Apple's Warning Weighs on Sentiment

Overview: Apple's warning that it will miss Q1 revenue due to the knock-on effects of the coronavirus seemed to be a modest wake-up call to investors, who, judging from the equity market, were looking beyond. Equities have fallen, and bonds have rallied. Japan, Hong Kong, and South Korean stocks fell by more than 1%, and only China and Indonesia were able to post gains. The MSCI Asia Pacific Index fell for the fourth consecutive session. Led by information technology, materials, and energy, the Dow Jones Stoxx 600 is giving back yesterday's gains and a little more. The S&P 500 is off by around 0.3% in electronic trading. Benchmark 10-year bond yields are mostly 2-4 bp lower, though Korean bond yields tumbled 10 bp (to ~1.53%) as President Moon called for emergency measures, which renewed speculation of lower rates by the central bank. The US 10-year yield is near 1.54% and is approaching the recent low of 1.50%. The US dollar is firmer across major and emerging market currencies, though, as one might suspect, the yen and Swiss franc are holding in best. Sterling joined the advancers after its employment report. Gold is up about 0.5% (~$1589), a little more than $3 from the month's high. April WTI initially opened above last Friday's high (after yesterday's holiday) and has proceeded to sell-off through last Friday's lows. A break below $50.80 would undermine the technical outlook.  

Asia Pacific

Japan's 5-year bond auction was 4.4-times oversubscribed, a little higher than last month's reception. Reports continue to point to strong foreign demand. The demand for Japanese government bonds, though, is not the same as the demand for yen. Dollar-based investors, for example, can buy JGBs and hedge the yen back into dollars and thereby earn a yield that is comparable and often better than US Treasuries. Japanese investors appear to like long-dated JGBs, which may be cheap relative to swaps or currency-hedged European bonds.  

The minutes from the February 4 meeting of the Reserve Bank of Australia did reveal anything new to investors. The coronavirus represents a near-term material risk to the economy. It reviewed the case for a rate cut after three cuts last year. It judged that the risk of spurring more leveraging and house price increases offset the marginal benefits. The central bank's framing of the issue offers important insight to businesses and investors. Between the adverse shocks from the wildfires and the coronavirus, the market expected the trade-offs to shift toward the middle of the year and allow for the RBA to cut the cash rate to 50 bp. 

Some estimates suggest that China is operating at around half of what it was before the Lunar New Year. However, other reports, looking at transportation data, see this month's traffic at around 15% of the level seen last year. The arrivals to Hong Kong in February have collapsed to about 3k a day, a drop of 99%, according to reports.   

The Australian dollar fell every week since the start of the year until last week when it rose by 0.6%. The push below $0.6700 likely signals a return to the multi-year low set on February 10, near $0.6660. Below there is not much technical support until closer to $0.6300 from 2009. Note that tomorrow and Thursday, there are large options (A$1.5 bln and A$1.6 bln, respectively) at $0.6700 that will roll-off. The dollar continues to trade within last Thursday's range (~JPY109.60-JPY110.10). Although there are no significant options expiring today, tomorrow and Thursday, see large expirations of the JPY110 strike ($1.1 bln and $2.4 bln, respectively). If that helps block the dollar's upside, a break of JPY109.50 could signal a test on JPY109.00. The dollar rose by about 0.35% against the Chinese yuan to resurface above CNY7.0 and reached its highest level (~CNY7.0070 since February 4).   

Europe

The UK employment data was somewhat better than expected but could not lift the pall that hangs over sterling as harsh rhetoric by UK negotiator Frost keeps the risk of a no-deal exit from the standstill agreement at the end of the year, at elevated levels. Despite the uncertainty headed into the end of last year, the UK economy created 180k jobs in the final three months of 2019, which is about 20% more than economists forecast. However, average weekly earnings, including bonuses, slowed to 2.9% in Q4 19, the slowest since August 2018. Of note, the number of EU nationals working in the UK rose by 36k in Q4 from a year ago. 

Germany sentiment readings had appeared to be improving, but the dramatic fall in both factory orders and industrial output seems to have sapped it. The ZEW February survey was dismal. The assessment of the current situation unwound half of January's gain to fall to -15.7 from -9.5. It has been negative since last June. The expectations component had risen to 26.7 in January, climbing from -44.1 last August. It slumped back to 8.7 in February, a three-month low.  

The euro is holding yesterday's low near $1.0820, but the pressure remains strong. A break of $1.08 targets about $1.0740, the bottom of an old gap from April 2017 French elections. Resistance is now pegged in the $1.0840-$1.0860 area. Sterling is trading in a little more than a 30-tick range on both sides of $1.30. It has stalled near $1.3070 in recent sessions. Some demand for sterling is evident from the cross against the euro. The euro has reversed lower from GBP0.8350 and looks poised to fall below GBP0.8300 and test last year's low (December) near GBP0.8275.  

America

Apple reported that production is resuming at a slower than anticipated pace. Some estimates suggest only around 40%-50% of business activity had resumed by last weekend. Apple had previously planned on factories re-opening on February 10.  Non-Chinese sales, reportedly, are in line with previous forecasts.

The US is not letting the Phase One of the trade deal to end its efforts to stymie China's economic efforts. Reports suggest two new fronts in what we (and some others) have argued is a new Cold War. First, the US is considering blocking jet engines from the GE-Safran joint venture. Second, the US may move to close a loophole that allows sales of chips to Huawei made overseas by bringing the threshold to 10% made in the US, down from 25%. 

The US reports the February Empire State survey. Of the high-frequency data, it is among the first insights into a new month's activity. It is expected to have edged up to about 5, which would be the highest reading since last May. The Treasury's International Capital report (for December) is released after the close. However, it is notable through November, there were an average net sales of about $2 bln of US stocks and bonds. In the same period in 2018, the average was new purchases of $75 bln of US paper, and in 2017, the average of the first 11 months was almost $54 bln. At the same time, the US budget and current account deficits have grown.   

Canada and Mexico have light diaries today. Canada reports January CPI figures tomorrow.  Mexico's Finance Minister Herrera opined that the central bank has scope for additional rate cuts and noted that the IMF's director of the Western Hemisphere also argued along similar lines. Banxico has cut rates 125 bp through last week, and most economists expected another 50-75 bp in cuts this year.  

The risk-off mood has lifted the US dollar against the Canadian dollar after approaching the 200-day moving average yesterday (~CAD1.3220). Initial resistance is pegged near CAD1.3275, which corresponds to about a 50% retracement of the recent decline. The Mexican peso rose to fresh 18-month highs against the US dollar (~MXN18.5240) but could not sustain the gains and has backed off a bit. The greenback is testing the MXN18.64 area as North American dealers prepare to return to their stations. There is near-term technical potential toward  MXN18.67-MXN18.72.  

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