Weekly market update : Markets wobble as the virus spreads

Monday January 27

Weekly market update

The financial markets have had a turbulent past week, with the coronavirus epidemic in China. This epidemic has revived the fears of operators, such as the SARS epidemic in 2003, but the WHO has not declared an international emergency, which moreover cost USD 53 billion at the time. China's responsiveness and action is a sign of relief, allowing the major indices to pick up again on Friday.

Indexes Over the past week, Asia has paid the heaviest price. The Nikkei lost 0.9%, the Hang Seng dropped 3.5% while the Shanghai Composite lost 3.2% (the Chinese stock market will remain closed until Fb 2 for the Lunar New Year celebrations). In Europe, performances are mixed. The CAC40 recorded a weekly loss of 1.2%, with luxury goods and automobiles, the Footsie lost 1.1% while the Dax gained 0.4%. For the peripheral countries of the euro zone, Spain and Portugal lost 0.9% and 0.4% respectively. As for Wall-Street, no alarm bells ringed, the Dow Jones fell by 0.5% over the week, the S&P500 by 0.2% while the Nasdaq100 moved to its highest levels, with a gain of 0.8%.

Commodities Oil prices fell sharply during last week, weighed down by the rapid spread of the new coronavirus, which could affect oil demand in China. As for the United States, while weekly inventories recorded a surprise drop, production remains at a record level (13 mbpd). Brent dropped 7% to USD 60.9 while WTI is trading at USD 54.4. Gold and silver's paths have diverged last week. The gold metal stabilized at USD 1568, sought after for its safe-haven nature. Silver, whose demand is more industrial in nature, is losing some ground at USD 17.9. The industrial metals segment was down sharply on the week, impacted by news from China. Copper lost ground at USD 6050, as did aluminum and nickel at USD 1780 and USD 13300, respectively.

Equities markets How about three? After Apple and Microsoft, the very closed club of companies capitalizing more than 1000 billion dollars has just welcomed a new member, in this case Alphabet. It must be said that their recent progression over a sliding year leaves no doubt about the strength of their underlying trend, which is largely upward. These "Stars" of the American stock market have managed to reach stratospheric valuation levels, following exceptional performances. Apple is showing its ability to create value in the service sector. The Cupertino company's share price rose by 107% during the reference period. Thanks to the profitability of its Cloud compartment, Microsoft (+56%) is the portfolio's core value par excellence. Finally, Alphabet (+37%), a true ecosystem, is accumulating profits in a large number of sectors. Total capitalization of France 's CAC40 relative to US heavyweights (in billions of dollars)

Bond market The further downward revision of the International Monetary Fund's "World Economic Outlook" update did not significantly change the bond market barometer. The IMF now expects global economic output to increase by only 3.3% for the current year. On the other hand, the stress from Asia with the coronavirus has led to security purchases. As a result, sovereign bond yields deteriorated slightly. The 10-year US 10-year yield returned to 1.7%, a loss of ten basis points. The same trend applied in Europe, with yields on the Bund falling to -0.29% and on the French OAT, which symbolically fell back below zero. Italy, despite the political uncertainties, took advantage of this and saw the rate on its major loan fall to 1.26%, as did Spain at 0.37% and Greece at 1.30%. Switzerland, for its part, maintains optimal conditions for borrowing, with a rate of -0.7%. Evolution of the spread between the Italian and Bund rates Return to normal for the spread after 2 peaks of widening due to political uncertainties.

Forex market Forex traders returned to the pound as better than expected unemployment data was released, marking the lowest since 1975. The labour market continues to challenge anemic growth in the UK. The GBP/USD rose 100 basis points to 1.31 and the EUR/GBP returned to 0.84, losing the same spread to the British currency. The single currency lost ground against its counterparts. The EUR/JPY is trading at 121.13 (-150 basis points). The bearish run is replicated against the Swiss Franc at 1.07 and against the Dollar at 1.103. The approach of the Italian regional elections is weighing on the euro, while the first 2020 meeting of the European Central Bank has not really brought any new elements. As for the Japanese currency, the trend is towards recovery, as the USD/JPY is down 70 basis points.

Economic data The IMF has presented its 2020 projections and its words are reassuring, indicating a 3.3% growth of the world economy. It indicates that industrial activity is recovering and that trade tensions have reduced. The institute forecasts growth of 6% for China and 2% for the United States but a slowdown in the Indian economy. In Europe, the ZEW indicator, measuring German investor sentiment, reached 26.7 points at its 2015 peak (see chart). At the same time, the UK unemployment rate falls to a historic low of 3.8%. The long list of Flash PMI publications (purchasing managers' surveys) has shown that in Germany, manufacturing activity recovered slightly to 45.2 against 43.7, a rise that also applies to services, with an indicator at 54.2 against 52.9. In the United States, the same statistics are mixed. For the industrial segment, the figure comes out at 51.7 against 52.4 expected, while services reassure at 53.2 (consensus 52.9). Positive trend in the Zew index in Germany over the last 2 months

Markets wobble as the virus spreads With the new spike in stress due to the virus from China, the markets have replicated the oscillating movements that have been going on since the beginning of the year, with sequences of rises followed by violent but still limited profit taking. Although these phases of reflection are taking place on chart highs, they are marking strong uncertainty on the part of investors, who can quickly move in either direction. The commercial "ceasefire" is nevertheless calming the environment, especially as geopolitical events have momentarily dissipated. Intensive publications of annual results continue to pour onto investor screens, and it is clear that deviations from expectations can cause great damage to prices. As a result, market participants are refocusing on corporate fundamentals, which are essential to the upward trend in valuations.