Apple is dominating the headlines this morning after taking a leaf out of the Japan Government form book of years past. That is, waiting for a public holiday to announce really bad news, in the hope that either people don’t notice, or the damage is limited. It didn’t work for Japan and it won’t for Apple (NASDAQ:AAPL) either. It announced it would miss revenue targets for Q1, due to the disruption of coronavirus on Chinese consumption and their heavily China-centric supply lines.
That wasn’t the only interesting news from overnight though. China announced it was cutting its medium-term financing rate amongst some other technical announcements. The Loan Prime Rate will almost certainly be cut later this week and it is clear both the Government and PBOC are starting to warm up the stimulus engine. Expect more announcements in the coming week. As to whether the impending wave of stimulus merely keeps the economic lights on or spurs that much hoped for V-shaped economic recovery depends though, entirely on the evolution of its coronavirus battle.
Investors rand for the South Africa exit door overnight as Moody’s slashed its GDP growth forecast for the country to a mere 0.70% for 2020, sending the rand south. It matters because Moody’s credit rating for South Africa is up for review in March, and Moody’s is the last rating agency to have South Africa at investment grade. We can expect more investor outflows if that rating is reduced to junk next month making South Africa, as a BRICS member, more like a brick through the window, rather than a brick in the wall of the world’s future growth.
Apple’s woes, announced overnight, have bought a welcome dose of reality to financial markets. Even if the coronavirus was to magically disappear tomorrow, the downstream effects to the disruption to global commerce and supply lines will be felt for some months to come. That v-shaped recovery may well be u-shaped. Hong Kong’s Unemployment Rate data this morning, and China New Loans, could further drive that point home.
With Apple announcing the i-Phone availability will be limited, Singapore’s government will be hoping that its citizens don’t add that to the panic buying list with toilet paper and rice. Everyone has two phones here in the Red Dot. Today, is in fact, an important day for Singapore, with the much anticipated 2020 Budget announced.
The Government has already telegraphed an increase in deficit spending to mollify the effects of the coronavirus slowdown on the economy. Markets are expecting a budget loaded with economic goodies, and thus, the potential for some disappointment is high if the required sugar rush is not delivered. That could weigh on Singapore stocks tomorrow, although we expect strong government measures to support SME’s and to limit employment reduction along with possibly, some tax relief.
Equities
Apple’s announcement that it is not immune to coronavirus has sent Asian stock markets lower this morning, with the U.S. on holiday overnight. That dose of reality has sent the Nikkei 225 lower by 1.40%, the KOSPI by 1.50%, with the Shanghai Composite down 0.90% and the CSI 300 by 0.50%.
The Hang Seng has fallen by 1.40% with warnings from Cathay Pacific Airways (HK:0293) about material impacts on earnings and ahead of this afternoon’s dreaded unemployment data. Singapore’s Straits Times has fallen only 0.60% ahead of this afternoon’s expected stimulus-heavy 2020 budget.
When the world’s largest company sneezes, everyone else is likely to catch a cold. We expect the negative sentiment to flow through into European stocks with countries such as Germany highly exposed to China’s travails. Whether the eternal optimists of Wall Street look at the dip as a buying opportunity, or a reassessment of their starry-eyed view of the world, remains to be seen.
Currencies
The South African rand slid through 15.0000 to the dollar overnight following a negative update by Moody’s Investor Services. Facing a potential downgrade next month, USD/ZAR may retarget recent highs of 15.4000. A slide in the rand will leave the central bank in an uncomfortably Indian-like position of its fellow BRIC. Falling growth but rising prices and currency will limit its room to cut rates in the near-term to support the economy.
Emerging markets overall though, are holding up remarkably well given that each of the BRICS is facing serious economic issues of varying kinds. Investors can probably thank the hunt for yield anywhere in 2019 for that, with emerging market FX only retreating modestly since the coronavirus outbreak. That still ironically, leaves much of EM ex-BRICS, with the ability to ease monetary policy than most of the BRICS themselves.
Amongst the major currencies, both the EUR/USD and GBP/USD weakened overnight and are sitting near their overnight lows today at 1.0830 and 1.3000 respectively. Aggressive rhetoric from both sides ahead of trade talks, and in Europe’s case fall-out from slowing China growth, mean that a re-test of two-year lows around 1.0800 is expected sooner rather than later. Europe, and the German/France axis, are paying the price for selling their souls to the China export market, at the expense of hard decisions in the domestic one.
The China-centric Australian and New Zealand dollars are both under pressure this morning. Falling 0.35% to 0.6690 and 0.6420 respectively as Asian equities fall post the Apple (NASDAQ:AAPL) announcement. We expect Petro-currencies such as the ruble and Norwegian krone to suffer a similar fate when trading commences later this morning.
Oil
With the U.S. closed yesterday for a public holiday, oil had a quiet session. Apple’s announcement on the negative effects to its results from coronavirus has sent both Brent and WTI tumbling along with regional equity markets.Brent crude has fallen 1.0% to $56.80 a barrel and WTI has fallen 1.40% to $51.60 a barrel. After a strong rally over the past week, Brent crude is struggling to hold onto gains above the $57.00 a barrel level, and WTI above $52.00 a barrel.
As I have stated previously, the rally has been built on a lot of optimism and very little fact, with a lot of sand mixed into the concrete. With so much hot money chasing its tail in energy markets, the penchant for traders to hold out of the market risk is very low.
Oil’s rally was always corrective in my opinion, and we may now have seen the best of it for now. Fortune favors the brave, but stupidity does not.
Gold
Gold rose slightly overnight on very thin holiday reduced volumes. The rush for the exit doors across equity markets in Asia after Apple’s announcement this morning has been supportive, therefore. Haven buying has seen gold rally four dollars to $1589.00 an ounce today in Asia.
It is interesting to note, that despite all the v-shaped economic recovery claims, from the armies of highly experienced epidemiologists on Wall Street, gold has stubbornly refused to sink. An impending v-shaped recovery the moment that coronavirus is under control, also predicted by the same to be just around the corner, should be negative for the yellow metal in its role as a haven-based asset.
Gold has, in fact, quietly ground higher and sits only ten dollars or so, away from major resistance in the $1595.00/1600.00 an ounce region. A daily close above this area would be a strong technical signal that further gains lie ahead.
It may also signal that some of the recovery optimism is misplaced, as the bond market is also signalling to us. I find it hard to be bullish on gold at these lofty levels. But with coronavirus clearly impacting global supply chains with an increasingly obvious frequency and Greece and Italy able to sell government bonds at yields under 1.0%, I accept that gold may be telling us something.