European Equities: A Week in Review – 29/02/20

The Majors

It was a week to forget for the European majors and beyond.

Market reaction to the continued spread of the coronavirus drove demand for safe havens in the week.

For the DAX30, it was 7 consecutive day in the red, sinking the German Boerse into corrective territory in the week. It was even more dramatic for the EuroStoxx600, which fell from an all-time-high 433.9 on 19th February into corrective territory, with a 10% loss coming in just 6 trading sessions.

So, looking at the numbers, the DAX30 ended the week down by 12.44% to lead the way. The CAC40 and EuroStoxx600 weren’t far behind with losses of 11.94% and 12.25% respectively. Heavy losses on Friday just added salt into the wounds, with the majors not only in corrective territory but also in the deep red for February.

The CAC40 fell by 8.55% in February, with the DAX30 and EuroStoxx600 sliding by 8.41% and by 8.54% respectively.

We aren’t in bear territory yet, but we could be should economic data begin to spook investors alongside the coronavirus.

The Stats

It was a relatively busy week on the Eurozone economic calendar.

Through the 1st half of the week, key stats included German business sentiment figures and 2nd estimate GDP numbers for the 4th quarter.

Business sentiment improved in February, with the IFO Business Climate Index rising from 96.0 to 96.1. The upside came off the back of a pickup in business optimism that was partially offset by negative sentiment towards the current state of the economy.

Interestingly, the figures failed to reflect any negative bias stemming from the spread of the coronavirus. The timing of the survey likely failed to capture the spread across Europe and the U.S.

Germany’s GDP numbers were in line with 1st estimates, affirming the stall in the economy in the 4th quarter. Not great with what’s on the horizon…

Later in the week, French consumer spending and 2nd estimate GDP numbers and German unemployment figures were in focus on Friday.

A slide in consumer spending in January will be yet one more concern for the ECB. It wasn’t all bad, however, with Germany’s labor market resilient at the turn of the year.

On the monetary policy front, ECB President Lagarde was of the view that the spread of the virus had yet to have enough of an impact on inflation to warrant monetary policy support. Next week’s stats could change that narrative…

The Market Movers

From the DAX, it was a bearish week for the auto sector. Daimler and Volkswagen led the way down, with weekly losses of 11.62% and 10.67% respectively. BMW and Continental weren’t far behind, with losses of 9.37% and 9.42% respectively.

It was a particularly bearish week for the banking sector, with Deutsche Bank and Commerzbank tumbling by 16.88% and 20.09% respectively.

From the CAC, things were not much better for the banks. BNP Paribas slumped by 17.74%, while Credit Agricole and Soc Gen seeing losses of 17.73% and by 17.64% respectively.

The French auto sector took a more modest hit, with Renault and Peugeot sliding by 16.35% and 8.57% respectively.

Travel and tourism stocks were worse hit, however. Germany’s Lufthansa tumbled by 21.17%, with Air France-KLM ending the week down by 23.90%.

On the VIX Index

The VIX rose by 2.43% on Friday. Following on from a 42.09% surge on Thursday, the VIX ended the week up by a whopping 134.84%.

Risk aversion plagued the global financial markets driving the VIX to its highest level since hitting 50.3 back in February 2018. On Friday, the VIX had hit a week high 49.5 before easing back.

Updates of the spread of the coronavirus led the U.S equity markets into corrective territory and the largest weekly slide since the Global Financial Crisis.

For the week, the S&P500 slid by 11.49%.

VIX 29/02/20 Daily Chart

The Week Ahead

It’s another busy week ahead on the Eurozone economic calendar. Through the first half of the week, private sector PMI numbers are due out of Italy and Spain. Finalized numbers are also due out of France, Germany, and the Eurozone.

Expect Italy’s manufacturing PMI on Monday and the Eurozone’s composite on Wednesday to have the greatest influence. There could be revisions to German and French numbers to look out for, however.

On Wednesday, German and Eurozone retail sales figures will also be in focus ahead of German factory orders on Friday.

The markets will be looking for some indication of what impact the coronavirus has had on the economy. February and March numbers will be a better guide.

From elsewhere,

Private sector PMI numbers out of China and the U.S in the 1st half of the week will also influence. Expect manufacturing PMI numbers out of China from the weekend and on Monday to have a greater impact, however.

It will ultimately boil down to updates on the coronavirus, however. The next big risk to the market is for the WHO to announce the coronavirus as a pandemic and for more cases in the U.S…

Global Shares Routed as Investors Ditch Risky Assets on Fear of Worldwide Recession

The major European stock indexes are trading sharply lower on Friday after entering correction territory the previous session, after falling 10% below the record highs seen on February 19. This follows steep sell-offs in seven major Asia-Pacific markets and the United States, which have also reached correction territory.

It took just six days for the benchmark S&P 500 and NASDAQ Composite Indexes to fall from record highs into correction territory. On Thursday, the blue chip Dow Jones Industrial Average plunged 1,200 points, its biggest one-day drop ever.

In Europe, at 11:44 GMT, the UK’s FTSE 100 Index is trading 6602.33, down 194.07 or -2.86%. Germany’s DAX Index is at 11974.17, down 393.29 or -3.18% and France’s CAC is trading 5354.27, down 141.33 or -2.57%.

Global Stocks Set for Worst Week Since 2008 Financial Crisis

World share markets were headed for their worst week since the depths of the 2008 financial crisis as investors ditched risky assets on fears the coronavirus would become a pandemic and trigger a global recession, Reuters said.

Hope that Fed Comes to the Rescue

Hopes that that the epidemic that started in China would be over in a few months and economic activity would return to normal have been shattered, as new infections reported around the world now surpass those in China.

Hope remains, however, that the U.S. Federal Reserve would cut interest rates as soon as next month to support economic growth.

“We don’t even need to wait for economic data to wee how badly the economy is being hit. You can tell that the sales of airlines and hotels are already falling by a half or something like that,” said Tomoaki Shishido, senior economist at Nomura Securities.

“It is fair to say the impact of the coronavirus will be clearly much bigger than the U.S.-China trade war. So the Fed does not have a reason to take a wait-and-see stance next month,” Shishido said.

Expectations the Fed will cut interest rates to cushion the blow are rising in money markets. Analysts say Fed funds futures are now pricing in about a 75% chance of a 25-basis point cut at the central bank’s March 17-18 meeting.

Fear of Major Global Economic Slump

Fear of a major economic slump is driving commodity and equity prices lower.

Fear as measured by the CBOE volatility index or VIX, jumped to 39.16, the highest level in about two years, well out of the 11-20 range of recent months, according to Reuters.

The index, which measures expected swings in U.S. shares in the next 30 days, typically shoots up to around 50 when bear market selling hits is heaviest and approached almost 90 during the 2008-09 financial crisis, Reuters wrote.

“The coronavirus now looks like a pandemic. Markets can cope even if there is a big risk as long as we can see the end of the tunnel,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “But at the moment, no one can tell how long this will last and how severe it will get.”

Major Asia-Pacific Markets Tumble into Correction Territory; Investors Brace for Chinese PMI Reports

Asia-Pacific shares tumbled on Friday with China’s Shenzhen stocks diving nearly 5%, as investors feared the coronavirus might develop into a pandemic and trigger global recession. Investors continued to brace for an impact on economic growth with global shares heading for the worst week since the financial crisis in 2008.

On Friday, Japan’s Nikkei 225 Index settled at 21142.96, down 805.27 or -3.67%. Hong Kong’s Hang Seng Index closed at 26129.93, down 648.69 or -2.42% and South Korea’s KOSPI Index finished at 1987.01, down 67.88 or -3.30.

In China, the Shanghai Index settled at 2880.30, down 111.03 or -3.71% and in Australia, the S&P/ASX 200 Index closed at 6441.20, down 216.70 or -3.25%.

Coronavirus Update

New infections rapidly spread around the world with countries stockpiling medical supplies and preparing emergency responses, shattering hopes that the epidemic would be contained to China and economic activity would return to normal, Reuters said.

China to Release Key Economic Data This Weekend

While the markets are closed over the weekend, China will release reports on February Manufacturing and Non-Manufacturing PMI. The data is expected to show activity in in China’s manufacturing sector in February probably shrank at the fastest pace since the global financial crisis, a Reuters poll showed, as the epidemic took an excruciating economic toll on Chinese factories. Analysts estimate Manufacturing PMI at 45.1, down from 50.0 and Non-Manufacturing PMI at 51.4, down from 54.1.

Steep Losses in China after Stimulus Effect Wears Off

The global stock market rout knocked mainland Chinese shares lower, which have been relatively well supported this month, as new coronavirus cases in the country fell and Beijing doled out measures to shore up economic growth.

The CSI300 Index of Shanghai and Shenzhen shares dropped 2.9%, on track for its first weekly loss in three.

“Economic troubles outside China, especially in the U.S., could hurt the Chinese economy. Foreign investors, who were buying Chinese shares after the Lunar New Year holidays, have become a net seller since late last week,” said Wang Shenshen, senior equity strategist at Mizuho Securities. “Their selling might have intensified today.”

European Equities: Futures Point to more Doom and Gloom ahead

Economic Calendar:

Friday, 28th February

French Consumer Spending (MoM) (Jan)

French GDP (QoQ) (Q4) 2nd Estimate

German Unemployment Change (Feb)

German Unemployment Rate (Feb)

Italian CPI (MoM) (Feb) Prelim

German CPI (MoM) (Feb) Prelim

The Majors

It was back into the deep red for the European majors, with Wednesday’s mixed session having been just a brief respite for the bulls.

The EuroStoxx600 slid by 3.75% to lead the way down, with the CAC40 and DAX40 ending the day down by 3.32% and 3.19% respectively.

A greater spread of the coronavirus across new countries and a sharp rise in new cases in Italy weighed on risk appetite on Thursday.

Fears of a recession in the world’s 8th largest economy rattled the markets, with China, Japan, Singapore, and South Korea already under the cosh.

Travel and Leisure stocks continued to bear the brunt of investor ire, though all sectors ended the day in the red.

The Stats

It was a relatively quiet day on the Eurozone economic calendar on Thursday. Economic data included prelim February inflation figures out of Spain and finalized consumer confidence figures for the Eurozone.

Unsurprisingly, economic data continued to play 2nd fiddle to the news wires and coronavirus updates.

The Eurozone’s consumer confidence indicator came in at -6.6 according to finalized numbers, which was in line with prelim. In January, the indicator had stood at -8.1.

  • The pickup in consumer confidence was attributed to a brighter outlook on the economic situation. Sentiment will likely tumble in the next set of numbers.
  • By contrast, the Employment Expectations Indicator eased mildly from 105.3 to 105.0.

Later in the day, U.S 4th quarter GDP numbers and durable goods orders were in focus but also failed to influence late in the session.

Core durable goods rose by 0.9% in January, following a 0.1% rise in December. Durable goods fell by 0.2%, however, partially reversing a 2.9% jump from December.

2nd estimate GDP numbers were in line with 1st estimates, with even a 5.2% jump in pending home sales not enough to prevent the slide.

The Market Movers

For the DAX: autos were back into the red on Thursday. BMW and Volkswagen led the down, with the pair sliding by 3.80% and by 4.79% respectively. Continental and Daimler saw more modest losses of 2.48% and 2.69% respectively.

Things were no better for the banks, which saw heavier losses on the day. Commerzbank slid by 5.25%, with Deutsche Bank down by 5.55%.

Deutsche Lufthansa was the worst performer on the DAX for a 2nd consecutive day, sliding by 6.48%.

From the CAC, it was another bearish day for the banks. BNP Paribas slid by 5.87%, with Credit Agricole and Soc Gen seeing heavier losses of 6.16% and by 6.44% respectively.

The auto sector also struggled, with Peugeot and Renault ending the day down by 1.89% and 6.38% respectively.

Air France-KLM slumped by 7.17% on the day.

The latest sell-off leaves the majors in corrective territory, with the EuroStoxx600 way off its all-time high from earlier in the month.

On the VIX Index

The VIX resumed its upward trend on Thursday, surging by 42.09%. Reversing a 1.04% loss from Wednesday, a 5th day in the red out of 6 saw the VIX end the day at 39.2.

Risk aversion spread across the global financial markets, with the S&P500 sliding into corrective territory on Thursday. Coronavirus cases in the U.S and the talk of a U.S pandemic led the move into corrective territory.

We had seen the markets previously buy into the view that the U.S economy would likely be unscathed from the virus.

Commentary from the CDC and rise in the number of cases suggested otherwise, however, with the U.S economic outlook now also uncertain.

When considering the economies that have fallen at the hands of the virus and those at risk, the doom and gloom sentiment does seem justified.

For the current week, Monday through Thursday, the S&P500 was down by 10.76%.

VIX 28/02/20 Daily Chart

The Day Ahead

It’s a relatively busy day ahead on the Eurozone economic calendar on Friday. Economic data includes German unemployment figures and French consumer spending and 4th quarter GDP numbers.

Of less influence on the day include prelim inflation numbers out of Italy and Germany.

From outside of the Eurozone, U.S inflation, trade data,  personal spending, and Chicago PMI numbers will also influence late in the day.

While the stats from the Eurozone and the U.S will influence, expect coronavirus news to remain the key driver.

Bargain hunters may be looking for an entry point but with so much uncertainty, any upside would likely remain limited.

In the futures markets, at the time of writing, the DAX was down by 269.5 points, while the Dow was up by 62 points.

Asian Shares Mostly Lower; Bank of Korea Leaves Policy Rate Unchanged While Aussie Yields Hit Record Lows

The major Asia Pacific stock indexes traded mostly lower on Thursday as cautious investors digested the latest news over the fast-spreading new coronavirus while assessing the potential global economic impact of the virus that has so far infected more than 81,000 people and killed over 2,700.

Although most of the people infected and killed by the disease to-date are from China, the number of cases outside of the country has surged in recent weeks with countries like South Korea, Italy and Iran at the forefront.

Meanwhile, the U.S. Centers for Disease Control and Prevention on Wednesday confirmed the first potential “community spread” of the coronavirus stateside. Additionally, late Wednesday, President Donald Trump announced that Vice President Mike Pence will be in charge of the U.S. response to the deadly outbreak. Trump also said the risk of the disease to the country remained “very low.”

On Thursday, Japan’s Nikkei 225 Index settled at 21948.23, down 477.96 or -2.13%. South Korea’s KOSPI Index finished at 2054.89, down 21.88 or -1.05% and Hong Kong’s Hang Seng Index closed at 26687.89, down 8.6 or -0.03%.

China’s Shanghai Index settled at 2991.33, up 3.4 or +0.11% and Australia’s S&P/ASX 200 Index closed at 6657.90, down 50.2 or -0.75%.

Early in the session, U.S. futures markets are pointing toward a lower opening on Thursday after the benchmark S&P 500 Index wiped out $1.7 trillion in just two sessions.

Bank of Korea Keeps Policy Rate Unchanged

In an unexpected move, the Bank of Korea kept its benchmark policy rate unchanged. Central bank policymakers surprised the financial markets by holding the benchmark interest rate at 1.25% when analysts polled by Reuters were expecting a rate cut. That was despite a recent spike in the number of coronavirus cases in the country threatening its economy.

Aberdeen Standard Investments’ Leong Lin Jing described the Bank of Korea’s interest rate decision as “a little bit curious.”

“Bank of Korea has had a habit of being a little bit behind the curve … when acknowledging that growth is slowing down,” Leong said.

Australian Shares Fall for Fifth Straight Session

Increased reports of coronavirus cases around the world saw Australian shares tumble of a fifth consecutive session on Thursday, wiping out all the gains achieved earlier in the year, the Brisbane Times reported.

All sectors aside from healthcare and utilities finished in the red, led by steep declines in technology and energy shares. As was the case earlier this week, the weakness was driven by uncertainty on the human and economic toll the coronavirus may bring.

In other news, Australia’s 10-year bond yield fell to a new record low of 0.845 percent after Australia’s Prime Minister Scott Morrison said risk of global pandemic is very much upon us, while urging the need to take action.

Additionally, Australia private capital expenditure dropped -2.8% in Q4, much worse than expectation of 0.5% increase. In seasonally adjusted terms, building and structures dropped -5.9%. Mining dropped -2.7%. Equipment, plant and machinery rose 0.8%. Manufacturing dropped -10.1% and other selected industries fell -1.9%.

Trump: US Coronavirus Risk ‘Very Low’; Microsoft Warns of Windows Unit Revenue Miss

U.S. equity markets finished mixed on Wednesday with the S&P 500 Index falling for a fifth straight session, while the selling pressure was a little lighter than the two previous sessions, the price action remained volatile as investors continued to react to headlines about coronavirus and its potential impact on the U.S. economy.

In the cash market on Wednesday, the benchmark S&P 500 Index settled at 3116.39, down 11.82 or -0.36%, the blue chip Dow Jones Industrial Average finished at 26957.59, down 123.77 or -0.43% and the technology-based NASDAQ Composite closed at 8980.78, up 15.17 or +0.17%.

Trump Says Coronavirus Risk in US is Low

President Donald Trump told Americans on Wednesday that the risk from coronavirus remained “very low,” and placed Vice President Mike Pence in charge of the U.S. response to the looming global health crisis.

He also said the spread of the virus in the United States was not “inevitable” and then went on to say: “It probably will, it possibly will. It could be at a very small level, or it could be at a larger level. Whatever happens we’re totally prepared.”

U.S. Coronavirus Update

Dozens of people were being checked for the coronavirus in the New York City area on Wednesday, officials said, but Governor Andrew Cuomo said the state has had no confirmed cases so far, Reuters reported.

“This situation is not a situation that should cause undue fear,” Cuomo told a news conference, saying that 27 people in New York have tested negative for the virus.

I’m happy to say right now, we don’t have a case,” county health commissioner Lawrence Eisenstein said.

In other news, the Centers for Disease Control and Prevention confirmed an infection of the new coronavirus in California in someone who had not traveled outside the United States or been exposed to a person known to have the virus, a first for the country.

Microsoft Expects Windows Unit to Miss Revenue Outlook on Coronavirus Impact

Microsoft Inc. said on Wednesday it does not expect to meet its quarterly revenue forecast for its Windows and personal computing business as a result of the coronavirus outbreak, sending its shares down more than 1% in after-market trading.

“Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated,” the company said in a statement.

Microsoft is the second company in the trillion dollar club to withdraw outlook. Earlier this month, Apple said that it may not be able to meet its March-quarter sales forecast.

European Equities: Another Slide on the Cards and the Prospects of a Global Pandemic Intensify

Economic Calendar:

Thursday, 27th February

Spanish HICP (YoY) (Feb) Prelim

Spanish HICP (YoY) (Feb) Prelim

Eurozone Consumer Confidence (Feb) Final

Friday, 28th February

French Consumer Spending (MoM) (Jan)

French GDP (QoQ) (Q4) 2nd Estimate

German Unemployment Change (Feb)

German Unemployment Rate (Feb)

Italian CPI (MoM) (Feb) Prelim

German CPI (MoM) (Feb) Prelim

The Majors

It was a mixed day for the European majors on Wednesday, with investors tiptoeing back into riskier assets. Support came in spite of the continued spread of the coronavirus, with a decision by EU member states to leave borders open delivering the support.

The continued concern over the spread of the virus was evidenced in travel and leisure stocks, however, that were the worst performers on the day.

The DAX30 saw its 5th consecutive day in the red, falling by 0.12%. Finding support was the CAC40, which eked out a 0.09% gain, while the EuroStoxx600 ending the day flat.

The Stats

It was a relatively quiet day on the Eurozone economic calendar on Wednesday. Economic data included jobseeker numbers out of France.

The numbers had a muted impact on the majors, however, in spite of total job seekers falling from 3,292.9k to 3,264.8k.

Concerns over the economic outlook continue to mute the effect of historical data that have yet to reflect the impact of the coronavirus.

Out of the U.S, January’s new home sales also had a muted impact on the majors late in the European session.

A bullish start to the day across the U.S majors did provide support, however…

The Market Movers

For the DAX: autos were amongst the top performers on Wednesday as investors went bargain hunting. BMW and Daimler led the way with gains of 1.26% and 1.05% respectively. Continental and Volkswagen saw more modest gains of 0.94% and 0.24% respectively.

It was a mixed day for the banks, however, with Commerzbank falling by 0.35%, while Deutsche Bank rose by 1.38%.

Deutsche Lufthansa was the worst performer on the DAX30, falling by 1.99%.

From the CAC, it was another bearish day for the banks. BNP Paribas fell by 1.00%, with Credit Agricole and Soc Gen declining by 1.14% and by 1.01% respectively.

The auto sector found support, however, with Renault and Peugeot ending the day up by 1.22% and 4.75% respectively.

Air France-KLM continued to struggle, however, with a 0.87% loss on the day.

On the VIX Index

The VIX saw red for the 1st time in 5-days, with a 1.04% loss. Following an 11.27% gain on Tuesday, the VIX ended the day at 27.6.

While the U.S equity markets had found support through the early part of the day, news updates on the coronavirus led to a late reversal, leaving the S&P500 down by 0.38% on the day.

The reversal was not enough to drive the VIX into positive territory, however, though the downside for the VIX may be temporary…

VIX 27/02/20 Daily Chart

The Day Ahead

It’s a relatively busy day ahead on the Eurozone economic calendar on Thursday. Economic data includes prelim February inflation figures out of Spain and finalized Eurozone consumer confidence numbers.

From the U.S, durable goods orders and 2nd estimate GDP numbers for the 4th quarter also provided direction.

Expect the Eurozone consumer confidence and numbers from the U.S to have the greatest influence from the calendar.

It will ultimately boil down to news updates and the later coronavirus numbers…

In the futures markets, at the time of writing, the DAX was down by 275.5 points, with the Dow down by 218 points.

European Equities: Covid-19 News Updates and ECB President Lagarde In Focus

Economic Calendar:

Wednesday, 26th February

France Jobseekers Total

Thursday, 27th February

Spanish HICP (YoY) (Feb) Prelim

Spanish HICP (YoY) (Feb) Prelim

Eurozone Consumer Confidence (Feb) Final

Friday, 28th February

French Consumer Spending (MoM) (Jan)

French GDP (QoQ) (Q4) 2nd Estimate

German Unemployment Change (Feb)

German Unemployment Rate (Feb)

Italian CPI (MoM) (Feb) Prelim

German CPI (MoM) (Feb) Prelim

The Majors

It was another bearish day for the European majors on Tuesday, with market fear over the spread of the coronavirus doing the damage once more.

The CAC40 led the way, falling by 1.94%, with the DAX30 and EuroStoxx600 ending the day down by 1.88% and by 1.76% respectively.

Economic data continued to play second fiddle on the day as news of a further spread of the coronavirus raised the prospects of a global pandemic.

The Stats

It was a relatively quiet day on the Eurozone economic calendar on Tuesday. Economic data included 2nd estimate GDP numbers for the 4th quarter out of Germany.

According to Destatis,

  • The German economy stalled in the 4th quarter, which was in line with 1st estimate numbers.

Compared with the previous quarter,

  • The growth of domestic final consumption expenditure slowed markedly.
  • Household final consumption expenditure stagnated in the 4th
  • General government final consumption expenditure rose by just 0.3%.
  • It was a mixed bag for fixed capital formation.
  • While gross fixed capital formation in construction increased by 0.6%, capital formation in machinery and equipment slid by 2%. Capital formation in other fixed assets was up by 1.1%.
  • Trade weighed on the economy in the 4th quarter, with exports down 0.2%, while imports of goods and services rose by 1.3%. It was the exports of goods, which fell by 0.4% that offset a rise in the exports of services (+0.4%).

Year-on-year, the economy grew by 0.3%, which was also in line with 1st estimates.

From the U.S, consumer confidence didn’t help, with the CB Consumer Confidence Index rising from 130.4 to 130.7. Economists had forecast an increase to 132.4.

The Market Movers

For the DAX: it was a bearish day for the auto sector on Tuesday. Continental led the way tumbling by 4.32%, with Volkswagen down by 2.25%. BMW and Daimler saw more modest losses of 1.44% and 1.42% respectively.

It was also a bearish day for the banks. Commerzbank slid by 5.84%, with Deutsche Bank down by 3.12%.

Deutsche Lufthansa also saw more red, sliding by 3.79% off the back of Monday’s 7.80% tumble.

From the CAC, it was a particularly bearish day for the banks. BNP Paribas slid by 4.88%, with Credit Agricole and Soc Gen falling by 3.62% and by 3.64% respectively.

The auto sector also continued to struggle. Renault fell by 2.87, with Peugeot ending the day down by 0.67%.

Air France-KLM fell by 3.28% following on from an 8.78% slide from Monday.

On the VIX Index

The VIX rose by 11.27% on Tuesday to market a 4th consecutive day in the green. Following on from a 46.55% surge on Monday, the VIX ended the day at 27.9.

A particularly bearish day drove the VIX to 30.0 levels for the first time since December 2018.

Market reaction to the continued spread of the coronavirus weighed heavily on the global equity markets, with the S&P500 sliding by 3.03%.

VIX 26/02/20 Daily Chart

The Day Ahead

It’s another relatively quiet day ahead on the Eurozone economic calendar on Wednesday. Economic data includes jobseeker totals from France.

Barring particularly dire numbers, the majors are unlikely to respond to the numbers later this morning.

With stats from the U.S limited to new home sales figures, market sentiment towards the global economic outlook will likely limit any upside on the day.

On the monetary policy front, ECB President Lagarde is scheduled to speak later in the day. Any monetary policy talk will influence, with the ECB likely to have material concerns over the spread of the coronavirus. The real question is what the ECB has to offer in terms of support. Certain members of the ECB will likely be reluctant to favor any further easing…

In the futures markets, at the time of writing, the DAX was down by 150.5 points, while the Dow was up by 57 points.

Asian Markets Stabilize but Move Seen as Temporary Rather Than Structural

The major stock indexes in the Asia Pacific region finished mixed on Tuesday with Japan plunging over 3%, followed closely by Australia’s nearly 2% decline. South Korea surprisingly edged higher. The main driver of the price action remained fears of the economic impact from the coronavirus. Although the markets did stabilize following Monday’s plunge on Wall Street, most analysts see the moves as more temporary than structural.

On Tuesday, Japan’s Nikkei 225 Index settled at 22605.41, down 781.33 or -3.34%. Hong Kong’s Hang Seng Index closed at 26893.23, up 72.35 or +0.27% and South Korea’s KOSPI Index finished at 2103.61, up 24.57 or +1.18%.

In China, the Shanghai Index settled at 3013.05, down 18.18 or -0.60% and in Australia, the S&P/ASX 200 Index closed at 6866.60, down 111.70 or -1.60.

Coronavirus Update

Despite the virus outbreak seemingly stabilizing in China, the new concern for most investors is the spreading of the virus outside the borders of the world’s second largest economy. Just two weeks ago investors were bracing for dismal economic data out of China. Now they are pricing in expected weak performances in South Korea, Japan and Australia with others to follow.

China Economic Update:  ‘Difficult to See Material Growth in Foreseeable Future’

At times, the headlines suggested China’s economy was due to stabilize because of government stimulus, interest rate cuts and the re-opening of factories. This raised hopes that the economic damage would be contained to the first quarter. However, this may not be the case as some factories in China continue to remain shut due to containment measures.

Becky Liu, head of China macro strategy at Standard Chartered Bank, told CNBC’s “Street Signs” on Tuesday that China’s first quarter GDP is expected to deteriorate “very materially” to only 2.8% while the full-year projection was at 5.5%.

“This will be lower than the minimum GDP growth which is required to achieve so-called doubling GDP by 2020 target at 5.7%,” Liu said.

“From what we have seen so far this year, nothing is growing aside (from) something very small…such as online gaming,” she said. “Even if the virus condition start(s) to get contained and we have real activities picking up in March, it’s very difficult to see China having any material growth in the foreseeable future.”

South Korea Economic Update:  Global Technology Sector Vulnerable

With the outbreak spreading to South Korea, technology companies are now facing new challenges due to the country’s importance in the global technology and semiconductor supply chains.

Alex Holmes, Asia economist at Capital Economics said on Tuesday, “If they (Korea) had to shut down factories across the country, then particularly the technology sector across the rest of the region who rely on Korea for things like…liquid crystal displays and semiconducting chips, they would really struggle.”

European Equities: Futures Point to a Positive Open as Bargain Hunters Return

Economic Calendar:

Tuesday, 27th February

German GDP (YoY) (Q4) 2nd Estimate

German GDP (QoQ) (Q4) 2nd Estimate

Wednesday, 26th February

France Jobseekers Total

Thursday, 27th February

Spanish HICP (YoY) (Feb) Prelim

Spanish HICP (YoY) (Feb) Prelim

Eurozone Consumer Confidence (Feb) Final

Friday, 28th February

French Consumer Spending (MoM) (Jan)

French GDP (QoQ) (Q4) 2nd Estimate

German Unemployment Change (Feb)

German Unemployment Rate (Feb)

Italian CPI (MoM) (Feb) Prelim

German CPI (MoM) (Feb) Prelim

The Majors

It was a particularly bearish start to the week for the European majors, with market fear over the spread of the coronavirus doing the damage.

The DAX30 led the way, sliding by 4.01%, with the CAC40 and EuroStoxx600 falling by 3.94% and by 3.79% respectively.

Economic data took a back seat on the day as a spike in cases in South Korea and Italy raised the possibility of a global pandemic.

The Stats

It was a relatively quiet day on the Eurozone economic calendar on Monday. Economic data included Germany’s IFO Business Climate Index figures for February.

According to the February survey,

  • The IFO Business Climate Index rose from 96.0 to 96.1 in February.
  • While sentiment towards the current situation deteriorated, companies were less pessimistic about the next 6-months.
  • The IFO Current Assessment sub-index fell from 99.2 to 98.9, while the Business Expectations sub-index rose from 92.9 to 93.4.

The slight uptick had little to no impact on the DAX30 and risk appetite in general, however.

There were also no material stats from the U.S to influence later in the day.

The Market Movers

For the DAX: it was a particularly bearish day for the auto sector on Monday. Daimler led the way tumbling by 6.43%, with Volkswagen down by 5.89%. BMW and Continental saw marginally more modest losses of 5.20% and 4.15% respectively.

It was also a bearish day for the banks. Commerzbank slid by 6.04%, with Deutsche Bank down by 5.74%.

Deutsche Lufthansa also saw red, tumbling by 7.80%, with the spread of the coronavirus particularly bad news for the airline industry.

From the CAC, it was a bearish day for the banks. BNP Paribas slid by 3.80%, with Credit Agricole and Soc Gen falling by 3.35% and by 3.64% respectively.

The auto sector also struggled at the start of the week. Renault slid by 6.63, with Peugeot ending the day down by 6.97%.

Air France-KLM took yet another hit on Monday, sliding by 8.78%.

On the VIX Index

The VIX surged by 46.55% on Monday. Following on from a 9.77% gain on Friday, the VIX ended the day at 25.0.

A particularly bearish day drove the VIX to its highest level since 3rd January of last year.

Market reaction to the spread of the coronavirus weighed heavily on the global equity markets, with the S&P500 sliding by 3.35%.

VIX 25/02/20 Daily Chart

The Day Ahead

It’s another relatively quiet day ahead on the Eurozone economic calendar on Tuesday. Economic data includes Germany’s 2nd estimate GDP numbers for the 4th quarter.

Expect any revision from 1st estimates to influence early in the day.

From the U.S, consumer confidence figures will also provide direction, with the futures pointing to a positive open as investors go bargain hunting.

In the futures markets, at the time of writing, the DAX was up by 70.5 points, with the Dow up by 168 points.

Asian Markets: South Korea Plunges More than 3%; Airlines, Smartphone Industry at Risk

The major Asia Pacific stock indexes are trading lower on Monday, led by losses in South Korea after government officials raised its coronavirus alert to the “highest level” following a rapid spike in cases over the weekend.

On Monday morning, the Korea Centers for Disease and Control and Prevention reported that seven people have died from COVID-19. The number of cases has risen to 161 new cases, bringing the total to 763 nationwide – the country with the most cases outside the mainland.

In response to the rising death toll and the number of coronavirus cases, South Korea has raised its virus outbreak alert to the “highest level” as confirmed case numbers keep rising.

“The COVID-19 incident faces a grave turning point,” President Moon said following a meeting with ministers and experts.

“The next few days will be crucial. The government will raise the alert level to the highest level of ‘grave’ according to experts’ recommendations and drastically strengthen our response system.”

On Monday at 06:52 GMT, Japan’s Nikkei Index is trading 23386.74, down 92.41 or -0.39%. Hong Kong’s Hang Seng Index is at 26873.86, down 434.95 or -1.59% and South Korea’s KOSPI Index is at 3032.88, down 6.79 or -0.22%.

China’s Shanghai Index is trading 3032.79, down 6.88 or -0.23% and Australia’s S&P/ASX 200 Index closed at 6978.30, down 160.70 or -2.25%.

Asia Pacific Airlines Take another Hit as Travel is Further Restricted

Airline stocks in the Asia Pacific region are down sharply amid contagion fears. In Australia, Qantas Airways plummeted 7.22% while Hong Kong-listed shares of China Eastern Airlines and China Southern Airlines both fell more than 4% each.

According to Reuters, South Korea’s Korean Air Lines and Asiana Airlines said on Monday they are suspending flights to Daegu, the country’s fourth-largest city with the largest number of coronavirus cases, for the time being.

Korean Air has decided to halt all flights to Daegu until March 28, while Asiana will halt all flights to the city until March 9, their representatives said.

South Korea’s Korean Air Lines and Asiana Airlines dropped 5.52% and 5.54% respectively.

Cell Phone Industry at Risk

Samsung Electronics said on Saturday that one coronavirus case had been confirmed at its mobile device factory complex in the southeastern city of Gumi, causing a shutdown of its entire facility there until Monday morning.

Samsung Electronics, the world’s top smartphone maker, said the floor where the infected employee worked would be shut down until the morning of February 25.

Samsung’s factory in Gumi accounts for a small portion of its total smartphone production, and it makes high-end phones, mostly for the domestic market. Samsung produces most of its smart phones in Vietnam and India.

The outbreak of the coronavirus has dented the smartphone industry, with Apple warning that it expected a hit to revenues thanks to factory shutdowns, delays and store closures.

Analysts are saying that Chinese smartphone giant Huawei has been coy on coronavirus impact, with one executive stating there would be no impact on its global supply chain over the next three to six months.

However, they are deeply skeptical and say Huawei will be worse affected than Apple, since it is hugely reliant on Chinese consumers for smartphone business.

IMF, US Government, Fed are Watching the Data, When They Should Be Listening to the Financial Markets

Are officials playing “kick the can” with the financial impact of the coronavirus on the global economy, or are we ready to say we’re going to see zero growth during the first quarter? And how long are we going to have to wait for predictions of a global recession? Two quarters?

I get that no one wants to cause a panic in the markets, but guess what, I think there will be, once the seemingly optimistic Federal Reserve policymakers finally have some negative data they can work with. By then it may be a little too late to rescue the second quarter.

After sounding too optimistic about the economy in 2018 and aggressively raising rates three times in 2019, they now appear to be a little stubborn about acknowledging there is a future economic downturn in the air.

Sometimes I feel that Fed members are more worried about predicting the length of an economic downturn than the actual start of economic problems. But now is the time to set aside track record worries like they were batting averages and make the call, even it is a tad early.

In this case, calling it a disaster early will be better than calling it too late. I don’t think anyone is going to be upset if the Fed makes a pre-emptive strike and makes an insurance rate cut a few months early. After all, investors are already pricing in at least one rate cut later in the year.

IMF:  We Don’t Know When It Will Happen, but We’ll Tell You What It Will Look Like

On February 19, International Monetary Fund (IMF) chief Kristalina Georgieva said the new coronavirus, or COVID-19, outbreak is the “most pressing uncertainty” facing, the world economy right now.

She further added it’s an international health emergency that “we did not anticipate in January” and “It is a stark reminder of how a fragile recovery could be threatened by unforeseen events.”

But then she went into optimistic mode and said, “If the disruptions from the virus end quickly, we expect the Chinese economy to bounce back soon, she wrote. “Spillovers to other countries would remain relatively minor and short-lived, most through temporary supply chain disruptions, tourism, and travel restrictions.”

February 19? This sounds like something she should have said in late January. Last week, Apple warned investors about reduced demand and supply chain interruptions. So I think the IMF is behind the ball.

To her credit, Georgieva did mention the IMF’s longer-term viewpoint, saying that a long-lasting outbreak would have significant consequences for the Chinese and global economies.

“Its global impact would be amplified through more substantial supply chain disruptions and a more persistent drop in investor confidence, especially if the epidemic spreads beyond China,” she said in a post.

Over the weekend, Georgieva started to acknowledge a worst case scenario, “But we are also looking at more dire scenarios where the spread of the virus continues for longer and more globally, and the growth consequences are more protracted.”

Economic Impact of Coronavirus Will Be Clearer in ‘Three or Four Weeks,’ Mnuchin Says

Meanwhile, U.S. officials will have a better idea of how the coronavirus outbreak will impact the economy in “three or four weeks,” U.S. Treasury Secretary Steven Mnuchin said Sunday.

“I think we’re going to need another three or four weeks to see how the virus reacts, until we really have good statistical data,” he said.

Mnuchin further added, “Although the rate of the virus spreads at is quite significant, the mortality rate is quite small. It’s something we’re monitoring carefully, one of the discussions we’re having here is that countries should be prepared, but I think we’re at a point where it’s too early to either say this is very concerning or it’s not concerning.”

Will check back with you, Mr. Mnuchin, in three or four weeks, to see what the markets seem to already know.

Fed Still Waiting on the Numbers

Last week, Federal Reserve Vice Chairman Richard Clarida reiterated that the “fundamentals in the U.S. are strong” though he said Fed officials are monitoring risks, in particular the coronavirus.

“It’s obviously something that is probably going to have a noticeable impact on Chinese growth in the first quarter,” he said. However, there’s no indication at this point that it will impact policy.

“What we would be looking for is some body of evidence that suggests that we need to make a material reassessment of our outlook, and certainly we have not done that yet,” Clarida said. “But we are monitoring, because China is a huge part of our economy.”

Conclusion

The IMF is not predicting an economic downturn per se, but seems to be telling us what one would look like in both the short-term and long-term. Mnuchin says we won’t know if there are going to be problems for three or four weeks and the Fed’s Richard Clarida says the economy is fine and the Fed is monitoring the situation.

In the meantime, the financial markets, especially U.S. Treasurys, gold, the Japanese Yen and to some extent, the global equity markets, seem to be saying the economic problems are already here.

Financial market investors were ahead of the Fed before in 2018 and central bankers made three cuts in 2019. I think they are right again so I expect the Fed to cut its benchmark rate sooner rather than later in 2020.

European Equities: Futures Point to a Tough Day Ahead for the Bulls

Economic Calendar:

Monday, 26th February

German IFO Business Climate Index (Feb)

Tuesday, 27th February

German GDP (YoY) (Q4) 2nd Estimate

German GDP (QoQ) (Q4) 2nd Estimate

Wednesday, 26th February

France Jobseekers Total

Thursday, 27th February

Spanish HICP (YoY) (Feb) Prelim

Spanish HICP (YoY) (Feb) Prelim

Eurozone Consumer Confidence (Feb) Final

Friday, 28th February

French Consumer Spending (MoM) (Jan)

French GDP (QoQ) (Q4) 2nd Estimate

German Unemployment Change (Feb)

German Unemployment Rate (Feb)

Italian CPI (MoM) (Feb) Prelim

German CPI (MoM) (Feb) Prelim

The Majors

It was a bearish day for the European majors on Friday, with the DAX30 sliding by 0.62% to lead the way down. The CAC40 and EuroStoxx600 saw more modest losses of 0.54% and 0.49% respectively.

Risk aversion stemming from a marked increase in the number of new coronavirus cases sent the majors in the red.

While numbers out of China continued to reflect a slowing in the number of new cases and deaths, it was South Korea that spooked the markets.

With the number of new cases and deaths spiking, there were also likely doubts over the accuracy of the numbers out of China.

The downside was relatively minor, however, with better than anticipated private sector PMI numbers for February limiting the damage.

The Stats

It was a busy day on the Eurozone economic calendar on Friday. Economic data included private sector PMI numbers out of France, Germany, and the Eurozone.

According to the prelim numbers:

The French Manufacturing PMI fell from 51.1 to 49.7, while the services PMI jumped from 51.0 to 52.6.

It was also mixed out of Germany, with the manufacturing PMI rising from 45.3 to 47.8, while the services PMI fell from 54.2 to 53.3.

For the Eurozone, the Manufacturing PMI rose from 47.9 to 49.1, with the Services PMI rising from 52.5 to 52.8.

The Eurozone’s Composite PMI increased from 51.3 to 51.6.

According to the Eurozone PMI survey,

  • The Eurozone’s Composite Output Index hit a 6-month high, with the Manufacturing Output Index hitting an 8-month high.
  • Supported by better numbers out of France and Germany, the Manufacturing PMI hit a 12-month high in February.
  • In spite of the rise in the Manufacturing PMI, new orders fell for a 17th consecutive month. The decline was the smallest in 15-months, however. Domestic demand offset much of a more marked decline in demand from overseas.
  • Overall, however, new orders increased at a rate equal to January’s 7-month high.

From the U.S, PMI numbers were particularly disappointing, however, adding to the doom and gloom that ultimately led to a bounce-back in the EUR.

The Market Movers

For the DAX: it was a bearish day for the auto sector on Friday. Daimler led the way sliding by 3.03%, with Volkswagen down by 2.46%. BMW and Continental saw more modest losses of 1.51% and 1.38% respectively.

It was also a bearish day for the banks. Commerzbank fell by 3.41%, with Deutsche Bank down by 4.46%.

Deutsche Lufthansa also saw red, falling by 1.86%, as the markets continued to digest Air France-KLM’s earnings results and forward guidance.

From the CAC, it was a relatively bearish day for the banks. BNP Paribas and Credit Agricole both fell by 0.08%, with Soc Gen falling by 0.48%.

The auto sector also struggled at the end of the week. Renault slid by 3.00%, with Peugeot ending the day down by 1.49%.

Air France-KLM took another hit on Friday, sliding by 3.30%, the loss coming off the back of a 3.49% tumble on Thursday.

On the VIX Index

The VIX rose by 9.77% on Friday. Following on from an 8.21% gain on Thursday, the VIX ended the day at 17.1.

Bearish sentiment through the European and U.S sessions delivered the upside on Friday as the markets digested the latest coronavirus updates.

Disappointing private sector PMI numbers out of the U.S added to the negative sentiment at the end of the week.

The S&P500 fell by 1.05% on the day, following from a pullback on Thursday that had reversed gains from earlier on the week.

VIX 24/02/20 Daily Chart

The Day Ahead

It’s a relatively busy day ahead on the Eurozone economic calendar on Monday. Economic data includes German IFO Business Climate index numbers for February.

Forecasts are negative for the majors, with the IFO Business Climate Index forecasted to fall from 95.9 to 95.1.

While we can expect influence from the numbers, updates from China and beyond on the coronavirus will remain the key driver near-term.

In the futures markets, at the time of writing, the DAX was down by 235.5 points, with the Dow down by 408 points.

European Equities: A Week in Review – 22/02/20

The Majors

It was a bearish week for the European majors in the week ending 21st February, with the DAX30 falling by 1.20% to lead the way down.

The CAC40 and EuroStoxx600 saw more modest losses of 0.65% and 0.61% respectively.

Negative sentiment towards the anticipated impact of the coronavirus on corporate earnings and global trade pressured in the week.

At the start of the week, Apple issued a warning over demand for the 1st quarter that saw the majors hit reverse on Tuesday.

Mid-week, the majors managed to claw back their losses from Tuesday to move back into positive territory for the week.

Support had come from the Chinese government and the PBoC’s moves to mute the impact of the coronavirus on 1st quarter growth.

This was coupled with a downward trend on the number of people catching the virus, with the death toll also in decline.

A reversal came on Thursday, however, with earnings weighing. Air-France KLM delivered to a stark warning on Thursday, which hit risk appetite on the day.

At the end of the week, the majors were unable to shift away from the negative sentiment towards the coronavirus as new cases jumped globally.

Things could have been far worse had economic data from the Eurozone not been skewed to the positive in the week. The softer EUR had also provided some support earlier in the week before Friday’s rebound.

The Stats

It was a busy week on the Eurozone economic calendar.

On Tuesday, the ZEW Economic Sentiment figures for Germany and the Eurozone were in focus, which weighed on the majors.

Germany’s ZEW Economies Sentiment Index slid from 26.7 to 8.7 in February, with the Eurozone’s falling from 25.6 to 10.4. Concerns over the impact of the coronavirus on global trade contributed to the slide.

The focus then shifted to consumer confidence figures out of Germany on Thursday and prelim February private sector PMIs on Friday.

Germany’s GfK Consumer Climate Index fell from 9.9 to 9.8 for March, coming in ahead of a forecast of 9.6. There were no major concerns over the coronavirus, with sentiment towards the economic outlook on the rise.

The main event of the week, however, was the release of prelim private sector PMI numbers out of France, Germany, and the Eurozone.

According to the prelim numbers:

The French Manufacturing PMI fell from 51.1 to 49.7, while the services PMI jumped from 51.0 to 52.6.

It was also mixed out of Germany, with the manufacturing PMI rising from 45.3 to 47.8, while the services PMI fell from 54.2 to 53.3.

For the Eurozone, the Manufacturing PMI rose from 47.9 to 49.1, with the Services PMI rising from 52.5 to 52.8.

The Eurozone’s Composite PMI increased from 51.3 to 51.6.

According to the Eurozone PMI survey,

  • The Eurozone’s Composite Output Index hit a 6-month high, with the Manufacturing Output Index hitting an 8-month high.
  • Supported by better numbers out of France and Germany, the Eurozone Manufacturing PMI hit a 12-month high in February.
  • In spite of the rise in the Manufacturing PMI, new orders fell for a 17th consecutive month. The decline was the smallest in 15-months, however. Domestic demand offset much of a more marked decline in demand from overseas.
  • Overall, however, new orders increased at a rate equal to January’s 7-month high.

The Market Movers

From the DAX, it was a mixed week for the auto sector. Volkswagen led the way down, sliding by 2.63%. BMW and Daimler saw more modest losses of 1.88% and 1.55% respectively. Continental bucked the trend in the week, rising by 0.47%.

It was a particularly bearish week for the banking sector, however, with Deutsche Bank tumbling by 7.28%. Commerzbank fell by a more modest 1.36%.

From the CAC, it was also a bearish week for the banks. BNP Paribas fell by 0.86%, with Credit Agricole and Soc Gen sliding by 2.59% and by 2.08% respectively.

Things were not much better for the French auto sector. Renault tumbled by 8.17%, with Peugeot ending the week down by 1.19%.

The shift in risk appetite also weighed on airline stocks. Germany’s Lufthansa fell by 3.28%, with Air France-KLM down by 5.02%.

On the VIX Index

The VIX rallied by 24.85% in the week ending 21st February to deliver a 1st weekly gain in 3-weeks. Reversing an 11.57% fall from the previous week, the VIX fell by 11.57% to end the week at 17.1.

Economic data out of the U.S at the end of the week disappointed, with the all-important U.S service sector contracting for the 1st time since October 2013. According to prelim February figures, the Services PMI fell from 53.4 to a 76-month low 49.4.

Things were not much better for the manufacturing sector, with the PMI falling from 51.9 to 6-month low 50.8. As a result, the U.S Composite Output Index slumped to a 76-month low 49.6.

Dire numbers at the end of the week coupled with rising coronavirus cases across the world drove risk aversion on Friday. Two consecutive days in the green at the end of the week delivered the lion’s share of the gains.

VIX 22/02/20 Weekly Chart

The Week Ahead

It’s another busy week ahead on the Eurozone economic calendar. Through the 1st half of the week, Germany’s business sentiment and 2nd estimate GDP numbers are in focus.

Through the 2nd half of the week, the markets will need to wait until Friday for employment numbers out of Germany and consumer spending and 2nd quarter GDP numbers out of France.

We expect prelim February inflation figures out of Spain, France, Italy, and Germany to have a muted impact on the majors.

From elsewhere, consumer confidence numbers out of the U.S will influence on Tuesday. Durable goods and 2nd estimate GDP numbers out of the U.S on Thursday will also provide direction.

Outside of the numbers, expect updates from China and beyond on the spread of the coronavirus to remain the key driver.

European Stocks Pressured by Coronavirus Fears; Euro Zone PMIs Show Better Growth

European shares slumped on Friday, as investors monitored the latest developments in the coronavirus outbreak. Traders generally followed the lead in Asia which was mostly lower across the board. Basic resources stocks lost the most, but all sectors on all major bourses are being pressured. The biggest concern for investors is the spreading of the coronavirus outside of China.

At 11:34 GMT, the U.K.’s FTSE 100 Index is trading 7416.93, down 19.71 or -0.27%. Germany’s DAX is at 13640.50, down 23.50 or -0.17% and France’s CAC is at 6043.11, down 19.19 or -0.32%.

Economic News

CNBC reported that leaders of the 27 EU member states failed to make any headway in budget talks on Thursday. The U.K.’s departure from the bloc last month is projected to leave a £55 billion ($71.3 billion) hole in the EU’s coffers over the next seven years.

Business activity in the Euro Zone accelerated more than expected this month, a business survey showed on Friday, in welcome news for policymakers at the European Central Bank who are battling to revive growth and chronically low inflation.

Euro Zone February Business Growth Better than Expected

IHS Markit’s Euro Zone Composite Flash Purchasing Manager’s Index (PMI), seen as a good gauge of economic health, rose to 51.6 in February from January’s final reading of 51.3, beating all forecasts in a Reuters poll which had a median prediction of 51.0. Anything above 50 indicates growth.

“The Euro Zone economy managed to pick up some momentum again in February despite many companies having been disrupted in various ways by the coronavirus, which caused supply problems,” said Chris Williamson, chief business economist at IHS Markit.

Demand remained relatively strong, suggesting there won’t be a deterioration next month. The new business index held at January’s seven-month high of 51.3.

Williamson said the survey was consistent with GDP growth of 0.2%, matching the projection in a Reuters poll published this week.

The headline index was buoyed by a rise in the PMI for the bloc’s dominant services industry to a forecast-beating 52.8 from 52.5.

With demand resilient, demonstrating some confidence, firms took on more workers, albeit at a slower rate than in January. The employment index dipped to 52.6 from 53.0.

While a manufacturing PMI held below the break-even mark, it continued its upwards march. It rose to 49.1 from 47.9, its highest level in a year and ahead of all forecasts in a Reuters poll.

An index measuring output, which feeds in to the composite PMI, rose to 48.4 from 48.0.

Most forward-looking indicators in the survey moved in the right direction, suggesting the manufacturing recovery was still on course and optimism remained elevated. The future output index only dipped to 57.9 from January’s 17-month high of 59.8.

“The expansion is being led by welcome resilience in the service sector but manufacturing is also showing encouraging signs of pulling out of the downturn that has plagued producers for over a year,” Williamson said.

Some Asian Countries on Brink of Recession as Virus Spreads Outside China

The major Asia Pacific stock indexes were mostly lower on Friday as lingering concerns over the economic impact of the ongoing coronavirus epidemic continued to drive global investors out of Asian stocks. While the impact of the virus on China’s economy continues to be the main concern, investors are now reacting to the rapid spread of the coronavirus outside mainland China and its impact on Asia’s economies.

On Friday, Japan’s Nikkei 225 Index settled at 23386.74, down 92.41 or -0.39%. Hong Kong’s Hang Seng Index finished at 27308.81, down 300.35 or -1.09% and South Korea’s KOSPI Index closed at 2162.84, down 32.66 or -1.49%.

China Shanghai Index settled at 3039.67 up 9.52 or +0.31% and Australia’s S&P/ASX 200 Index finished at 7139.00, down 23.50 or -0.33%.

Coronavirus Update

CNBC reported that investors continued to watch for developments on the ongoing coronavirus – also known as COVID-19 – outbreak, with the World Health Organization’s (WHO) Director-General Tedros Adhanom Ghebreyesus telling reporters on Thursday that the low number of cases outside of China “may not stay the same for long.”

WHO said Thursday that the new coronavirus has not yet spread widely around the world, but emphasized that the virus could break out globally at any time. Outside of China, Tedros said there are 1,076 confirmed cases in 26 countries, including seven deaths. The remarks come after health officials confirmed that the virus has spread to Iran and cases surged in South Korea overnight.

“The number of cases in the rest of the world is very small compared to what we have in China, but that may not stay the same for long,” Tedros said. “The window of opportunity we have now may close, so we need to use the window of opportunity we have now by hammering the outbreak in any country,” Tedros added.

“I think the number of cases are really manageable and I hope South Korea will do everything to contain this outbreak at this early stage,” Tedros said about the situation.

Some Asia Countries on Brink of Recession

Japan and Singapore are on the brink of recession and South Korea on Friday said its exports to China slumped in the first 20 days of February as the outbreak upends global supply chains.

Factories in China, Southeast Asia’s largest trading partner, have struggled to return to work as authorities ramp up containment efforts, with officials saying that January and February exports and imports will be hit by the outbreak that has claimed more than 2,200 lives.

“Data suggests that a pickup in activity is still elusive, which could have negative implications on global growth,” DBS Group Research said in a note.

European Equities: Consumer Confidence Figures Could Limit any Upside Later Today

Economic Calendar:

Thursday, 20th February

German PPI (MoM) (Jan)

GfK German Consumer Climate (Mar)

French CPI (MoM) (Jan) Final

French HICP (MoM) (Jan) Final

Eurozone Flash Consumer Confidence (Feb)

Friday, 21st February

French Manufacturing PMI (Feb) Prelim

French Services PMI (Feb) Prelim

German Manufacturing PMI (Feb) Prelim

German Services PMI (Feb) Prelim

Eurozone Manufacturing PMI (Feb Prelim)

Eurozone Markit Composite PMI (Feb) Prelim

Eurozone Services PMI (Feb) Prelim

Italian CPI (MoM) (Jan) Final

Eurozone Core CPI (YoY) (Jan) Final

Eurozone CPI (MoM) (Jan) Final

Eurozone CPI (YoY) (Jan) Final

The Majors

It was a bullish day for the European majors on Wednesday, with the CAC40 rising by 0.90% to lead the way. The DAX30 and EuroStoxx600 weren’t far behind, with gains of 0.79% and 0.83% respectively.

A softer EUR and updates from China on the spread of COVID-19 provided support.

According to COVID-19 numbers as at Tuesday night, there were a total of 74,185 cases, with 2004 deaths. The pace of new infections continued to ease, which was considered positive.

Ultimately, however, the expectation of continued fiscal and monetary policy support to prop up the Chinese economy drove the majors on the day.

The Stats

It was a quiet day on the Eurozone economic calendar on Wednesday, with no material stats out of the Eurozone to provide direction.

From the U.S, stats were limited to housing sector data and wholesale inflation figures for January, which had a muted impact ahead of the FOMC meeting minutes which were released after the European close.

The Market Movers

For the DAX: it was a mixed day for the auto sector on Wednesday. Continental led the way rising by 0.65%, with Volkswagen and Daimler seeing more modest gains of 0.15% and 0.18% respectively. BMW bucked the trend on the day, falling by 0.43%.

It was a bearish day for the banks, however. Commerzbank fell by 0.62%, with Deutsche Bank falling by 0.65%.

Deutsche Lufthansa found strong support, rising by 1.02%.

From the CAC, it was a mixed day for the banks. BNP Paribas and Soc Gen rose by 0.15% and by 0.05% respectively, while Credit Agricole fell by 0.11%.

Autos found much-needed support, with even Renault avoiding another day in the deep red. Peugeot rose by 0.83%, while Renault rallied by 2.49%.

Air France-KLM saw red, however, falling by 0.82% on the day.

On the VIX Index

The VIX fell back into the red on Wednesday, with a 3.03% decline. Partially reversing an 8.41% rise from Tuesday, the VIX ended the day at 14.4.

Risk appetite returned on Wednesday, with the U.S majors making solid gains in spite of Apple’s earnings warning on Monday.

Tech stocks led the way, suggesting that the markets see any slowdown in the Chinese economy as a short-term blip.

From the FED, the FOMC meeting minutes suggested that rates would likely remain unchanged near-term, as trade uncertainties diminish. While the FED noted that global growth was beginning to stabilize, uncertainties remained.

There were references to the coronavirus but were not alarmist enough to spook the markets on the day.

VIX 20/02/20 Daily Chart

The Day Ahead

It’s a relatively busy day ahead on the Eurozone economic calendar. Economic data includes German and Eurozone consumer confidence numbers for March and February.

Wholesale inflation figures out of Germany and finalized January inflation figures out of France will likely have a muted impact on the majors.

Later in the day, Philly FED Manufacturing PMI numbers from the U.S will also provide direction.

On the monetary policy front, we can expect the majors to respond to the overnight FOMC meeting minutes and the ECB monetary policy meeting minutes due out later today.

Ahead of the European session, the PBoC is expected to cut Loan Prime Rates to bolster support. Any hold and expect the majors to come under pressure at the open.

In the futures markets, at the time of writing, the DAX was up by 35.5 points, with the Dow up by 71 points.

Fed’s Kashkari: Virus Could Deliver Negative ‘Shock’ That Could Force Fed to Lower Rates

Several Federal Open Market Committee (FOMC) members have been making the rounds recently, giving their takes on current monetary policy and the potential impact of the coronavirus on the U.S. economy.

FOMC Mester:  Coronavirus Could Drag on U.S. Economy

On February 14, Cleveland Fed President Loretta Mester said the coronavirus epidemic, which has killed thousands and sickened tens of thousands in China, could be a drag on the U.S. economy this quarter.

“I expect that, certainly in China and perhaps in Asia, the first quarter and it remains to be seen by how much and for how long that will persist,” Mester told Bloomberg Television. “But in general I am seeing that as a risk to my forecast – I haven’t marked down my forecast.”

The data show the U.S. economy is in a “good place,” Mester said, using a favorite phrase of Fed policymakers.

Several Fed officials, including Chair Jerome Powell, have also said they expect to see some impact on the U.S. economy from the coronavirus.

“They have not, however, signaled expectations that the impact would lead to a “material change” to the outlook, the bar they have set for any further adjustments to rates.

FOMC Kaplan:  US Interest Rates ‘Roughly Appropriate”

Dallas Federal Reserve Bank President Robert Kaplan on February 18 repeated his view that the current setting of U.S. interest rates is “roughly appropriate” through the end of the year, even as he noted risks from the flu-like epidemic that has brought parts of China to a halt.

Predicting consumer-led U.S. GDP growth of 2% to 2.25% in 2020, a drop in U.S. unemployment to 3.5% from 3.6%, and a rise in inflation toward the Fed’s goal of 2%, Kaplan sounded fairly upbeat in an essay released Tuesday morning laying out his assessments, Reuters said.

“Of course, this outlook is clouded by the impact of the coronavirus originating in Wuhan, China,” Kaplan said.

Economists at the Dallas Fed are looking at different possible scenarios for the epidemic’s effect on U.S. and global growth, Kaplan said, but “it is still too soon to predict with confidence the ultimate impact” on the economy.

FOMC Kashkari: ‘Shocks could hit U.S. economy and Call for Lower Rates’

The Federal Reserve is likely to keep interest rates where they are until mid-2020 but may need to cut them, Minneapolis Fed Bank President Neel Kashkari said on Wednesday, pointing to the coronavirus in China as one potential risk to the U.S. economy, Reuters said.

“If I were to guess, I’d guess we’re probably going to sit here for the next three months, next six months, maybe longer,” Kashkari told a symposium in Mankato, Minnesota.

“But if I were to guess what the next move would be, my best guess is the next would be down rather than up, because we are pretty close to neutral today, and there are any number of shocks around the global economy that could hit the U.S. economy and call for lower rates.”

Kashkari said the impact from the virus could deliver a negative “shock” that could force the Fed to lower rates from their current target range of 1.5% to 1.75%.

Asia Pacific Shares Tumble on Apple Guidance Reduction, HSBC Pre-Tax Profit Miss

The major Asia Pacific stocks indexes closed mostly lower on Tuesday after Apple Inc. said it will not meet its revenue guidance for the March quarter as the coronavirus outbreak slowed production and weakened demand in China.

The company said Monday it is “experiencing a slower return to normal conditions than we had anticipated” after the extended Lunar New Year holiday.

“…We do not expect to meet the revenue guidance we provided for the March quarter due to two main factors,” Apple said in a statement. “The first is that worldwide iPhone supply will be temporarily constrained.” “The second is that demand for our products within China has been affected.”

Apple also said, “The situation is evolving, and we will provide more information during our next earnings call in April. Apple is fundamentally strong, and this disruption to our business is only temporary. Our first priority – now and always – is the health and safety of our employees, supply chain partners, customers and the communities in which we operate.”

At 09:00 GMT, Japan’s Nikkei 225 Index settled at 23193.80, down 329.44 or -1.40%. Hong Kong’s Hang Seng Index finished at 27530.20, down 429.40 or -1.54% and South Korea’s KOSPI Index closed at 2208.88, down 33.29 or -1.48%.

China’s Shanghai Index settled at 2984.97, up 1.35 or +0.05% and Australia’s S&P/ASX 200 Index finished at 7113.70, down 11.40 or -0.16%.

HSBC Misses Expectations on 2019 Pre-Tax Profit

Europe’s largest bank, HSBC, reported a 33% fall in 2019 pre-tax profit to $13.35 billion after it took a goodwill impairment of $7.3 billion. The write down was related to its European investment banking and commercial banking businesses, HSBC said.

In terms of HSBC’s business in Asia, where the bank derives the bulk of its earnings, Quinn warned of pressure from the ongoing coronavirus outbreak.

“Since the start of January, the coronavirus outbreak has created significant disruption for our staff, suppliers and customers, particularly in mainland China and Hong Kong,” he said.

“Depending on how the situation develops, there is the potential for any associated economic slowdown to impact our expected credit losses in Hong Kong and mainland China,” he added. “Longer-term, it is also possible that we may see revenue reductions from lower lending and transaction volumes, and further credit losses stemming from disruption to customer supply chains.”

Energy, Tech Sectors Drag Down Australian Shares on Coronavirus Impact

The S&P/ASX 200 Index tumbled on Tuesday, led by losses in the energy and technology sectors, due to worries over the impact of the coronavirus epidemic on China’s economy and its global supply chains.

Apple Inc.’s warning that it will not meet its revenue forecast in the March quarter was the catalyst behind the 1.2 percent decline in Australia’s technology index.

Woodside Petroleum led the losses among energy stocks as oil prices declined due to demand worries put forth by the fears of the spreading virus.

RBA Policymakers Reviewed Further Rate-Cut Case, Worried About Borrowing, Coronavirus

The Reserve Bank of Australia (RBA) reviewed the case for a further interest-rate cut, but decided against it in order to avoid encouraging additional borrowing as house prices climb, minutes of its February 4 meeting in Sydney showed, Bloomberg reported.

The RBA also expects the coronavirus outbreak to “subtract from growth in exports over the first half of 2020,” the minutes released Tuesday showed. It acknowledged it was “difficult to assess potential indirect effects on activity” from the epidemic and devastating wildfires over summer as data were yet to be published.

The RBA also maintained an easing bias and reiterated its expectation rates were likely to stay low for “an extended period,” the bank retained a broadly upbeat view of the economy’s prospects.

Apple Cuts Revenue Guidance for Fiscal Q2 Due to Coronavirus

U.S. investors are preparing for a lower opening on Tuesday as stock index futures retreated from record highs early in the session after Apple Inc. said it will not meet its revenue guidance for the March quarter as the coronavirus outbreak slowed production and weakened demand in China.

The warning from the company with the highest market cap in the United States served as a wake-up call to investor optimism that economic stimulus by Beijing and other countries would shield the global economy from the effects of the coronavirus epidemic.

Investors initially trimmed positions in mid-January on concerns the coronavirus would have some effect on China’s economic growth and on U.S. companies doing business in the country, but those worries were put to bed in early February when China’s government made a preemptive strike against those concerns by providing massive amounts of stimulus.

The move was enough to send U.S. equity prices to record highs last week, but the warning from Apple and the subsequent sell-off in the U.S. futures indexes indicates that the damage could be significant if China cannot gain control of the virus.

As late as Monday, China’s central bank was still at by announcing an interest rate cut on medium-term loans. This was supposed to pave the way for a reduction in the benchmark loan prime rate on Thursday.

The move was also expected to provide a boost to global equity markets this week, instead sentiment was stunned when Apple informed investors its manufacturing facilities in China have begun to re-open but are ramping up more slowly than expected, reinforcing signs of a broader hit to businesses from the epidemic.

“Apple is saying its recovery could be delayed, which could mean the impact of the virus may go beyond the current quarter,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

“If Apple shares were traded cheaply, that might not matter much. But when they are trading at a record high, investors will be surely tempted to sell.”

Apple Expects to Miss Second-Quarter Forecast for Revenue

Apple said Monday that it does not expect to meet its quarterly revenue forecast because of lower iPhone supply globally and lower Chinese demand as a result of the coronavirus outbreak, CNBC reported.

The company initially said that it expected to report net sales between $63 billion to $67 billion in its fiscal second quarter, Apple did not provide a new forecast for its fiscal second-quarter revenue on Monday.

The company said it provided a wider range than usual in late January, citing the uncertainty around the coronavirus outbreak.

“As you can see from the range, anticipates some level of issue there. Otherwise, we would not have a $4 billion range,” CEO Tim Cook said at the time.

iPhones and Other Products in China Affected

Apples makes most iPhones and other products in China. The Coronavirus has caused it to temporarily halt production and close retail stores in China. Some Apple retail stores reopened in China with reduced schedules last week.

The company said Monday it is “experiencing a slower return to normal conditions than we had anticipated” after the extended Lunar New Year holiday. All iPhone manufacturing facilities in China have reopened, but Apple said it still expects supply shortages of the phone globally.

This is the second time in the last 13 months that Apple has had to cut its guidance due to concerns in China. In January 2019, Apple was forced to slash revenue guidance for its fiscal first quarter of 2019 due to weak iPhone sales in China, CNBC reported.

Apple is widely expected to announce a new, cheaper iPhone model this spring. It’s unclear if the delays in China will affect that launch.

Key Quote

“This disruption to our business is only temporary,” Apple said. “Our first priority – now and always – is the health and safety of our employees, supply chain partners, customers and the communities in which we operate.”