Was it a false breakout in equities?

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  In this equity update we talk about the growing evidence of the global supply chain grinding to a halt which could very quickly lead to a significant impact on economic activity. Something that is clearly not being discounted in equity markets. So it naturally begs the question whether yesterday's new all-time high was a false breakout.


On January 20 on our Market Call podcast we flipped our tactical view on equities from long to short as the unknowns and nonlinearities created hidden risks that should be avoided. Our communicated stop loss was new highs in S&P 500 and that came yesterday as on balance earnings have been good and investors buying the narrative of monetary and fiscal impulse offsetting whatever weakness coming out of China. Being honest to our stop loss we flipped our tactical view. Already today we trending somewhat down in Brent crude and global equities. That coupled with price action among global logistics firms and indications on demand in China and Asia is making us questioning whether the breakout yesterday was false.

Source: Saxo Group

The global supply chain freezes

One thing that is getting more and more evident is that the global supply chain is clogging up with shipping prices tumbling as ships are idling in ports. Maersk, the world’s largest shipping company, have seen it shares tumble 23% from the peak in December and 6% since the coronavirus hit the official newswire on January 20. Today the world’s largest car manufacturing plant in South Korea was also added to the casualties as Hyundai suspended production due to lack of parts coming from China. With fine-tuned global supply chains manufacturing companies could grind to a halt or partial halt as China is the world’s factory. The second derivative of this is lower revenue after inventories are depleted which then quickly eats into operating cash flow generation and then cash balance. If a company is operating with a low cash balance this means that credit lines have to get increased with banks running greater risk. It’s not difficult to see that a couple of more weeks and this could develop into a full blown disaster for global growth.

Source: Saxo Group

One of the world’s largest logistics firms, DSV Panalpina, was out with its 2019 annual report today and the CEO was sending a warning signal to the market that’s probably just drowning in the regular news flow.

It is difficult to predict the market situation in 2020; currently the corona virus situation is impacting global supply chains and creating uncertainty. However, at this stage it is not possible to predict the financial impact,” says Jens Bjørn Andersen, CEO

Source: DSV – 2019 Annual Report

The impact from the coronavirus is real and the economic costs are accelerating and even worse the companies best positioned in the global supply chain cannot even indicate the cost short-term. On Monday we will go through the global logistics industry and the dynamics playing out in the global supply chain. Going into the weekend we maintain our long equity view respecting the price momentum, but we maintain a flexible mindset and will flip to short if the news and price action on balance changes enough to the downside.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.