Market has bounced yesterday with Europe recovering nearly half of the losses made the previous day helped by some short covering on the positive US Macro data. European and US futures are now up 0.2% for today.

Sell off from coronavirus, has mainly hit commodities (GSCI index down 6.5%) and stocks (roughly $1.5 trillion off the value of world stock markets) since the outburst on January 20. Of course, the most sold regions were Equities in China (down almost 10%) and other Emerging markets.

Chinese health officials warned spread of the virus is accelerating, and fears are growing that incubation period could be up to two weeks before signs of illness begin to manifest. Respiratory expert says outbreak might peak in the next week or 10 days.

Travel curbs have been tightened severely with Hong Kong insulated by some checkpoints and North Korea closing the border with China.

The question is no longer if, but how hard, the coronavirus will damage Chinese economy and its trading partners in Q1. Yesterday, for the 1st time since October, the 3-Month/10-Year Yield curve has inverted again.

This website is very interesting and show the official cases confirmed and the area involved across the Globe:

We already know that Macau’s Golden Week visitors from China has dropped 88% on the 27th of January and for the first four days of the holiday, arrivals were down 75%, the data show. Data are going to worsen considering the further tightening measures applied. Wuhan, which is taking the biggest hit from the virus spread, accounts for 1.6% of China’s Gdp.

We think that analysts/economists are realizing that their expectations for almost everything are too much optimistic for 2020. The latest IMF forecast for 2020 Global Gdp at 3.3% (released last week) will be adjusted very soon.

However, as mentioned yesterday morning, the economic drag from the virus may prompt the Central Banks to intervene. The first message will be given by China as they have already promised to offer” abundant liquidity” after holidays but we also expect the Fed to possibly resume its policy easing. Fed funds futures now show a full quarter-point cut is now priced in by the end of October, while just a few weeks ago a reduction wasn’t seen until early 2021.

For another reason, even the SNB seems to be ready to intervene as President Thomas Jordan mentioned in Davos. The Swiss Franc is getting stronger and stronger, around 1.066 vs Eur, up to levels which are calling for Central Bank intervention via interest rate cut or open market operations.

Yesterday European banks were outperforming as the ECB published the results of its Supervisory Review and Evaluation process discussing the overall requirements and guidance for Core Equity Tier 1 (CET1) capital for Eurozone banks. Requirements set by the ECB stayed unchanged YoY at 10.6%, which were seen as a positive.

It seems that the framework is becoming more conciliatory and the capital situation of the sector is improving as low profitability of the banking sector is widely seen as one of the highest financial stability risks in Eurozone currently.

Supervisors will intensify oversight of business models, yet with appreciation that poor profitability reflects both cyclical and structural factors as the ECB sees overcapacity, digitalization and broad cost inefficiencies as key issues to tackle.

As far as Macro, yesterday, mixed numbers in US. Although December durable goods orders were at 2.4% vs 0.3% consensus, the strength was entirely concentrated in a near-doubling of defense capital goods orders while core good orders posted the largest drop since April, -0.9% vs 0.2% in December.

Very interestingly, US house prices are increasing, with S&P Corelogic 20-City composite up 2.55% vs 2.4% consensus while Richmond Fed manufacturing jumped to 20, the highest since September 2018, from minus 5 a month earlier, mainly due to rebounds in sales and orders in manufacturing sector.

US consumer confidence jumped to 131.6 vs 128 consensus in January, one of the highest levels since August. It seems Americans haven’t been this confident in the current economy since the peak of the DotCom bubble. Present situation confidence rose to 175.3 vs 170.5 last month, back at the highest level since 2000 (chart).

US Job market continues to be tight while it seems that the spread between dis-saving and consumer confidence has once again been stretched too wide (too much spending vs higher confidence).

Today’s Macro

  • January UK home prices
  • France, Italy Consumer Confidence
  • EU M3 Money Supply
  • US FOMC rate decision (20:00)

Yesterday’s earning release


Apple (after market): delivered a strong set of Q120 results, +1.5% in post trading after closing +2.8%, with a huge beat on revenues and guidance, although a notable miss on services. Quarterly revenue up 9% YoY, and an all-time record, mainly fueled by strong demand for iPhone 11 and iPhone 11 Pro models (iPhone strength broad based, led by US +8% YoY), and all-time records for Services and Wearables. Net Profit was $4.99 a share, also beating analysts’ expectations. For Q220, Apple said sales will be between $63-67 billion, higher than consensus. Apple was up 86% in 2019, already up more than 8% YTD with 1% dividend yield.

Santander: announced positive results, with profit beating expectations as capital increased. Q4 net income +8.5% vs consensus, Q4 net interest income in line, final year CET1 ratio fully-loaded 11.7% vs estimate 11.3%. The bank has definitely strengthened its capital position, seeing CET1 close to 12% by end 2020 versus 11.65% in 2019. Also expects to deliver high single-digit average annual earnings per share growth over the next three years. Stock down 6% in 2019 and 27.5% in 2018, down 5% YTD, 5.6% dividend yield.


Xilinx (after market): US Semis, profit warning, stock down 10% in post market, mainly due to weak guidance, projecting Q4 sales $750-780 million, below analysts’ consensus. Also said it would reduce its global workforce by about 7% and cut discretionary spending.

Novartis: small miss, as net income fell 5.9% in Q419, hit by tax charges, but guided for growth in both sales and profit in 2020 (see sales to grow mid to high single digit). Core operating income, was $3.46 billion, up 11% from $3.11 billion YoY. The continued momentum of its drugs Entresto and Cosentyx, combined with the launch of gene-therapy Zolgensma, helped drive growth at the topline. Stock up 9.5% in 2019, flattish YTD, 3.2% dividend yield.

LVMH: delivered a miss, with ADR trading flattish yesterday in US. Sales up 8% on an organic basis, slowing from 11% in Q319, mainly due Hong Kong jitters and issues from cosmetics brands in the U.S. Selective Retailing and Watches & Jewelry segments posted slower growth, down sequentially and in absolute terms around +1%. Stock up 60% in 2019, flattish YTD, 1.5% dividend yield.

Today’s earning release

Facebook, Microsoft, Boeing, General Electric, Paypal, Mastercard, Mcdonald’s, AT&T, Tesla, Novartis, Santander

And finally, let’s go back to the volatility topic, the two chart below show that cross-asset volatility is still at multi-year low, but can strongly jump in a session only. The Eurostoxx 50 intra-day volatility rose up to February 2018 high, the so called Volmageddon , while the yuan volatility is increasingly rising, USD/CNH 5 handles higher since January 23 (just few patches with 10 handles since 2010). If the Virus is not contained, the pair might even break out 10 handles.

SX5E intraday volatility

Yuan Volatility