Markets have continued to bounce yesterday with some sector rotation out of Defensives into Cyclicals, volumes were below the average. This morning the situation is radically different after a substantial sell-off in Asia.

The Eur/Usd has slightly broken the support at 1.10 (currently at 1.1011) after dismal loan growth data and Oil has temporarily bounced on the news that Saudi Aramco was attacked along with the airports of Abha and Mushait through a large number of missiles and drones. In addition, Libya has seen its oil production slashed by 75% in just one week as warring factions within the country attempt to use the key commodity to seize control, with production slumping from 1.2 million barrels per day to just over 320,000 barrels per day.

In China, while there is some news of Hong Kong researchers testing a vaccine, there are nearly 8K confirmed cases in China, more than SARS epidemic. Those who have been closely comparing this outbreak with the 2003 SARS outbreak may notice that the coronavirus has achieved an important milestone. Barely a week into global response to the outbreak, the number of confirmed cases has already passed the number of SARS cases reported during the entire months long ordeal.

In addition, the virus is more contagious than SARS at its peak, with increased incidence of 790/day in the past five days (vs. 100+/day during the peak of 2003 SARS).

China’s Premier LI confirmed that virus is spreading and the situation is still “grim and complex” and the World Health Organization will consider merits of a global emergency.

It is very scary to see the potential trajectory of the coronavirus infections through the 20th of February at the current pace with a linear growth (which hopefully might not be the case). The data is coming from the China National health commission.

Virus outbreak is a disruption for China but also for US operations in China with Starbucks shutting more than half of the stores (10% of group revenues), Mac Donalds has closed “several hundred” restaurants and Apple seeing disruptions to production for the new phones (not mentioned in the conf call made yesterday).

Toyota halted Chinese production along with other several car producers. British Airways, Lufthansa, American Airlines and other airlines have cancelled with China.

The FOMC yesterday was merely a non-event. Funds rate target range left unchanged at 1.5-1.75%, as widely expected. According to Powell, rates are currently “appropriate” to support growth, jobs and inflation. The FOMC realigned IOER (secondary interest rate covering banks’ excess reserves) by +5bps to 1.60%, a pure technical operation. A related tool, the rate on overnight reverse repos, also rose by 5 basis points, to 1.5%. Overall, the FOMC will support liquidity, injecting funds through repo operations at least through April, compared with January previously, and buying Treasury bills at least into the second quarter.

The market has now recovered ¾ of the losses we had on Monday but one main point is that participation on the upside has been much lower than on the downside. We shouldn’t be too surprised as equity positioning has continued to climb (from Deutsche Bank analysis) and the main move would be to sell, certainly not to buy aggressively.

If we look at US futures, as they rallied into year end and over the first few weeks of 2020, we saw notable amounts of new longs being added and prior to the pull back over the last couple of days, the 30-day build in net longs on S&P and Nasdaq was over 2x greater than the average over last year.

With the recent sell-off we have seen some recent long being liquidated but no new shorts added. Shorts on market stay extremely low for the moment.

Looking more broadly at the EM space, the pace of capital inflows into risky assets slowed down last week when concerns about the coronavirus increased. Exchange-traded funds focused on emerging markets attracted USD 311.7mn in the week ending January 14. this was significantly lower than USD 3.16bn in the previous week. The impressive run of 16 consecutive weeks of inflows may come to an end if risk aversion continues to rise.

As far as Macro is concerned, mixed data yesterday. In US, the trade deficit widened in December for the first time in four months $ -68 billion vs $ -65 billion consensus while inventories wholesales were at -10bps vs 10bps consensus. In addition, a very ugly data on US pending home sales, sales crashed 4.9% MoM, the biggest monthly drop since May 2010 (chart). However, note that while December crashed, pending home sales still surged 6.8% YoY (with mortgage rates down over 1%).

US pending home sales

In Europe we saw a higher consumer confidence in France and Italy, while a flattish one in Japan. All these confirm the positive momentum in consumer confidence which started at the end of Q4 2019.

Today’s Macro

  • January Germany unemployment change
  • January Germany CPI
  • January EU consumer confidence
  • Bank of England Rate decision
  • Q4 US GDP, Personal consumption, Core PCE (inflation)
  • US Jobless claims

Yesterday’s earning release


  • General Electric: strong earnings release, stock up double digits on the news at its 15-month high, mainly due to very strong close to the year on cash, better profits on strength in aviation unit and increasing cash flow guidance. Adjusted earnings rose to $21 cents a share vs $17 cents consensus, sales fell lower than analyst estimates and industrial free cash flow was projected to climb to as much as $4 billion in 2020 from $2.32 billion in 2019. Performance in 2019 +47%, up 15% in 2020.
  • Boeing: reported its first annual loss in more than two decades as costs from the 737 Max crashes rise sharply (lost $636 in 2019 vs $10.5 billion profit in 2018), with costs to Boeing rising to more than $18 billion. However, Boeing burned less cash than analysts expected in the fourth quarter. Free cash flow was -$2.67 billion, versus the -$3.87 billion expected by analysts. That’s the reason why the stock was up single digit on the news. Performance 2019 flattish, Performance -1.5% YTD, dividend yield 2.5%.
  • Tesla: delivered a huge Q4 beat, with the stock up 12% in post market. revenue was $7.38 billion, up 2.2% YoY, versus an estimate of $7.06 billion while adjusted EPS came in at $2.14, well above the estimated $1.74, its fourth profit in the last six quarters. Importantly, final year deliveries should exceed 500,000 units in 2020, thanks to Model Y and 3 production in Fremont and Shanghai, higher than expectation, a more than 35% jump from 2019. Stock up 25% in 2019, 38% in 2020.
  • Microsoft: strong earnings, stock up 4% in post market. Revenue up 14%, higher than consensus, to $36.9 billion, marking the software maker’s 10th straight quarter of double-digit sales growth. EPS $1.51 vs. $1.08 YoY, estimate $1.32, mainly buoyed by cloud business literally on fire, corporate customers seeking to shift computing tasks to cloud-based systems. Stock up 55% in 2019, up 7% in 2020, 1.2% dividend yield.


  • Facebook: announced weak results with slowing growth, stock down 7% in post trading. Revenue up 25%, from advertisement Instagram e video, the slowest-ever quarterly sales growth for Facebook. Basically, growth stagnated in the US and Canada. Higher net income $7.35 billion vs $6.88 billion YoY. Decent but not enough. Stock up 57% in 2019, +8.8% in 2020.

Today’s earning release

Europe: Swatch, Roche, Royal Dutch, Deutsche Bank, Sabadell, Volvo, BT Group, Tod’s, Unilever

USA: Amazon, Verizon, Visa, Coca-Cola, Biogen, Amgen, Xcel Energy, Thermo Fisher, Electronic Arts