Navigating the coronavirus, and will the euro reach fresh lows?

It’s been a sea of red for equity markets on Thursday, as fears about the coronavirus have once again gripped markets. Financial markets are reacting to the huge increase in the number of cases reported in China in the last 24 hours due to a change in the methodology used to count new cases of infection. If this new methodology leads to a steady rise in the number of cases in China, then risky assets could stay mired in negative territory for some time. 

This new methodology is also likely to fuel speculation that the severity of the outbreak has been under reported by the Chinese authorities, which is one reason why the market sell-off has been so sharp today, with some European indices down more than 1%. There are now more than 60,000 cases in China alone, some 56 million people in the Hubei province are in virtual quarantine and many millions more are in lock down in other cities across China. While markets are digesting the fact that the coronavirus could be more widespread, and potentially deadly, than originally thought, risky assets are likely to remain on the backburner. Going forward, with no sign of the outbreak being contained, the key indicator to watch for financial markets is the number of new cases reported. If they increase then market sentiment is likely to be fearful and stocks could fall, however, if the number of new cases starts to decline then sentiment could improve and stock prices may pick up. 

Which sectors are most at risk from the coronavirus? 

Below we take a look at the economic impact of the outbreak, and  analyse the sectors that we think could see the biggest negative impact from the coronavirus:

Aviation:Boeing, already best by problems with its 737 Max jet, has said that the coronavirus will have big ramifications for the aviation industry. This is especially a problem for the big, global airlines, and aeroplane makers. For example, IAG, British Airways’ parent company, has seen its share price drop from 680p to 560p over the past month, before rallying to 630p, where it is currently struggling to gain traction. In contrast, Ryanair’s share price has mostly stayed stable as its focus is on the European market, which may see an increase in holiday makers as people avoid trips to Asia in the coming months. 

Oil:The International Energy Agency said that oil demand will see the slowest rate of growth this year since 2011, as the coronavirus hits Chinese consumption, and its impact spreads across the globe. This news is bad for oil companies and also any company that relies on Chinese consumption, such as the auto sector and luxury retail. Oil major BP’s share price is trading around 460p, which is close to its lowest level since September 2017. 

Luxury retail:Burberry’s share price has dropped sharply since the start of the outbreak, even though it has near 30% return on equity; LVMH, which has weathered the coronavirus storm better than some of its rivals, also experienced a sharp drop on Thursday as fears grow. Due to the strong financial dynamics behind some of these luxury retail empires, as long as the coronavirus doesn’t drag on for months and months, then we should see their stock prices jump back once the virus passes, as sales could increase later in the year due to pent up demand. 

Auto sector:Over the last month, Volkswagen has seen its share price fall, even though its share price has made a decent attempt at recovering in the last few days and has recouped nearly 50% of losses. Luxury car makers have had a tougher time due to the importance of the Chinese market. BMW has been under pressure since the start of the year, although it too has recently picked up as investors look for bargains. However, if the coronavirus fears grow, we would expect BMW and other luxury car brands to remain volatile. 

Why financial markets can’t rely on the PBOC for support 

To round up our coronavirus feature, we would say that risk sentiment could improve sharply if the Chinese government pump more stimulus into the economy. This would benefit the Aussie, Kiwi, NOK, oil price and stock markets in particular. However, we believe that the PBOC may be unwilling to add more stimulus to its economy while inflation is rising. Earlier this week, China reported that annual price growth for January jumped by 5.4%, which may deter the PBOC from rushing into loosening monetary policy further, even when the Chinese economy is at risk from the coronavirus. 

What’s down with the euro 

Elsewhere, the euro is currency to watch, as its broad-based slump continues. EUR/USD has fallen to its lowest level since April 2017, and the technical signals still point to the currency being a sell. The main factors weighing on the currency are two-fold: firstly, the dollar has been a favoured ‘safe haven’ currency during the coronavirus outbreak, and investors have chosen to sell the euro vs. the USD rather than other currencies because the yield on the euro is so low, this makes a short EUR/ long USD position so popular in the current environment. ECB President Christine Lagarde is also keeping a lid on euro strength by talking about the prospect for more monetary policy support for the Eurozone economy. It’s powerhouse, Germany is showing signs of stalling. CPI for January came in at -0.6%, which was worse than expected. Traders are now pricing in the prospect of a weak German GDP reading on Friday, which, if confirmed, could add to the euro’s woes. Thus, life below $1.08 could be on the cards for the euro in the coming days, however, a confirmed weekly break of $1.0850 will need to happen first. With momentum showing no signs of moving in the euro’s favour, we believe that this support level could be breached sooner, rather than later. 

The pound reacts to Boris Johnson’s re-shuffle 

The pound is also in focus today.  It has risen above $1.30 vs. the USD, after Boris Johnson’s cabinet reshuffle. Gone are any hint of free-thinking Remainers, and in are Dominic Cummings’ robots, but the FX market doesn’t mind about that. Perhaps having the cabinet all sing from the same hymn sheet is good for the currency (bad for democracy). Also, the Prime Minister wasn’t stupid enough to get rid of International Trade Secretary Liz Truss, who is fairly neutral regarding Brexit and is also leading the trade negotiations with the EU. While this is unlikely to be the reason why the pound is trading above $1.30, it is the best choice Boris Johnson made today. Overall, GBP/USD is fairly boring, and stuck in a $1.2890 – 1.3330 range for the long haul, in our view.