(29 January 2020)DAILY MARKET BRIEF 2:Equities better bid, oil rebounds. Sterling under pressure.

(29 January 2020)DAILY MARKET BRIEF 2:Equities better bid, oil rebounds. Sterling under pressure.

29 January 2020, 09:03
Jiming Huang
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European and US equity markets rebounded on Tuesday, as investors started licking their wounds from the coronavirus-led sell-off.

The S&P500 (+1.01%) and Nasdaq (+1.43%) surged as technology stocks led gains in the US.

Apple posted record earnings in the fourth quarter thanks to the increase in its iPhone sales and said that its revenue could rise 9% to 15% in the first quarter of 2020, though the actual forecasts may be imprecise due to the unknown impact of the spreading coronavirus as China represents 20% of the company’s overall business. Apple shares rose about 2% in the after trading.

Nikkei added 0.71% in Tokyo and the ASX 200 advanced 0.53% in Sydney.

Chinese markets remained closed, but Hang Seng started trading for the first time after the Chinese New Year holiday and slid 2.31% as stocks in Hong Kong caught up with the prior coronavirus sell-off.

FTSE (+0.16%) and DAX (+0.09%) futures hint at a marginally positive start in Europe.

WTI crude rose above $54 a barrel on the NYMEX, as Brent crude traded at $60 a barrel as investors put in perspective the supply disruption risks due to tensions in the Middle East and the possibility of further production cuts from OPEC’s March meeting if coronavirus meaningfully hammered demand in oil.

Data-wise, the inflation in Australia rose to 1.8% y-o-y, the highest in a year, in the fourth quarter versus 1.7% penciled in by analysts. Supply disruptions due to wildfires will likely push consumer prices higher in the coming months. And despite a spike in consumer inflation, the Reserve Bank of Australia (RBA) could be tempted to maintain its dovish stance in place, or even opt for lower rates to give a needed support to its economy which has been suffering from natural catastrophes and the negative implications of the coronavirus.

The pound dipped to 1.2975 against the US dollar as investors continued trimming their long sterling positions into Thursday’s Bank of England (BoE) meeting, then rebounded past 1.30. Although the BoE is unlikely to lower its rates at this week’s meeting, the probability of a 25-basis-point cut rose from nearly 0% to 60% during the course of January, amid British policymakers voiced concerns over Brexit uncertainties and the resulting soft economic data. Hence, the selling pressure on Sterling is likely here to stay before the BoE decision.

But before that, the Federal Reserve is expected to keep its interest rates unchanged within the 1.50%-1.75% range today and continue buying 60 billion USD worth of Treasury bills on monthly basis to maintain serenity in the short-term money markets. But now that the US-China trade risks are behind us, investors will increasingly question the Fed’s actual balance sheet expansion, which is said to be a ‘derivative of QE but not a proper QE’. Either way, T-bill purchases helped driving US stock prices to fresh record highs. Hence, winding down the bill purchases could trigger the opposite effect, a risk that the Fed is probably not willing to take at the current fragile risk environment. But this is a discussion that the Fed members will have to have sooner rather than later, and investors will keep a close eye on anything that could hint at lower bill purchases in the coming months. If anything, a 5-basis-point hike in excess reserve rate could be on the menu today but should see limited market reaction.

The EURUSD trades a touch above the 1.10 floor. Due today, a weak confidence data from Germany could pull out the floor and let the euro swing below the 1.10 mark against the US dollar.

By Ipek Ozkardeskaya

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