Markets continue to be dominated by the potential impact of the coronavirus. Investors are weighing up improving macro data, versus the economic impact from previous epidemics, such as SARS in 2002, and believing at least for the moment, that the outcome from the current virus is likely to be benign. In addition, central banks continue to maintain a stance of loose monetary policy, supporting markets. This has led to further gains for equity markets this week, building on last week’s strongest showing for the US market since June 2019.
Equity markets rise as investors focus on improving macro data
As of 12pm London time on Friday, US equities rose 1.4% for the week, with technology stocks having risen by 2.0%. European equities increased by 1.7%, although UK equities only managed to rise by 0.1%. However, the more domestically orientated mid-caps climbed 1.3%. Australian equities rose 1.5%, helped by better than expected earnings results from financials. Emerging markets rose 1.3%, with domestic Chinese stocks also increasing by 1.4%. In contrast, Japanese equities fell 1.7%, as domestic investors held a more pessimistic view as to the impact of the coronavirus.
Mixed week for government bonds
It was a mixed week for government bonds, with the price of US Treasuries falling, with the 10-year yield currently trading at 1.60%, as investors largely put fears of the coronavirus behind them. Similarly, UK gilts also sold off, with the 10-year yield currently trading at 0.63%, although this was not helped by the resignation of Sajid Javid, the Chancellor of the Exchequer. During a cabinet reshuffle, the Prime Minister Boris Johnson insisted that all Sajid’s advisers be replaced. Finding this unacceptable, the Chancellor, seemingly unexpectedly, resigned. This has raised question marks over whether the new Chancellor, Rishi Sunak, will stick to the previous fiscal rules, or be prepared to loosen the purse strings to appease Boris. In contrast, German Bunds rose in price, now trading at a yield of minus 0.40%.
A change in counting methodology causes coronavirus concerns to rise
European and US stocks continued to hit record new highs at the beginning of this week, as investors focused on the declining rate of growth for the number of new coronavirus infections in China. However, this ended abruptly on Thursday, when following a change to a broader definition to diagnose people , the number of new cases reported in Hubei, the province at the centre of the epidemic, reported a tenfold increase from the previous day, to 14,840, and a doubling of new deaths to 242.
Australian shares rise as the financial sector helps investors see beyond fears of the coronavirus
The Australian share market managed to finish the week in positive territory, with better than expected earnings results helping investors look past fears over the spread of coronavirus in China. Stronger half-year results in financials helped the sector finish up 3.6% over the week, offsetting losses for energy and mining. The “big four” banks led the way, notably National Bank and Commonwealth Bank which rose by 5.5% and 7.3% respectively after both banks beat expected profits. Utilities also outperformed, boosted by AGL, the electricity and gas provider. Upbeat first half profits were warmly received by several brokers, who then upgraded the stock. The utilities sector as a whole finished the week up 3.2%. Next week will see a further 100 major companies reporting, including some of the major mining companies such as BHP and Fortescue.
Issues under discussion
Despite the coronavirus, which led to a wobble in markets at the end of January, markets remain buoyant although the eventual economic impact of the virus remains unknown. Three quarters of US companies have now reported 4th quarter earnings results, and although analysts have lowered their earnings growth expectations for 2020, they remain surprisingly optimistic. Analysts have shaved their forecasts down to a growth rate of 8.1%, having started the year at 9.6%, and substantially higher than what was forecast for this year in 2019, a growth rate of only 1.7%. This probably helps to explain the buoyancy in markets; on the one hand, fear of the virus escalating, but on the other, fear of missing out if the economic impact proves to be benign, as SARS did in 2002. It does, however, leave a lot of scope for disappointment should the impact of the virus be greater than anticipated.