Markets last week 24/02/2020

Equity markets were mostly weaker last week, as fears increased that the covid-19 virus was developing into a global pandemic. Hundreds of cases were reported in South Korea, centered around a Christian sect; in Iran, the high number of deaths relative to reported cases likely indicates that perhaps thousands of cases have been missed; and in Italy, now hundreds have been diagnosed. In all these cases strict quarantine measures have been put in place. Safe-haven assets tended to do better, with government bonds up (most benchmark 10-year yields fell around 10 basis points) and gold also rising. On the counter, both oil and iron ore recovered some of their recent falls, in the latter case as traders reacted to declining growth in Chinese cases of the virus. Even in China, there was widespread scepticism on the quality of the official Chinese data on the spread of the disease.

In the US, the Democratic Party presidential nomination process moved to Nevada, where Bernie Sanders performed well, cementing, for now, his front runner status. Joe Biden did better than before, but needs a very strong showing in South Carolina, whose primary is to be held on 29 February, to dislodge his left-wing opponent. After that, so-called “super Tuesday” on 3 March will see the entrance of Mike Bloomberg, who had been surging in the polls but performed relatively poorly in the candidates’ debate last week. His campaign spend has increased to a total of nearly US$500m over the last ten days.

Equity sentiment was further undermined by a raft of corporate warnings about the effect of the virus on production, perhaps most notably from Apple. Companies in the airlines, travel, automobile and luxury goods sectors all indicated that current trading has been badly hit by the pandemic. There is also increasing evidence of the impact the virus is having on short-term economic performance from recent data releases.

The week ahead

Tuesday: US Conference Board Consumer Confidence

Our thoughts: despite stalling over the past 18 months, consumer confidence in the US remains at elevated levels, which are symptomatic of the later stages of the economic cycle. Last month the index increased by more than forecast to a 5-month high in a sign that consumers will continue supporting the record-long US economic expansion. A particular bright spot within the consumer confidence number is the optimism about future employment prospects. Interestingly, this has coincided with a slowing in wage growth – perhaps businesses are focusing attention on perks to keep employees happy instead. Bloomberg estimates for this week’s reading are widely spread at the time of writing, however the median estimate is for a further increase from 131.6 to 132.3.

Friday: Eurozone Inflation Report

Our thoughts: on Friday we will get a first look at the Eurozone’s inflation reading for February in the form of CPI. The European Central Bank’s (ECB) attempts to spur inflation towards its target continue to be ineffective. In fact the central bank has started looking at shaking up how it calculates inflation, in particular by giving more weight to housing costs. Headline CPI for the eurozone is currently at 1.4% and we may well see this rise further after witnessing the UK inflation report received last week. The report showed higher inflation than forecast, particularly for the headline figure, which was boosted by the cost of energy, motor fuel and air fares.

Saturday: China Manufacturing PMI

Our thoughts: overnight on Friday we will be provided with an insight into the impact of coronavirus on China’s economy in the form of the Manufacturing and Non-Manufacturing PMIs. The former is forecast to fall into contractionary territory, from 50.0 to 46.0. If it were to fall this low it would comfortably (or rather uncomfortably) be the lowest level since the 2008-09 global financial crisis. Last month’s PMIs were actually quite strong, however this was before the full extent of the threat from the virus began to register. The outbreak will hit economic growth hard in Q1, so weak PMIs are to be expected, however our belief is that (for the time-being) this should be a short-term shock.

The numbers for the week

United States

Strong numbers during the week spoiled by the PMI data on Friday

The US saw a run of very strong numbers in the earlier part of the week, with two frequently watched manufacturing surveys bouncing very strongly. The New York Empire State manufacturing survey came in at 12.9 compared with expectations of 5.0, while the Philadelphia Federal Reserve equivalent came in at 36.7 compared with consensus estimates of 11.0. The latter was the strongest reading since February 2017, shortly after confidence went through the roof after the election of Donald Trump. This strength seemed to be confirmed by the Conference Board’s Leading Economic Indicator, which was also significantly higher than expected. However, on Friday the Markit PMI data showed a steep deceleration, with the composite measure coming in at 49.6 – below the 50 expansion/contraction threshold – with the manufacturing and services components both down on the prior readings at 50.8 and 49.4 respectively. The services measure in particular was soft, down from a previous level of 53.4.

United Kingdom

Relatively stable data

In the UK, house price data was supportive, showing further evidence of the Boris bounce, with both the Rightmove house price index, which was up 2.9% year-on-year, and the official government number, which was up 2.2% on the same basis, showing growth in all regions, including London. Unemployment came in at 3.8%, unchanged on the previous month, with 180,000 new jobs created over the last quarter. Although average earnings growth fell to 2.9% annualised from 3.2%, this is still well ahead of inflation. CPI printed at 1.8%, slightly higher than expected as energy prices made an impact; given the very recent fall in the price of crude oil, no-one expects this upwards pressure to continue. Retail sales were somewhat better than expected as well, at +1.8%, and the Markit PMI readings were a little up in manufacturing at 51.9, although very slightly down in services at 53.3. The only blot in the copy book was another weak reading for car sales, which reverted to their downwards direction after last month’s bounce, falling 7.3% year-on-year.

Europe

More anaemic data for the area

Car sales in Europe were also weak, with a fall of 7.5% year-on-year. The French manufacturers in particular had a poor performance. Other downbeat data came from the ZEW institutional investor confidence index in Germany, where the expectations component fell to 8.7 from the prior 26.7. The current conditions measure fell to -15.7 from the previous -9.5. The GfK consumer confidence index, also in Germany, held up slightly better, only dropping marginally to 9.8. Unemployment in Germany remains at the lowest levels since reunification. Markit PMI data for the combined major economies on the continent rose somewhat, but performance was mixed. In Germany, manufacturing rose from a very low level, but services fell, whilst in France it was the other way around.

China/India/Japan/Asia

China: Again, there was very little official economic data. The People’s Bank of China continued to loosen monetary conditions in order to help stimulate the economy, and following last week’s raft of measures to assist  cash flow during the lock-down period, there was evidence of official pressure on individual companies such as Alibaba to reduce prices to help the wider economy. Travel data continue to show no return to normality, even if there is incipient evidence of factories reopening after the extended Chinese new year holiday.

Japan: Following the very weak GDP numbers last week, there was further evidence of pressure on the manufacturing sector, with core machinery orders down 3.5% year-on-year, compared with expectations of a decline of just 0.7%, and the machine tools orders data, which have been weak for a year now, showing no signs of recovery at -35.6%. Both the manufacturing and services PMI numbers fell, to 47.6 and 46.7 respectively; the latter in particular was a sharp decline. Perhaps the best indicator of how things are going in Japan was the all industry activity index, which fell to 0.0 from 0.9 previously.

Oil/Commodities/Emerging Markets

Oil followed through on its recent strength, with Brent crude up around 2.1% to US$58.50/barrel. As mentioned earlier, gold benefited from its safe-haven status and climbed to US$1643/oz.

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Andrew Hipshon

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