Graeme Wearden 

Markets recover some losses amid coronavirus growth fears – business live

Rolling coverage of the latest economic and financial news, as some Asia-Pacific markets continue to slide
  
  

A trader wearing a protective mask works in front of monitors at the KEB Hana Bank in Seoul, South Korea, today
A trader wearing a protective mask works in front of monitors at the KEB Hana Bank in Seoul, South Korea, today Photograph: Jeon Heon-Kyun/EPA

It’s nearly time for the first US interest rate decision of 2020 - but don’t expect many fireworks.

The Federal Reserve is widely expected to keep its benchmark Fed Funds rate unchanged, at 1.5% to 1.75%.

Following three cuts in the second half of 2019, the Fed is effectively on hold - waiting to see how the economic data plays out.

Although trade tensions have eased, the coronavirus crisis is a new threat to global growth - so central bankers will remain cautious.

Finally, the FTSE 100 index has closed 68 points higher at 7480, up almost 1% today.

That still means it has lost 100 points over the last two sessions, amid coronavirus worries.

David Madden of CMC Markets says traders have been snapping up potential bargains after Monday’s rout, and hoping Beijing gets a grip on the crisis:

Stock markets in Europe have pulled back some of the ground that was lost yesterday. In relation to the coronavirus, the situation has deteriorated in the past 24 hours as the number of confirmed infections has risen, and so has the number of fatalities. The positive move in equities is probably down to short covering plus bargain hunting as the health crisis has deepened. The longer the news story hangs around, traders might build up a tolerance to it.

The Chinese central bank has made it clear it is willing to use monetary tools in a bid to lift economic sentiment, should they feel it is required. The message from Beijing reassured traders somewhat, but the acid test will be whether the rebound lasts or not.

Here’s an interesting thread on the implications of the coronavirus, from Canada’s Toronto-Dominion Bank (TD).

Markets recover some of Monday's losses

Stock markets are now moving higher, lifted by hopes that the coronavirus outbreak could be controlled following Zhong Nanshan’s optimistic comments today.

The pick-up in American consumer confidence is also lifting equities, as it bodes well for US economic growth this year.

But... the main indices have still only recovered a third of Monday’s losses.

  • FTSE 100: up 61 points or 0.9% at 7,475
  • German DAX: up 87 points or 0.66% at 13,292
  • French CAC: up 48 points or 0.8% at 5,911

Wall Street has also opened higher, with the Dow Jones industrial average gaining 129 points or 0.45% (it lost 450 points on Monday).

Chris Towner, Director at risk advisor JCRA, says investors are trying to get to grips with the Wuhan virus.

“With the death toll rising above 100, financial markets are still trying to gauge the potential reach of this deadly virus. By comparison, the SARS virus impacted 8098 people with 774 fatalities. The question now is how quickly can this virus be contained and, in the meantime, how many countries and economies will be impacted? In times of risk aversion money normally floods into the Japanese yen and the Swiss franc.

Due to the proximity of Japan to China the risk of the virus penetrating Japan is high, with one confirmed case so far. Therefore, the Swiss franc is currently seen as the ultimate safe haven and has strengthened by over 3% against the Euro from its pre-Christmas level of 1.10 CHF to the Euro in the 1.06’s, the strongest level since April 2017.

Markets will now be focusing on the pace of the spread of the virus and whether there are signs of acceleration or deceleration.”

US consumer confidence rises

Just in: US consumer confidence has rallied this month, by more than expected.

The Confidence Board’s survey of consumer morale has spiked to 131.6, up from 128.2 last month.

Americans interviewed for the survey said their current financial situation had improved, adding that they were more optimistic about their future prospects.

Chinese expert: Outbreak could peak in 10 days

A top Chinese respiratory scientist has predicted that the Wuhan coronavirus has predicted that the outbreak could peak in one week or around 10 days.

Zhong Nanshan made the comments in an interview with Xinhua, the state news media site.

They say:

“It is very difficult to definitely estimate when the outbreak reaches its peak. But I think in one week or about 10 days, it will reach the climax and then there will be no large-scale increases,” Zhong said.

Zhong is the head of a national team of experts set up for the control and prevention of the novel coronavirus-caused pneumonia and an academician of the Chinese Academy of Engineering.

Zhong really knows his stuff -- he was deeply involved in fighting the SARS outbreak back in 2003 (telling reporters that the situation wasn’t under control). So this could be an encouraging signal, if Zhong is right....

But with more cases detected in Thailand today, and a second patient in Germany, the situation is still moving fast.

Despite the slump in demand for aircraft, overall US durable goods rose by 2.4% in December.

But if you strip out defence kit, demand was slightly lower. That’s a disappointing sign, says Chad Moutray, chief economist at the National Association of Manufacturers:

737 Max crisis: Ryanair jobs at risk as orders slump

Ouch. We have fresh evidence today that Boeing’s 737 Max crisis is causing economic harm.

First up, US aircraft orders plunged by almost 75% in December, according to the latest durable goods orders report just released.

That’s the biggest slump in non-defence aircraft orders since 2009, as airline hold off buying 7373 Max jets until the problems that caused two fatal crashes are fixed.

This delay is hurting Boeing (which sacked its CEO last month), and also harming its customers. It currently hopes to get the plane flying by this July.

Ryanair has warned pilots that it could be forced to close some bases, resulting in job cuts, because of the persistent delays.

In a memo, the budget airline told staff it won’t receive its first 737 Max jets until September or October at the earliest, as Ryanair does not take deliveries during its peak summer months of June, July and August. It had originally hoped to take delivery last April, boosting capacity on its routes.

Back in the UK, some of the investors caught up in Neil Woodford savings scandal have learned how much of their money has been lost.

And, as feared, it’s a very heavy blow.

Link Fund Solutions, which has been winding up the Equity Income fund, says investors will receive an initial payment of 46.3p and 58.9p for each share they owned in the fund, compared to 100p when it was launched.

They should receive a second payment, once the less-liquid assets held by the fund are sold off (although that will be a trickier task).

More here:

Several companies have instructed some staff not to come into the office

Wall Street bank Goldman Sachs has told staff who have visited mainland China to work from home for the next fortnight, Reuters reports.

Chinese video games giant Tencent and online retail giant Alibaba are also trying to keep staff out of the office, CNBC flags up:

The oil price would probably be even lower, but for ongoing supply disruption in Libya.

Libya’s crude output has tumbled in recent days, as the Libyan National Army (based in Benghazi) have blockaded ports as part of their campaign against the Libya’s Tripoli-based Government of National Accord.

This has pulled Libya’s oil production down from 1.2m barrels a day to 260,000 barrels and it could soon all-but run out.

Bjarne Schieldrop, chief commodities analyst at SEB, predicts that Opec (the oil cartel) could soon step in and cut supplies, to prop prices up.

“The University of Hong Kong estimates that at least 25,630 people in Wuhan have symptoms of the virus with 44,000 infected with no symptoms yet. This should imply that the sell-off in Brent crude is still not yet over, as the crisis is still intensifying....

On the supply side however, we see that Libya’s oil production will likely be down to zero (from 1.1 m bl/day) within days. OPEC is also following the coronavirus situation closely. It will most likely step in and reduce supply for a month or two in order to prevent an inventory build-up which the market would have to struggle with for an extended period.

The oil price is also suffering today, with Brent crude down 1% at $58.88 per barrel.

At one stage it touched $58.88, the joint-lowest since October.

Analysts at SP Angel Oil and Gas blame the ‘panic’ around the escalating coronavirus, telling clients:

  • The number of casualties in China continues to climb, as do cases of the virus elsewhere in the world
  • The Chinese government has tried to quarantine Wuhan and other cities, affecting tens of millions of people. Multinational businesses in China are also implementing lockdown procedures.
  • Oil demand growth is the biggest factor weighing on prices, China’s oil demand has been growing at an annual rate of 5.5%, while comparatively, US oil demand has been growing by 0.5%
  • Most of the demand loss will come from jet fuel as the risk of disease discourages travellers

Updated

UK retail sales remain subdued

Back in the UK, retail sales remain flat this month despite the so-called Boris Bounce.

Retailers are evenly split between those enjoying stronger sales this month, and those suffering weaker demand.

That’s according to the CBI’s monthly ‘distributive trades’ survey, which has come in at zero for January, the same as December.

That’s better than November’s -3, and a sharp improvement on the -49 suffered last August (when most shops reported declining volumes).

Retailers also reported that sales were poor for the time of year, undermining the theory that December’s general election has brought much cheer.

Anna Leach, CBI Deputy Chief Economist, says:

“Both official data and business surveys are painting a picture of subdued activity for retailers. A challenging Christmas has extended into the New Year, with little expectation of any improvement soon.

“2020 looks set to be another tough year for the sector as growth in households’ disposable income is set to remain modest and retailers continue to battle longer-term issues such as digital disruption and the cumulative burden of policy costs. The upcoming Budget provides an opportunity for the Chancellor to support retailers, primarily by fixing the broken business rates system.”

Copper prices are also being hurt by the prospect of China’s economy slowing as its government grapples with the coronavirus shutdown.

The futures price of Copper is down 0.5% today, and is on track for its 10th daily fall in a row.

Copper is seen as a bellweather of the health of the global economy (known as ‘Doctor Copper’ in the City).

Fashion chain Burberry is suffering badly from the virus crisis.

It’s the biggest faller on the Footsie this morning, down 3.5% at £19.30. Burberry’s shares have now lost 17% of their value since 17th January, just before experts warned that the virus could be much more serious than first thought.

Asia is a massively important market for Burberry. Last week, it reported that sales in mainland China had grown by “mid-teen” levels. It has been hoping for a bumper Lunar New Year -- creating a “Ratberry” campaign to piggy-back off the Year Of The Rat.

It also planned to take its Autumn/Winter 2020 runway show to Shanghai in April and open our first social retail store in Shenzhen, in partnership with Tencent. Those plans could all be hurt by the Wuhan coronavirus.

Neil Mackinnon, global macro strategist at VTB Capital, has also been looking at previous viruses such as SARS, for indications of how the Wuhan coronavirus may play out.

The lesson, he says, is that markets may tumble in the face of an epidemic-- but they then typically bounce back.

“Of course, making any accurate quantitative estimate of what the coronavirus means for global and Chinese GDP growth estimates or what it might mean for financial markets is fraught with difficulties. However, that is the nature of the beast. Equity markets seem to want to believe “good news”.

In other words, investors, in the absence of anything else to work on, refer to previous viruses, such as SARS in 2003 or MERS in 2012, as a template for price action in the markets or in terms of economic developments. The investment message from those episodes is that equity markets can drop 10% or so over a 1-3 month period before strongly bouncing back. Negative effects on economic growth are equally short-lived. For example, developing Asia recovered at an 11% pace after the summer of 2003.”

Pantheon: Coronavirus could drive Chinese GDP down

The Coronavirus crisis could drive China’s economy into reverse, fears Freya Beamish. chief Asia Economist at Pantheon Economics.

In a new research note, Beamish predicts that China’s “true” real GDP could be flat, or even fall in January-March, due to the efforts to contain the spread of the coronavirus, factory shutdowns, and fearful consumers.

She points out that the SARS virus caused a serious slowdown back in 2003, damaging service sector activity and manufacturing output.

We reckon the brunt of the damage was done in Q2 2003, when real GDP growth dropped to 1.8% quarter-on-quarter, from an average of 2.8% in the previous three quarters.

Growth then rebounded sharply in Q3, to 3.4%, coming off the favourable base of Q2, but again was weak in Q3.

Although coronavirus appears to be less deadly than SARS, it may be more contagious -- and Beijing may impose more stringent measures to tackle the virus.

Beamish predicts:

The bottom line here is that China could even see a contraction in quarterly real GDP growth in Q1, in reality, depending on the timing of factory closures and how long it takes to contain the virus.

We are assuming that missed spending will be recouped in Q2, leading to a bumper quarter, though it’s very possible that some of the expenditure on services around the holiday simply will be lost. This means the overall economy may not bounce back in the same way as in 2003. In short, you can make up for factory shutdowns by increasing overtime, but making up spending for a lost holiday is more complicated. And the containment measures could go on for longer than in our baseline assumption.

A person in Japan who has not visited Wuhan has contracted the coronavirus, local media are reporting.

Reuters explains:

Japanese Health Minister Katsunobu Kato said a person in Japan who had not visited Wuhan has contracted the new coronavirus, Japanese media reported on Tuesday.

The infected person is a tour bus driver in his 60s in the city of Nara, Kyodo said.

Health Ministry officials were not immediately available for comment.

The European market rally is now fading, as Hong Kong’s leader Carrie Lam outlines new measures to curb transport between her city and mainland China.

Hong Kong is suspending its high-speed rail link with China, and also cutting the number of flights in an attempt to limit the spread of coronavirus.

Sensible measures, but they also highlight how the epidemic will hurt economic activity in the region.

After their worst day in four months yesterday, European stock markets have opened higher this morning.

But it’s only a small recovery, given they lost over 2% on Monday.

  • FTSE 100: up 27 points or 0.38% at 7439
  • German DAX: up 38 points or 0.3% at 13,239
  • French CAC: up 27 points or 0.5% at 5,891

Jasper Lawler of London Capital Group says traders should await coronavirus developments....

It makes sense to compare and draw some inference between now and the performance of markets during SARS. European equities saw a 20-25% drawdown during SARS. The FTSE 100 is down just under 4% from its recent peak and the DAX has lost under 2.5% so there is plenty of downside risk. Is that size correction likely? The lower mortality rate of the Wuhan virus is a reason for optimism it won’t. But extra caution is needed because China is now much more important to the global economy than it was in 2003.

We think it is better to wait for the rise in the number of cases to slow before getting positive about the markets again. We know there is an incubation period of 14 days and the virus can be passed on when the subject is not showing symptoms. Putting that together, we could be on the cusp of a plateau or a massive escalation in the number of cases.

MSCI’s index of emerging markets shares has dropped by 0.5% today, amid worries that the coronavirus will hurt global growth.

John Velis of BNY Mellon Markets says:

With Chinese authorities working hard to contain the spread of the virus, and firms and provinces extending the week-long lunar new year to prevent massive travel volumes at the height of an epidemic, we’re seeing anecdotal evidence of large factories going idle until well after the new year, and foreign companies evacuating non-Chinese citizens.

Updated

Japan’s stock market has fallen to a three-week low today.

The Nikkei shed 0.55%, hurt by coronavirus worries and a rally in the yen (as investors race for save havens).

Companies exposed to the Chinese economy did badly, but shares in pharmaceuticals firms jumped.

Reuters has the details:

Shares of South Korean mask producer Monalisa surged 29%, while South Korean pharmaceuticals Kukje Pharma and Woojung Bio added 29% and 21% respectively on Tuesday.

Japan’s Kawamoto Corp, which supplies medical products including masks, saw its share prices tripled, while Japanese protective clothing maker Azearth rose 53% in the past week.

Malaysia’s Top Glove Corp has seen its shares surge by a quarter in a week.

'Significant threat' to Chinese economic growth amid coronavirus outbreak

Several economists fear that the coronavirus will hurt China’s economy -- although there’s uncertainty over quite how bad it will be.

My colleague Martin Farrer explains:

Economists agreed that the outbreak will have a negative impact in China but the lack of understanding about how the virus spreads and how bad it might be was adding to uncertainty to the mix and compounding investor concerns.

Citigroup said on Tuesday: “The wildcard is not the fatality rate, but how infectious the Wuhan virus is. The economic impact will depend on how successfully this outbreak is contained.”

The consultancy Capital Economics said the impact could be similar to the Sars outbreak in 2003 which knocked three percentage points off growth

“The outbreak is developing too rapidly to predict with any confidence the final extent of the economic damage,” said Capital’s chief Asia economist Mark Williams. “But it is now certain that the outbreak will have a significant impact on China’s GDP this quarter.”

And although China recovered quickly from Sars, Williams said the local economy was much stronger back in 2003 and was not facing the cyclical and structural headwinds posed by slowing population growth and industrialisation.

Introduction: Coronavirus fears grip markets

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Investors around the globe are focused on one question today -- how serious is the Wuhan coronavirus outbreak, and what impact will it have on the global economy?

Global equities suffered sharp losses on Monday, with Britain’s FTSE 100 plunged over 2% - its worst day since October. Wall Street followed, losing 1.5% as traders fretted that the virus could become a SARS-like epidemic proportions.

Overnight, the death toll from the virus hit 106, with more than 4,515 cases of the illness now been recorded across China. The first death has been reported in Beijing, highlighting how the virus has spread beyond the city of Wuhan.

This has prompted losses in some Asia-Pacific market today, particularly in markets which were closed on Monday. South Korea’s KOSPI 200 index has been badly buffeted, losing 3% during Tuesday’s session, while Australia’s S&P/ASX 200 shed 1.35% , with tourism, consumer and mining stocks leading the charge downwards.

Australia’s economy is tightly linked to China, providing the coal and iron ore needed to sustain the Chinese economy. But it’s hard to assess quite how much economic damage coronavirus could cause.

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My colleague Ben Butler reports:

“We haven’t got enough information,” the economist and former Reserve Bank board member Warwick McKibbin said.

McKibbin has previously estimated that a “mild” pandemic in Asia, such as the 1968 Hong Kong flu outbreak which killed about 1m people, would carve 0.8% from Australia’s gross domestic product, with most of the damage felt in the services sector.

And in a 2004 paper co-authored with the World Health Organisation, he estimated the 2003 Sars outbreak, which killed about 800 people, cut Australian GDP by 0.07%.

China’s stock markets remain closed for the Lunar New Year - preventing traders in Shanghai, Shenzhen or Beijing from selling stocks.

Europe’s stock markets may recover today - the FTSE 100 just opened 38 points higher (having lost 173 on Monday). But any signs that the virus is spreading faster or claiming more lives could send stocks down again.

Part of the problem, bluntly, is that pneumonia pandemics aren’t well understood in the City. Investors have been swotting up fast about incubation times, mortality rates and infectious control -- but it’s still hard to plug this public health crisis into a classic trading mode.

As Neil Wilson of Markets.com puts it:

The problem is investors have very limited visibility of the current situation in China, have virtually zero knowledge of epidemiology and virology, and have no clue how bad it will get or lasting the impact will be.

Risk models are not geared for this situation.

Here’s a pithier take:

Also coming up today

A new healthcheck on Britain’s retail sector is expected to show a pick-up in spending this month, as confidence rises following December’s general election.

New economic surveys from the US could show a rise in durable goods orders, and consumer confidence. However, such data could soon be overtaken by concerns over the coronavirus.

The agenda

  • 11am GMT: CBI index of UK retail sales for January. Forecast to rise to +4. from 0
  • 1.30pm GMT: US durable goods orders for December. Forecast to rise by 0.9%, from -2.1%
  • 3pm GMT: US consumer confidence index for January. Forecast to rise to 128.0, from 126.5

Updated

 

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