Markets in risk-off mode, Fed sounds caution, BoE set to cut?

Fears of a pandemic may be overegging the pudding, but there is again a clear risk off mood in the market. Cases and deaths rise, airlines are gutting their flight schedules and factories are extending holidays well into February. The mood in the market is one of severe concern – Hong Kong shares tumbled overnight, down 3% again while the Nikkei in Japan was off nearly 2%. The yuan is close to 7 again.

Global equities traded without direction yesterday with little steer coming from the Fed and ongoing watchfulness over the coronavirus in China. Uncertainty over the virus spread and its economic impact continues to dog global markets and today will pressure US and Europe lower still. Yesterday the FTSE and DAX posted tiny gains. The Dow eked out the slimmest of gains, while the S&P 500 was marginally lower. There was no conviction in the bounce post Monday.

Futures indicate European shares are lower as the coronavirus spread shows no signs of slowing. Numbers outside China remain small, but WHO Director-General Tedros Adhanom Ghebreyesus said they’re worried about human-to-human transmission. The WHO will meet today to decide whether this is a global emergency.

Investors are clearly looking to the spread of the coronavirus and hoping it doesn’t start to show up more in Europe and the US. Fed chair Jay Powell’s concern over the outbreak only underlined caution as the order of the day.

The Fed left its main funds rate on hold but did tweak the IOER, raising by 5bps to 1.6%, as expected. The statement on the economy had just one change, with the Fed saying household spending was ‘moderate’. This compared to the December statement when they called it ‘strong’. This was a dovish move, as was Jay Powell’s caution over the coronavirus. He also reiterated the Fed’s worry about inflation being too low, and noted that there is yet to be a sustained pick up in manufacturing.

The Fed seems happy to sit back and assess the data for the time being. The focus is more on policy tools than on policy itself. The Fed remains on hold but we see a clear easing bias, as evidenced by the more cautious statement on household spending.

Earnings look positive in the US, with McDonald’s, Tesla and Apple all posting stronger-than-expected earnings. Even Boeing shares rose, as it tried (again) to draw a line under its troubles despite posting an annual loss for the first time since 1997.

The Bank of England is the main risk event today. I’m still in the cut camp. Markets currently see a roughly 50% chance of a cut.

Harder data has turned notably softer and the BoE doesn’t want to risk allowing weakness to become entrenched. Whilst PMI and CBI survey data did evince something of a Boris Bounce there should be sufficient doubts about whether this will be maintained to warrant a pre-emotive cut.

A cut takes GBPUSD back to 1.28, but a hold is likely to spur bulls to north of the 1.31450 resistance and take out 1.32. There will also be some significant importance attached to whether the BoE decision is seen as:

1) a dovish hold (not now but likely in May);

2) a hawkish hold (Boris bounce needs to be monitored for longer, seeing a turn in the data, low inflation isn’t a worry);

3) a hawkish cut (one and done, insurance cut); or

4) a dovish cut (one now, maybe another in May or in the second half if uncertainties persist).

Tesla crushed it with a second straight quarterly profit that defied even bullish expectations. The short case is staring to crumble with each quarter.

Tesla shares shot higher after hours, leaping 14% to $660. With a spike like this I think what you saw was a lot of shorts finally throwing in the towel.

EPS and revenues beat expectations – critically now Musk sees ongoing free cash flow and net income, which greatly diminishes reliance on investors for future investment.

Deliveries this year will easily exceed 500k – that’s a lofty 35% increase from last year.

Model Y production begins in earnest – deliveries are due to start in March, several months earlier than planned.

Oil was dealt a blow as US inventories rose more than expected. This was not what the bulls had been hoping for. Inventory data showed a build of 3.5 million barrels in the week to Jan 24th, seven times more than expected. Gasoline stocks rose for a 12th consecutive week, hitting a record high at 261.1 million barrels. WTI has retreated to below $53, testing the $52.0 area before bouncing.

In FX, GBPUSD is steady with 1.30 holding just, and should be flat at first before starting to move on BoE expectations running into the 12pm decision. It will be a big move – at least one big figure. EURUSD has found key support at 1.10 holding the bulls are yet to be drawn in properly. USDJPY is a tad lower under 109 seemingly on risk-off bid.