Financial market research and analysis

EQUITIES

There has been a steep fall in Asian markets overnight. There can often be some profit-taking in the run-up to the Lunar New Year but there are some specific causes too.

The Hang Seng fell 2% after Moody’s downgraded the credit rating of Hong Kong given the months of protests. Markets priced in the worst outcome for Hong Kong during the summer. We still take the view that since Alibaba made its huge second listing there, we can downplay the impact of the protests on our expectations for Hong Kong shares.

The Shanghai Composite was down 1% as concern grows over the spread of the coronavirus. The outbreak started in Wuhan, China and extra screening has been added to flights from the city after it was confirmed the virus can travel from person-to-person. Pharmaceutical stocks have been the exception to the rule. Chinese investors have loaded up on Chinese pharma shares in case there is a wider outbreak. If authorities are to be believed and the virus is contained, these pharma stocks should come back down to earth with a thud. If this becomes another SARS, we can expect the shares to go a lot higher, particularly in China where ‘mom n pop investors’ tend to pile in when there is a popular story.

Shares in Europe look set to take a turn for the worse, taking their cue from Asia where the human-human spread of the coronavirus is causing concern. The weakness in European shares comes despite an agreement between Presidents Trump and Macron to a truce on tariffs between their respective countries. Trump had earlier threatened 100% tariffs on $2.4bn French goods after France passed a 3% digital services tax, mostly impacting big US tech firms including Amazon, Apple, Facebook and Google.

Trading resumes on Wall Street after a long weekend with Netflix set to report Q4 earnings after the close. This is the first set of Netflix earnings results since the introduction of Disney+, the streaming service by Disney. Netflix is expected to report that it grew subscribers by 7.6 million in Q4, with 600k of them in the US. That comes after a shock decline in US subscribers in Q3. We expect the impact of Disney+ to be a re-run of history when Amazon Prime entered the scene. We think Disney+ will not cannibalise Netflix subscribers, but just help expand the universe of customers willing to switch to streaming services.

FOREX

A drop in the Chinese yuan over concern about the corona virus is hitting Asian currencies across the board with the Japanese yen the exception to the rule. The yuan weakness is a kneejerk reaction to the human-to-human spread of coronavirus but could get more embedded if the outbreak spreads.

The yen jumped after the Bank of Japan held pat on its monetary stimulus program. The BOJ increased its growth forecasts, seemingly turning more optimistic about Japan’s prospects now that the US – China phase one trade deal has been signed. USDJPY has slipped back below the key 11 handle.

UK unemployment data will be the main point of focus on the UK economic calendar today. GBPUSD has been stubbornly clinging onto $1.30 despite a series of disappointing economic data, including the longest run of retail sales declines on record. The unemployment figures are one of the last major datapoints before Bank of England decision next week. If cracks show up in the UK labour market, we suspect that might be the straw that breaks the camel’s back on a January rate cut.

In the Eurozone, we get the release of the latest monthly German ZEW survey.

COMMODITIES

A downturn in risk sentiment thanks to increasing concern over the coronavirus has helped give gold a nudge higher. We are of the opinion that if gold can hold $1550 per oz during a series of stock market record highs, it is in a position to benefit when sentiment weakens.