The Monday Report – 03 February 2020

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This story features AVITA MEDICAL INC.
For more info SHARE ANALYSIS: AVH

By Greg Peel

Second Leg

Wall Street had used the excuse of solid earnings results and a better than expected GDP performance to turn around an initial fall on Thursday night into a rally on the close. Traders were not letting coronavirus fears upset the domestic picture. And to top to it off, Amazon shot the lights out with its earnings numbers after the bell.

The success of Amazon in the US provides little in the way of an economic indicator downunder, but the local futures market anticipated a strong session on Wall Street on Friday night with Amazon at the helm. The ASX200 then reflected such sentiment in trading up 38 points to midday on Friday.

The pullback from that point was swift, and the afternoon brought steady selling all the way back to a tepid close. Perhaps helping to trigger the selling was the Chinese manufacturing PMI for January, which was indeed released as scheduled on Friday. It showed a dip to 50.0 from 50.2 – as expected, but not a great starting point ahead of what will be a very big plunge in February.

It’s all academic this morning with the Dow down -600 on Friday night and our futures showing down -119. The second leg of coronavirus-driven selling will hit today.

For the record, Link Administration ((LNK)) topped the ASX200 leaders’ board on Friday, rising 9.7% after announcing an acquisition.

GUD Holdings ((GUD)) rose 7.2% on its half year earnings result, while Avita Medical ((AVH)) posted a quarterly that was worth 5.5%.

Among the sectors, IT won the day with a 1.7% gain while buying resumed after some brief profit-taking in healthcare (+0.7%). Consumer staples remained the preferred defensive (+0.7%).

Financials (-0.2%), including insurance companies that just can’t take a trick right now, eased back and telcos (-0.3%) posted the biggest loss.

But strap in, we’re in for a big plunge on the open today.

Outbreak

Wall Street opened on Friday night with the knowledge the eurozone GDP grew only 0.1% in the December quarter when at least 0.2% was hoped for. No virus impact there.

December quarter earnings results from Dow stocks Caterpillar and the two big oil companies Exxon and Chevron also disappointed, putting Wall Street in selling mode from the open.

The case count and death toll from the coronavirus was continuing to accelerate, but what really set Wall Street off was the Chicago PMI. It fell to 42.9 in January from 48.9 in December – in other words deep into contraction. Not only is there no link between the virus and US mid-west manufacturing, the plunge came in a month when the signing of the phase one trade deal should have provided relief.

The implication, thus, is that expectations for a pick-up in global growth in 2020 may well have been misguided even before the virus became an issue. So it was only a case of salt in the wounds when President Trump declared a national health emergency and effectively shut the borders to any foreigner arriving from China. Other countries, such as Japan and Korea, had already announced similar measures.

US airlines also suspended all flights to China through to end-March, and in Delta’s case, end-April.

Markets are running on fear not of the virus itself, but of the economic implications of the global response to the virus. The global economy is going to take a hit, led substantially by China, and indications are it was not exactly in rude health beforehand.

All eyes now are on the Chinese stock market, which will open today, apparently. As of last week Beijing was extending the new year holiday further, but that situation is fluid.

Perhaps most telling in a -1.8% drop for the S&P500 and -1.6% for the Nasdaq was that Amazon still managed to rally 7.4%. It was not quite the 13% suggested by the initial response on Thursday night but clearly had this member of the trillion dollar market cap club also fallen in line with the market, the impact would have been notably greater.

All talk now is of when it might be time to buy. Consensus is not yet. There is still a suggestion this is the pullback Wall Street needed to have from overblown levels, and thus a suggestion there is likely more to come before a bottom is found.

Clearly there could be two triggers of a swift turnaround. One is a vaccine. The other is an inevitable announcement at some point from Beijing of a massive fiscal stimulus package aimed at reversing the damage done while the Chinese economy is as good as shut down.

The question is also as to whether other central banks will move to provide more accommodation as well. The Fed could quite easily throw in another rate cut. The ECB has less room to move but anything is possible. The RBA meets tomorrow.

Commodities

The overall trend for metals, other than gold, remains down.

The gold price has become very volatile, up one day and down the next, but the trend remains higher as global bond yields sink further. The US ten-year was down another -4 basis points to 1.52% on Friday night.

The fall in oil prices resumed in earnest following the airline announcements.

The US dollar index fell -0.5% yet that did not provide any support for the Aussie, which is very much China-linked. It’s down -0.3% at just under US$0.67. This may well be the factor that keeps the RBA from cutting just yet.

The SPI Overnight closed down -119 points or -1.7% on Saturday morning.

The Week Ahead

Given we did get the Chinese PMI numbers on Friday we can assume other Chinese data releases will follow as scheduled. They include industrial profits today as maybe the Caixin manufacturing PMI if Caixin is open.

Manufacturing PMIs from the rest of the world are due today, followed by services PMIs on Wednesday.

Australia will see December building approval numbers today and retail sales on Thursday, along with January house price and ANZ Bank job ad numbers today.

It’s jobs week in the US, with private sector numbers on Wednesday and non-farm payrolls on Friday.

It is a rather unfortunate environment in which to kick off the local reporting season in earnest. This week sees a handful of companies reporting each day from tomorrow, before the season ramps up thereafter.

The Australian share market over the past thirty days…

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