Equities edge higher as Brent crude stress eases
Head of Equity Strategy
Summary: Global equities are higher as investors are less worried about the coronavirus with Brent crude sending bullish signals as the world prepares for China to slowly resume manufacturing. The US Chemical Actitivity Barometer Index reached a new all-time high in January as growth accelerated in a sign that the US manufacturing sector is betting on growth ahead. In today's equity update we also look at European banks and Q4 earnings.
The last two sessions in global equities have been driven by a consensus narrative that the mid-term impact from the Chinese coronavirus will be limited as China is expected to slowly allow manufacturing sector to begin operating again. Brent crude is sending a firm signal today that the worst might be behind commodity markets as the oil price pushes above $55/brl again. In global equity markets we observe emerging market equities, private equity firms and European small caps leading the gains.
Before the coronavirus was on everybody’s lips the dominating theme in financial markets was reflation and food inflation is still running high so if coronavirus impact is on the decline then the reflation could quickly come back. The US Chemical Activity Barometer Index reached a new all-time high in January with the best growth rate observed in more than a year in a sign that the US manufacturing sector is gearing up for growth ahead as the growth slowdown that lasted for almost two years is coming to an end. This would fit with OECD’s leading indicators that suggest the global economy is in a recovery phase.
Besides human and economic pain in China the coronavirus has one side effect that the market is taking not off and that is massive stimulus coming from the world’s largest economy. This will add to already accommodative monetary policies in the other major economies and in general expanding fiscal deficits. In the case the coronavirus is not worsening the 2020 reflation theme could come back quickly. A key market to watch here is long-dated bonds which will react fast to a shift in narrative.
One of the surprising parts of the equity market in February has been European banks that were underperforming European equities in general. On the back of better than expected earnings and additional cost-cutting exercises European banks are up 7.5% in February and with ECB President Lagarde’s signal that the ECB is constrained on further rate cuts our view is that we could finally have seen the bottom in European banks. A potential long-term catalyst for European banks is Europe’s “green deal” with massive government-led investments in green technology which will create lending demand with some downside protection. Europe’s “green deal” could become an indirectly government subsidy and growth enabler for European banks. We urge investors to have European banks on their watchlists.
Among companies reporting earnings we got a positive surprise from French luxury maker Kering that has Gucci as its biggest brand that crushed estimates despite Hong Kong sales slump and uncertainty over Chinese sales due to coronavirus. Before US equity markets open for trading Shopify will report Q4 earnings with extremely high expectations as Shopify has some of the most aggressive valuations we have observe over the past 10 years with an EV-to-sales ratio of 39x.
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Energy crisis could turn energy stocks into secular winnerWith long-term expected returns for the global energy sector close to 10%, we look at 40 stocks that could be set to cash in.
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.