Week Ahead: four things that will dominate markets

It’s been a blustery weekend here in the UK as storm Ciara rolls in, but when the storm clouds clear, what will be in store for financial markets? We take a look at the five things that could determine price action in the week ahead. 

1, The coronavirus 

Without doubt, the headlines have become more alarmist this weekend and fears about the coronavirus continue to rise. The concern is that the virus could now become a pandemic as more cases are recorded worldwide, and as fears grow about how easy it is for the disease to spread. For financial markets the main concern is how this will affect Chinese and global growth, as China is experiencing more and more isolation, as air travel in and out of the country is curtailed and factories remain on lockdown. First thing on Monday we will get the latest Chinese producer and consumer price data for January. This data may be too early to show all of the effects of the coronavirus, as the situation has worsened throughout February, however it could throw up another conundrum for the Chinese authorities. Both consumer and producer prices are expected to rise at the start of the year, with annual consumer prices expected to grow by 4.9%, up from 4.5% in December. With price pressures growing, this could curtail further action from the People’s Bank of China (the Chinese central bank) and limit how much they can cushion the economic fallout from the coronavirus. This time last week, major global stock markets were primed to open higher after the Chinese central bank said that it would pump the largest amount of liquidity into the Chinese economy since 2004, however, there have been no such moves this weekend. This lack of action from the Chinese authorities could see stocks struggle at the start of the week after a sell off at the end of last week. Although global stock markets continue to do well, we believe that it is risky to own Asian stocks and emerging market stocks in the current environment, and we believe that defensive stocks, including utilities and healthcare, will continue to outperform other sectors while the infection rate for the coronavirus continues to rise. Thus, we would urge caution when trading at the start of this week, as stronger than expected inflation data out of China could trigger fears that the PBOC will not use further monetary policy action to support the Chinese economy as it is ravaged by the coronavirus. This is also likely to keep the FX market is risk aversion mode. USD/JPY’s attempt at recovery failed at the 110.00 mark last week, and we except the yen, swiss franc and the US dollar to remain in demand this week, while the AUD, NZD and NOK will continue to suffer, read more below. 

2, Oil and commodities 

The oil price remains precarious, especially as weekend reports suggest that China’s oil demand so far or February has plunged by 25% year on year, which is the equivalent of 3% of global demand. This is bad news for energy producers, especially as some Chinese companies have claimed that coronavirus is a force majeure event and are cancelling their contracts for oil, LNG and some metals including copper. A surplus of commodities floating on tankers near China, but unable to dock, is likely to be bad news for prices, and due to this we would expect to see commodity prices to remain weak in the short term. Brent crude did attempt to rally back to $55 last week, but the rally petered out and at the start of a new week Brent crude is trading around $54.50. There is some talk that Opec could cut production by a further 600k barrels per day in response to the coronavirus, if this is agreed then we would expect a small uptick in the oil price, however, we believe that the oil price won’t make a full recovery until the coronavirus is well past its peak.  

Metals are also experiencing a wobble in their prices. China is the world’s largest importer of copper, its price has fallen to a 3-year low as fears have grown about the coronavirus, to $2.53 per lb, this could fall further if the virus continues to spread and if the economic shut down continues indefinitely. 

Commodity currencies are also under attack, as we mentioned above. The Aussie dollar has fallen to its lowest level since 2009 on the back of this outbreak, highlighting just how interlinked the Australian currency is with the fate of China’s economy. Although the RBA said that growth could fall in the first few months of 2020, the bank remained generally upbeat, however, the FX market wasn’t buying it. We would suggest that the Aussie will remain under attack for as long as the outbreak continues to hurt China’s economic prospects. At this stage, 0.6350 (300 pips away), is key support. We expect that the RBNZ won’t be able to help the kiwi dollar when it meets this week. Anyone trading these currencies should follow what happens to the oil price to determine where they go next. 

3, Global growth prospects

Key Q4 2019 GDP figures will be released this week for the UK and Europe. The UK’s GDP figure for Q4 is expected to show that growth slowed to a 0.8% annual rate for the final quarter of last year, but the risk is to the downside. Considering a large majority of the market expects the UK economy to have performed badly last year, only a large GDP miss is likely to weaken the pound or the FTSE in any meaningful way. A bigger test for the UK will be the Q1 figures released in April, which will confirm if there has been a ‘Boris’ effect to the UK’s growth prospects. 

Europe’s growth figures are worth watching due to the dismal performance of the euro in recent weeks. EUR/USD is trading below $1.0950 after another week of losses. The market is expecting a fairly tepid 1% annual growth rate for 2019, with the German economy growing at a mere 0.7% last year. Considering Germany is exposed to Chinese economic weakness, we believe that a weaker than expected reading for Germany could see the euro decline further, with $1.0900, the low from the end of September, now key support. 

4, Stocks, what next?

European and US stocks took a tumble at the end of last week, but overall, they have held up well in the face of the coronavirus, for example the S&P 500 is 120 points from its peak. Interestingly, the key drivers of the S&P 500’s performance has been the 100 largest companies in the index; in contrast the Russell 2000 index of smaller US companies is lagging behind the S&P 500’s performance for the year so far. This suggests that traders want the security of large, US blue chip companies that they believe can weather any global financial storms ahead. The Nasdaq’s performance since the start of the year has outpaced that of the S&P 500, suggesting that the market is betting on the big brand names in US tech continuing to outperform for the foreseeable future. Utilities and healthcare are also outperforming other sectors, these are defensive sectors, suggesting that traders of US stocks are looking at the “safest” stocks in this period of economic confusion, and even though US indices are rising, traders are picky about the stocks they are willing to buy.  

More than 60% of companies on the S&P 500 have now reported their earnings for Q4 2019. According to FactSet, the number of companies reporting EPS, sales and profits above analyst estimates are below 5-year averages. However, there has also been some good news for US stocks; as more companies have reported, the blended earnings growth rate for the S&P 500 is 0.7%, up from -0.5% last week. If this figure holds until the end of earnings season, then it would be the first positive earnings growth rate since Q4 2018. Something to cheer about if you trade US stocks. It’s also worth watching Fed chairman Jerome Powell this week, as he will testify to Congress on Tuesday. If he suggests that the Fed is concerned about low inflation and that the US central bank will stick with a neutral to dovish stance for the foreseeable future, then we could see US stocks recover later this week.