Head of Saxo Strats
Summary: Data suggest COVID-19 is beginning to impact Beijing as well and South Korea saw a one-day 50% jump in infections triggering a sell-off in South Korean equities. Global equities are a bit more calm but should they be that? The risk is increasing that we could see a severe supply chain disruption and semiconductors could be the epicenter following the car industry's troubles. We recommend investors to be tactically negative on semiconductors on expected Q1 earnings miss.
Risk-off in equities came to live in yesterday’s session sparked by news that Beijing was now experiencing a surge in infections and traffic congestion data suggesting more people in Beijing was staying at home. News got worse overnight with South Korea announcing a 50% jump in new COVID-19 cases in addition to a ‘special management zone’ to contain the outbreak. The reaction in the leading equity index in South Korea KOSPI 200 was a big gap down with an attempt to come back failing closing lower extending KOSPI 200’s drawdown length to 27 months. South Korea is generally a good country to watch for many macro reasons and now the COVID-19 outbreak in the country makes it even better.
The bigger risk contagion effect that the equity market doesn’t seem to be pricing in is the potential for COVID-19 to spread to other Asian countries on a larger scale. If that happens it will cause severe global supply disruptions. South Korea is famous for its footprint in the semiconductor industry and the MSCI World Semiconductor Index 1.5% from its all-time highs. Tactically being short semiconductors is a good risk-reward candidate playing on Q1 earnings miss on global supply chain disruptions.
The Philly Fed Business Outlook Survey jumped to 36.7 in February some of the highest level in many decades following the jump in January. There’s a saying that one observation is a change and two is trend, so something is going on and our hypothesis is that some US firms are beginning to source some manufacturing temporarily in the US to offset the lack of production capacity in China. Even if they source US manufactured goods at higher prices eating into gross margins they have to do it in order not to deplete inventories and then suddenly seeing revenue drop dramatically. Yesterday’s session saw a little bit of this connection with US steel producers such as Nucor and U.S. Steel being bid. We recommend investors to scan for US manufacturing companies as they could get a boost in Q1 from the COVID-19 outbreak in China.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
