Adam Vettese, UK Market Analyst at eToro, has provided his daily commentary on traditional and crypto markets for March 2, 2020.
Central banks around the world are moving to combat the impact of the coronavirus by providing additional support to the financial system, following the worst week for global markets since 2008.
The Bank of Japan has signalled additional liquidity for the market, while Italy has said it too will inject €3.6bn to mitigate the impact of the largest outbreak of coronavirus in Europe.
The US Federal Reserve is now expected to follow suit by cutting rates by 0.5 percentage points (two cuts, effectively) in March, while rate cuts are also being tipped across the globe from the UK and Canada to India and Australia.
The news from Asia on Monday was already more positive, with the CSI 300 index climbing sharply, the Nikkei closing up 0.95% and the Hang Seng set for a firmer close. Nonetheless, financial advice firm Edward Jones, in a note on Friday, said that investors should expect headlines to continue driving share prices while the picture looks murky in terms of hard data.
The global monetary response comes after all three major US stock market indices entered correction territory last week. While the market rout was broad-based, not all sectors were affected equally. The Energy Select Sector SPDR ETF fell more than 16% over the course of the week, while the Communication Services Select Sector SPDR ETF (which counts Facebook, Google and Netflix as its biggest holdings) sank by 9.6%. Netflix, which doesn’t face many of the physical supply chain issues being faced by more traditional businesses and stands to benefit from consumers spending more time inside watching television, only fell 2.9% over the course of the week.
Energy companies and airlines were among the hardest hit, with the former suffering on the back of a 15% plus tumble in the price of US crude oil to around $45 a barrel. It has since rebounded to $51 over the weekend. The speed at which airline investors have reacted points to the perceived severity of the epidemic for their businesses, given that a falling oil price is typically a supportive factor due to their fuelling needs. Delta, United and American all fell by more than 20%, as did London-listed International Consolidated Airlines Group. Also of note last week was the presence, as highlighted by traders at T. Rowe Price, of “systematic selling by algorithm-based strategies”.
Nasdaq Composite clings to a flat day on Friday
The Dow Jones Industrial Average was the hardest hit of the three major US stock indices last week, sinking 12.4% and completely wiping out its gains from the past year. Outside of the major benchmarks, the Cboe volatility index, commonly known as the ‘fear gauge’, hit its highest level since 2011. However, amid the panic, there were plenty of investors taking advantage of the drop in prices to put money to work. Vanguard raked in billions of dollars in net flows into both stock and bond ETFs. The week almost ended even deeper into negative territory, with stocks down more than 3% at points on Friday, but a last minute rally took the Nasdaq Composite to a flat day and kept S&P 500 losses under 1%. Norwegian Cruise Line, which has lost around a quarter of its value in the sell-off so far, was one of the big winners among America’s largest firms on Friday, closing the day more than 7% higher. In the Nasdaq Composite, $165bn market cap chipmaker Nvidia led the way on Friday, with a 6.9% share price pop.
- S&P 500: -0.8% Friday, -8.6% YTD (-11.5% last week)
- Dow Jones Industrial Average: -1.4% Friday, -11% YTD (-12.4% last week)
- Nasdaq Composite: 0% Friday, -4.5% YTD (-10.5% last week)
Ugly week for British stocks pumps up dividend yields
It was an uglier end to the week for London-listed stocks, with the FTSE 100 falling 3.2%, although the index roughly matched its US counterparts’ weekly performance overall. The FTSE 100 is now down 12.8% year-to-date, a fall which has pushed the dividend yield offered by the index overall past 4.5%. HSBC, Lloyds Banking Group and British American Tobacco now all offer dividend yields around the 7% mark. As with a number of days last week, airlines Tui and IAG were at the back of the FTSE 100, with both falling by more than 8%. More out of character was National Grid, which sank 5.5% on Friday having held steady all week. With its near 5% dividend yield and the fact it provides a necessary service, the utilities firm is considered by many to be a good option for choppier markets. Only eight names in the FTSE 100 delivered a positive Friday, with Rolls Royce’s 3.2% gain leading the way following a strong earnings report from the firm.
- FTSE 100: -3.2% Friday, -12.8% YTD (-11% last week)
- FTSE 250: -2.3% Friday, -11.7% YTD (-11.3% last week)
Stocks to watch
JD.com: US-listed Chinese e-commerce firm JD.com reports its latest quarterly earnings update this morning New York time. Prior to the epidemic hitting, the firm had enjoyed a 50% share price run-up since the beginning of October. While its stock is now trading more than 10% off its level from earlier in February, it held up well in the face of last week’s rapid sell-off. Last quarter, one focus of analysts on the company’s earnings call was its logistics unit, and that is certain to be a feature this time round related to the ongoing coronavirus saga. Currently, of analysts covering the stock, 32 rate it as a buy, three an overweight and eleven a hold.
StoneCo: New York-listed StoneCo is a Brazilian financial technology provider, that will report its latest set of earnings on Monday after the market closes. Bar the past week, the stock has been on a tear since the beginning of June 2019, going up by more than 60% during the period. Warren Buffett, through his firm Berkshire Hathaway, is a significant investor in the company. Having built up momentum in prior quarters, the firm lagged estimates in Q3 2019, and investors will be watching closely for signs of whether that was a one-off or if it points to a more systemic problem.
Dentsply Sirona: Dentsply is a dental equipment maker and has effectively had its past year of share price gains wiped out by last week’s selloff. The company is reporting its Q4 2019 earnings first thing today New York time, after a three-year period that has been a rollercoaster for investors share price wise, including a 50% share price drop during 2018. Dentsply has a good recent track record of beating earnings expectations. Wall Street analysts are predicting an earnings per share figure of $0.75.
Cutting through the noise: Does the coronavirus mean more interest rate cuts are coming?
The US Federal Reserve had indicated pre-epidemic that interest rate cuts would be on hold for the time being. However, all eyes are now on how the central bank will react to the coronavirus epidemic, especially when so little is known about what precisely the economic impact will be. Investors are betting that the Fed will choose action over inaction in the face of the potential threat to global economic growth posed by the virus, and with stock markets in freefall. According to T. Rowe Price, futures markets are currently pricing in a 100% chance of a rate cut this month, with a 58% chance of further cuts by the end of the year. The yield on ten-year US Treasuries has hit its lowest level on record, indicating that investors are anticipating a rate cut coming sooner rather than later.
Last week’s sell-off left cryptoassets firmly in bear market territory or the last two weeks as investors fled the sector en masse. However, there are signs of recovery after a weekend of stability for the three largest coins.
Bitcoin is holding at around $8,600 mark, slightly firmer in morning trading, while Ethereum is also up around 2% at $219, and XRP is up 2.5% at $0.229. It follows a dramatic trading period for the assets, which have all been in both bull and bear territory in February. From a technical standpoint any further deterioration in the price could see the prevailing uptrend challenged.
The outlook from here is uncertain, with the coronavirus creating a game-changer ‘Black Swan’ scenario, but there are some key points coming up, including the bitcoin halving in May which will have an impact on prices. This, combined with the potential lowering of interest rates could well make a case for risk assets such as bitcoin to become more attractive.
All data, figures & charts are valid as of 2/03/2020. All trading carries risk. Only risk capital you can afford to lose.
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