Emerging markets rose 3.8%, despite mainland Chinese stocks remaining in negative territory for the week, having lost 3.4%. However, Hong Kong and South Korean stocks rose 4.2% and 4.4% respectively. By 12pm on Friday, the gloss on stock markets was beginning to lose its shine, as investors began to wonder whether the rally had been overdone, with the likely economic impact from the coronavirus still very much unknown.
Defensive assets, such as developed market government bonds, gave up some of their recent gains, with 10-year US Treasuries now yielding 1.61%, UK Gilts 0.57% and German Bunds minus 0.39%. Gold fell by 0.9% over the week, now trading at $1,572 an ounce.
At the beginning of the week, the Chinese central bank, the PBOC (People’s Bank of China), announced that it would inject the equivalent of $173bn into the economy to help support growth as the impact of the coronavirus takes hold. A report from Goldman Sachs, the US investment bank, suggested that global growth would be negatively impacted by 0.1% to 0.2%, assuming that the rate of infections slows significantly through February and March. The total number of infections already exceeds that of the SARS epidemic in 2002. There were also reports of a cure being not far away, although the World Health Organisation played down these rumours. The PBOC fixed the daily onshore traded renminbi at a stronger level than the all-important level of Rmb7 to the US dollar, providing confidence that the Chinese would support their currency.
Stabilising US leading economic indicators
This helped to restore confidence in markets, with investors being further encouraged by the latest ISM (Institute for Supply Management) manufacturing purchasing managers index (PMI) data being released. The index came in at 50.9 for the month of January, with any number above 50 indicating that the majority of businesses are experiencing growth. This was stronger than both the previous month’s figure of 47.8, and above forecasts of 48.5. On Wednesday, the latest private sector payrolls number was released, with 291,000 new jobs having been created, versus expectations of 157,000. Taken altogether, this helped propel US stocks to record all-time highs.
Encouraging UK leading indicators versus looming EU trade negotiations
Similarly, in the UK the latest manufacturing PMI was released, rising to 50 for the month of January, up from 47.5 in December, and ahead of forecasts. Post the general election in December 2019, the UK manufacturing sector has stabilised as it has benefitted from a mild recovery in new orders, employment and business confidence. However, with trade talks due to begin between the UK and the European Commission on the 1st March, negotiating positions between the two parties are hardening, with the inevitable gulf of expectations appearing.
Whilst German manufacturing disappoints
The rally in markets this week, glossed over the not so positive data release out of Germany, showing that new industrial orders for January were down a further 2.1% from the month before. Expectations had been for a slight recovery. This is set against a background that German car manufacturers, like others in Europe, are only weeks away from being forced to close due to supply chain disruptions caused by the coronavirus, with 9.4% of component goods coming from China. Christine Lagarde, the new governor of the European Central Bank, was quoted as saying there was less scope for central banks to come to the rescue of economies in the event of further weakness, however, expectations were for a mild economic recovery over the coming months.
Energy stocks weigh on the Australian market
The Australian market finished the week marginally higher by 0.1%, as the energy sector weighed on gains made by healthcare and technology stocks. With the oil price falling, the energy sector fell by 4.6% over the period. Matters were made worse for energy stocks given reports of Chinese firms seeking delays to natural gas shipments as a result of attempts to control the coronavirus. Healthcare and Information technology were the best performing sectors this week, up 2.0%% and 1.6% respectively.
In other news, the Reserve Bank of Australia (RBA) left its main interest rate unchanged at its all-time low of 0.75%. RBA Governor, Philip Lowe, has predicted that the recent fires would cut economic growth by approximately 0.2% in the December quarter and the current quarter growth figures. But despite the disasters, the Governor maintained the economy was going through “a gentle turning point for the better”, predicting modest increases in growth and consumer spending over the next two years.
In the Smartfund portfolios we sold out of US TIPS, which are inflation protected government securities. We have taken profits as these securities have benefitted from the rally in defensive assets following the outbreak of the coronavirus. The volatility overlay has de-levered the asset exposure of the fund and therefore there is less need for defensive assets. We also further reduced our currency hedging to Sterling, believing the currency is vulnerable to headlines, as UK/EU trade negotiations gather steam.