Wall Street may have stabilized on Monday, but the headlines around the coronavirus continue to suggest caution is warranted when it comes to diving too quickly back into risk assets, tempting though it may be to buy the pandemic dip. (I know, it’s absurd to even say.)
According to China’s National Health Commission, the death toll from the virus is now 425, and there are in excess of 20,400 confirmed cases on the mainland. More than 2,750 of those are deemed “severe”.
Mainland Chinese assets collapsed on Monday, as equities and the onshore yuan caught up (or maybe caught down is better) to offshore proxies and global markets, where investor angst has been building since January 23, the last time onshore markets traded.
Without resorting to alarmist rhetoric, the scope of the virus’s spread has forced a wholesale rethink from analysts around China’s economy, assets and currency. Earlier, we noted that Nomura sees an opportunity to short the yuan amid expectations of a larger policy response, decelerating growth and growing doubts about China’s ability to make good on its trade promises.
JPMorgan, meanwhile, cut its forecast for the yuan to 7.00 from 6.85 by the end of next month, in recognition of “short-term risk bias”, which is probably an understatement. The bank does expect a tepid bounce in the second quarter, though. UBS reckons the yuan will stay offered in the next several weeks. SocGen slashed their growth target for China to just 4.5% on Monday and said they expect a pair of additional 10bp OMO cuts and one 50bp RRR cut in H1. In the same vein, Citi expects another 15bps worth of cuts to OMO rates on top of Monday’s moves.
You get the idea. China is already growing at the slowest pace in decades, and the bounce evidenced in December’s activity data now looks destined to disappear.
One question – and we asked this last month, although prior to the virus outbreak – is whether rate cuts will end up irritating Donald Trump. The US of course lifted the currency manipulator label as part of the “Phase One” trade deal, but one wonders what will happen if PBoC easing ends up piling depreciation pressure on the yuan.
That could compound an already tenuous situation if Beijing ends up being unable to fulfill its promises under the trade deal due to a demand slump engendered by the virus. On Monday, Bloomberg suggested Chinese officials may be seeking leniency from the Trump administration, something US officials later denied.
The bottom line is that global growth is in jeopardy, and that’s showing up pretty much everywhere you might want to look.
Amid the health scare, markets have all but forgotten about US earnings season. On Monday, Alphabet missed after hours, sending the shares lower. Revenue (ex. partner payouts) came up short, and ad revenue growth slowed versus the same quarter last year. The numbers betrayed the worst Q4 topline growth since 2015.
“In order to avoid repeating the share price collapse experienced by their predecessors, today’s market cap leaders will need to at least meet – and preferably exceed – current consensus growth expectations”, Goldman wrote, in a Friday note suggesting another burst tech bubble isn’t in the cards. “This time, expectations seem more achievable”, the bank mused. That was true for Apple and Amazon. Not so much for Facebook and Google.
Ever the realist, SocGen’s Andrew Lapthorne on Monday wrote that for all the “fanfare”, “S&P 500 profit growth is still running in negative territory, and despite the big beats we have seen in recent weeks, Q419 EPS has yet to make it back to where it was in October last year”.
As for the impact of the burgeoning pandemic, Lapthorne cautions that the bank expects “downgrades to pick up as companies and analysts start to factor in the effects of the coronavirus”.
And yet, he doesn’t ignore the allure of the exceedingly rare, buyable dip: “Conversely, any good news would likely to be jumped on by investors clamoring for a place to put their money”.
FOMO or bust.