Wall Street’s New Year’s resolution to eat a more plant-based diet paid dividends yesterday (sic), with investors gleefully consuming Apple's (NASDAQ:AAPL) latest results, sending its shares to record highs and lifting the Wuhan virus-induced gloom. Apple produced an above-expected profit and also upgraded its forward guidance. Stock markets rallied, and the flight to haven assets partially reversed, with even oil finishing the day in the black.
More good news is probably forthcoming later today as well, with three more components of the financial markets favorite big-tech rap artist, MT FAANG, due to report. Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB) are both expected to continue on their march to world domination. In the case of Microsoft, like Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN), the “cloudier” the outlook the better.
Facebook meanwhile will have pushed data “mining” to previously unheard-of depths to extract valuable revenue. Never mind the potentially substandard bracing in the mine shafts. Tesla (NASDAQ:TSLA), for its part, may make a profit, or not. It may sell more cars, or not. It doesn’t seem to matter though; it’s as bankable as this chap Drake (a favourite of daughter two). Investors will still buy the single anyway.
Let’s not forget that although the cloudier the world becomes, the more silver big tech finds in its linings, clouds are often the precursor to bad weather. General Electric (NYSE:GE) and Boeing (NYSE:BA) will also report, and the best we can probably hope for there is that things weren’t as bad as last quarter.
The microscopic elephant in the room remains the Wuhan virus, with more cases popping up around the world overnight, although at what appears to be a manageable level still. As I have stated before, it is not necessarily the virus per se that is the problem for the world’s economy. It is the self-feeding negative feedback loop on economic activity, and thus growth, it creates. If any examples were needed, CNBC reported this morning that the White House is considering stopping all flights between the U.S. and China. Cathay Pacific Airlines in Hong Kong has cut capacity to the Mainland by 50%.
The “third-space” of handmade beverages, Starbucks (NASDAQ:SBUX), also reported yesterday. Although its results were as pleasing as a free-trade, vegan, organic, gluten-free, sustainably sourced almond milk Frappuccino with chia seed syrup, it noted that the impact on its future results from the Wuhan virus in China was unquantifiable at this stage.
Therein lies the rub, the Wuhan virus is already affecting economic activity, both in China and abroad. Its overall impact remains unquantifiable at this stage. A worst-case scenario, dragging over the next few months, could even knock the Federal Reserve off autopilot trajectory. Markets may enjoy one or two days in the sun. I would be remiss in my role as the voice of reason if I did not caution investors to be wary of chasing, what may be temporary, dead cat bounces. Until we have much more clarity on the controlling of the Wuhan virus outbreak at the very least.
Australian inflation data rose slightly this morning, with the Inflation Rate YoY for Q4 printing at 1.80% versus 1.70% expected. While no doubt pleasing for the Reserve Bank of Australia, it is not enough to knock their easing bias off track. Next week’s rate decision will be a close-run thing. Optimists are pricing in another 25-basis point cut to 0.50%. Given rates are at already record lows, and with not a lot of monetary gas left in the tank, I feel the RBA will choose to hold. With a direct beta to China, the Wuhan virus situation will impact the lucky country if it continues for an extended period. The RBA will want to keep the powder it does have left, dry, as a precaution.
Elsewhere in Asia, Vietnam and Thailand release Industrial Production, expected to reinforce the Asian recovery pre- and post-trade deal. Japan announces Consumer Confidence for January and should also show an improving trend along with Singapore’s PPI data this afternoon. Unfortunately, the greens shoots of the regional recovery will continue to be overshadowed by the Wuhan virus situation.
The FOMC announces its first rate decision of the year. later today in the U.S. There is zero chance of a cut in the Fed funds rate and a negligible chance of a change in its hold steady guidance. The Federal Reserve may note some concerns about the impact of an extended Wuhan virus crisis, but even here, they may refrain rather than spook markets. With U.S. data and earnings continuing to be healthy, the Federal Reserve will keep a brave face and preserve its monetary policy firepower. Pleasingly, against the Wuhan backdrop, both it and the PBOC have plenty.
Equities
Wall Street enjoyed a very positive overnight session after Monday’s sell-off. It was boosted by robust durable goods data, and stellar results from Apple. The S&P 500 rallied 0.95%, the tech-heavy NASDAQ leapt 1.55%, and the Dow Jones rose 0.67%.
Hong Kong has returned to work today and played immediate catch-up to Wuhan virus travails of the previous sessions elsewhere, plunging 2.50% in early trading. With an economy in recession on the front lines of the China situation, the Hang Seng will likely continue to suffer as a proxy to the still-closed Mainland markets.
The situation elsewhere in the region is somewhat rosier, however. Some APAC stock markets have followed Wall Street’s lead and risen, albeit not with the same sense of optimism evident there. The Nikkei 225 and South Korean KOSPI have carved out 0.60% gains with the Singapore Straits Times edging 0.25% higher. Australia and New Zealand are both in the green.
Reports this morning from China that both suspected and confirmed cases of Wuhan virus infection, and deaths, continue to rise, has tempered sentiment in other regional markets. Malaysia, Indonesia and Philippines markets are all slightly in the red.Wary of dead cat bounces, Asian markets are likely to remain cautious today and will be vulnerable to negative headlines emanating from China.
Currencies
The positive Wall Street session yesterday saw haven currencies such as the Japanese yen and Swiss franc retreat slightly overnight, with USD/JPY rising back above 109.00 to 109.20. The U.S. dollar though, remained rock solid against the rest of the world, with the Dollar Index futures trading at two-month highs.
The offshore Chinese yuan staged a small comeback overnight after the second test of 6.9900 in as many days failed. USD/CNH has fallen to 6.9600 this morning having spiked lower to 6.9500 overnight. One suspects there may be some official interest on top of USD/CNH ahead of the 7.0000 level, but any dips are likely to be shallow and short in duration.
Elsewhere, regional Asian currencies continue their slow and modest retreat against the U.S. dollar but are still holding most of their two-month rallies. Although the Wuhan virus has spread to neighboring countries, its numbers have been modest in comparison to the Chinese Mainland. That fact has probably spared regional Asian currencies from a deeper sell-off thus far, with investors giving them the benefit of the doubt.
Their trajectory will be intrinsically tied to the still-developing situation in China, and the emergence, or not, of the Wuhan virus in their respective territories.
Oil
Oil rallied overnight, supported by earnings announcements on Wall Street and speculation that OPEC+ may move to further support prices and extend cuts until June. That all looks more like hope versus reality, with energy perhaps the most vulnerable asset class to a surprise global economic slowdown, given the surplus available globally.
In all likelihood, the massive sell-off of the last few days saw profit-takers, commercial interest and bargain hunters emerge. Brent crude rose 0.60% to $59.60 a barrel and WTI rose 0.80% to $53.60 a barrel. Asia has seen the rally continue, both contracts rising around 1.0% to $60.15 and $54.00 a barrel respectively.
Oil remains acutely vulnerable to negative headlines coming from China and the rest of Asia regarding the Wuhan virus. The Wuhan virus is a fact, whereas talk of OPEC+ cuts and extensions is merely conjecture, with nothing official from the grouping on these points. Noting my comments above regarding dead cat bounces, the corrective oil rally of the last 18 hours should be treated as exactly that, most likely corrective.
Gold
With the rotation out of haven assets in New York overnight—inspired by Apple earnings and U.S. data—gold gave back its recent gains, falling 0.90% to $1568.50 an ounce. Gold has continued easing slightly in Asia, falling another two dollars to $1566.50 an ounce, reflecting the cautious optimism in Asia today.
The overnight price action highlights the fact that the continuation of the gold rally is entirely dependent on further geopolitical uncertainty, and not golds fundamentals in themselves. With some strong earnings to come on Wall Street this evening, and assuming a quiet day on the virus front, gold could well find itself moving closer to its critical $1550.00 an ounce support. The recent highs around $1583.00 an ounce form resistance, followed by $1600.00 an ounce.