Bank of China to inject USD 175 bn to relieve the symptoms

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03.02.2020 | 5 Læsetid
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The debate about the effects on society and the economy from the Corona virus is intense. In Europe, there is still no panic as SARS and MERS, to take two examples, blew past without major effects. In Sweden, the sell side analysts are aligned saying that investors should take the opportunity to buy the dips in the market.

The debate about the effects on society and the economy from the Corona virus is intense. In Europe, there is still no panic as SARS and MERS, to take two examples, blew past without major effects. In Sweden, the sell side analysts are aligned saying that investors should take the opportunity to buy the dips in the market.

The corona virus has a very rapid spread but with a relatively low mortality rate. It currently stands at 2.2 percent but will of course increase as some people will not recover. Common flu has around 0.1-0.2 percent mortality. If the Corona virus follows a similar trend as SARS, mortality will rise by up to 10 percent. However, all of this is a matter of speculation and we hope that these percentages are kept at low rates. However, the rapid spread is probably the main reason why the authorities in China react so strongly that, despite draconian measures, they are unable to hold back the spread of infection.

This time the virus has a secondary effect not seen before. As the Chinese authorities do the utmost to curb the spread of the virus shutting down city by city, this also affects the economy. As a further effect, country after country has closed their borders and air links to China.

Something like this has never happened before so it is very unclear exactly how this will impact the world economy in terms of deteriorating GDP growth. It is clear however that China constitute a major part of the total word economy compared to only ten or 20 years ago, so the effect could be greater this time. Before the big outbreak, China was closed for a week-long new-year weekend and now the machinery is not running again at full speed.


The picture above shows how much of a specific region´s imports come from China. Although countries will still trade goods the corona virus is likely to have a negative impact on the global economy. This view is also clearly supported in commodity prices. As shown in the graph below, copper is trading like a waterfall: 


The Fed elaborated about their concerns that they would not gain momentum for inflation and thus guided about future interest rate cuts at their last meeting. This has tilted the market to look forward for additional interest rate cuts, as can be seen in the Fed Funds market:


But what seems a bit strange is that the Fed is currently netting out purchases in the bond market by letting existing assets on the balance sheet expire. See the falling blue line in the graph below. This is de facto reducing the liquidity in the world's largest economy which this time coincides with the outbreak of the Corona virus in China. 


The price decline on the world's stock exchanges have also been steep. There are no signs of any bottom. One must not forget that the downturn on the stock exchanges occurs at extremely overbought levels. Investors have been looking for triggers to sell and this time it happened to be the Corona virus.


The Shanghai Stock Exchange (in blue) is currently falling 8 percent. China's Central bank has expressed that they will inject USD 174 billion in the market. We'll see how this will be received. The Fed and other Central banks will learn to follow suit. It is probably only when they launch their programs that some form of stabilization can be foreseen.

Below the daily graph for the S&P 500 index is shown. The index was kept up with the help of statements from the WHO, stating that China had control over the spread of the Corona virus. However, it took just a day before the WHO changed its foot and announced that the virus is a global health hazard.


Fib 23.6 and a rising MA50 is serving as support. In case of a break to the downside, the next level can be found around 3 155 where Fib 38.2 meet up. 

Out of the 505 companies in S&P 500, 226 has released its earning as of last Friday. As can be seen in the table below, 69 percent has delivered earnings above expectations and 64 percent has delivered revenues exceeding forecasts.


So far, US tech has been one of the top performing sectors when it comes to reporting. 97 percent of the 31 tech companies that has released their reports showed earnings above expectations and 87 percent showed revenues ahead of expectations. Nevertheless, the tech heavy Nasdaq is still struggling. After a bounce back above MA20 and EMA9 on Wednesday, Nasdaq fell on Friday and managed to close the week below the two averages. The short trend is thus falling: 


The next level on the downside can be found slightly below 8 845, where Fib 23.6 meet up.

Tesla is on fire (in a good way)

On Wednesday last week, Tesla managed to beat expectations for yet another quarter. There seems to be no end to the upwards movement in the share which have been overbought since early December 2019:


In its report, the company also stated that the delivery of Model Y CUV will take place earlier than previously expected. The number of vehicles believed to be sold during the year was also revised upwards. Competition is expected to tighten in the EV-segment in the coming years, but Tesla has established themselves as one of the top players leading the revolution. As profitability is improving one may also expect that production will continue to increase and perhaps, Tesla will remain the top player in its field for years to come.

A set back in the share price performance has however been needed for some time. Perhaps that will create a good buying opportunity.

Mixed report season so far and OMXS30 is losing momentum

As of Friday 31 January 2020, 15 out of the 28 OMXS30-companies has released their Q4 2019 reports according to Reuters Eikon.


As can be seen in the table above, earnings outcome in relations to expectations have been mixed. 47 percent companies beat earnings estimates while yet another 47 percent of the corporates did not meet the earnings forecasts. In terms of revenue, 67 percent beat estimates while 33 percent of the reported companies missed revenue expectations.


As shown in the graph above, OMXS30 is consolidating. However, the index is losing momentum as can be seen by a falling MACD. MA50 serves as a first level of support on the downside, followed by Fib 23.6 at 1 750. 

Revenge for Swedbank

Swedbank managed to beat earnings expectations for Q4 2019. However, earnings were down from Q4 2018 as a result of investigations related to the Baltic money-laundering scandal. Dividends were also cut but the share still managed to gain on the report and broke above MA200. This is since the report outcome was better than the market had anticipated. During Friday´s trading, the share also managed to close above a previous high from October 2019:


The top from July around SEK 150 still needs to be broken before the next level found around SEK 158.5 can be tested.

DAX at support ahead of more reports

According to Reuters Eikon, only two of the 26 DAX-companies has reported. 


The German DAX is struggling and closed Friday´s trading below MA50 and Fib 23.6. MACD has also generated a sell signal:


However, the DAX index is trading at a support around 12 980 and MA100. In case of a break on the downside, the next level can be found around 12 755.

Oil price at scary levels

WTI-oil has fallen for four weeks in a row and is approaching scary levels around 50.4 USD/barrel. See the weekly graph below. Note also MACD that has generated a sell signal: 


In case of a break to the downside, some sort of support is likely to be found around 47.9 followed by 45.1 USD/barrel. 

GBP strengthens after Brexit

The Pound Sterling strengthened against the USD as Bank of England held rates unchanged as Britain finally leaved the EU on the night to 1 February 2020. As shown in the graph below the currency pair GBP/USD is trading above its EMA9 and MA20. The pair still needs to break above Fib 23.6 before previous top from December 2019 can be tested:



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