European update – Earnings, Wuhan, Fed, gold, oil

Earnings Provide Welcome Distraction

Europe is off to a decent enough start, with earnings on the other side of the Atlantic providing a timely boost against the backdrop of the rapidly spreading Wuhan virus.

Source – Thomson Reuters Eikon

Apple knocked it out of the park on Tuesday with a record quarter, beating on revenue and earnings while raising the bar for the coming quarters. Sales of phones and wearable were strong, especially when you consider that its first 5G phone is due to be released later this year. The question now is whether the other big tech firms can raise their game as well and give investors more reason to be cheerful.

There’s plenty for investors to get their teeth stuck into, with Facebook, Boeing, General Electric, AT&T and Microsoft all reporting today. Boeing’s results will be of particular interest given its ongoing issues with the 737 MAX which will now be grounded until at least the summer taking the total time to more than 12 months. The company secured funding commitments of more than $12 billion recently which may alleviate some concerns in the report, which will likely contain details of the terms.

Coronavirus cases surpass SARS

The spread of the coronavirus in China has brought back terrible memories of the SARS outbreak 17 years ago and with the number of those infected having already been surpassed, this could be much worse. Stocks highly exposed to China have already been whacked but the worst may not be behind them.

Investors may be showing some resilience at the moment, having rushed for the exits earlier this week, but I’m not convinced the earnings season distraction can be sustained. The knee jerk reaction on Monday was strong but with British Airways now cancelling trips to and from China, film premiers being cancelled, shops closing and internal travel plummeting, it seems entirely justified and probably not severe enough.

Fed may take back-seat approach

The Fed interest rate decision later on will offer another distraction for investors, although it’s unlikely to generate too much hype given everything else that’s happening. Interest rates are likely on hold for the rest of H1, barring a full blown coronavirus pandemic that could spark the central bank back to life.

It will be interesting to hear what policy makers have to say, given what an evenful month it’s already been, what with tensions spiking with Iran and the US signing a trade deal with China. I think the Fed will probably take a more considered, back-seat approach for now though, given its triple rate cut late last year.

Gold faces ongoing resistance

The rebound in equity markets took some of the shine off gold prices on Tuesday, something that the market appeared to be craving. While gold has performed relatively well in the midst of the coronavirus outbreak and the risk aversion that’s followed, it’s hardly taken off and regularly run into resistance. We saw similar behaviour earlier this year.

The first opportunity to sell has been grasped with both hands, taking gold back towards $1,560, before paring losses this morning. Gold will continue to be supported in this environment, with the Wuhan virus spreading at a remarkable rate but it may continue to face the same problems on the approach to $1,600 as it has all year.

Gold Daily Chart

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Oil steadies but vulnerable to further declines

Oil has plummeted since early last week, as traders feared for the Chinese economy as the number of coronavirus cases soared. Those fears haven’t abated but we are seeing a bit of a bounce in crude, as producers look to reassure traders that all is not as bad as it seems. The previous outbreak of SARS, we’ve been assured, did not affect demand as much as feared and should this be worse, Saudi Arabia and others stand prepared to act. I’m not convinced this will be enough in the near-term to put a floor under oil prices if/when sentiment shifts again but it appears to have helped stabilize the market for now.

Brent Daily Chart

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