• Coronavirus hurts risk sentiment, but for how long?
  • Growth in focus as US reporting season hits top speed.
  • European political risk back on the table with Italy.

Symptomatic of Coronavirus

The failure of markets to finish on a high on Friday puts the blame squarely on the Coronavirus, which continues to rouse investor suspicion that it's far from contained and has a longer incubation period than expected. Edgy, risk-off sentiment like a cat on a hot tin roof is a condition that is therefore likely to prevail as reports just don't seem to be dying down anytime soon; around 1,400 cases and 41 deaths have been reported so far across 14 countries. By comparison, only 8,094 cases and 774 deaths were seen during the devastating 2003 SARS outbreak.

While SARS in 2003 saw a mortality rate of ~10%, the Coronavirus is currently well under that at around ~3%. However, there could be upside risks to that number with the first confirmed cases in Australia, Canada and Europe only coming through this weekend. Though, it's unlikely there'll be massive impacts across developed nations given the robustness of medical institutions. Instead, if the Coronavirus were to grab hold in areas of Africa and South America - that would be of significantly greater concern. 

Source: Confirmed cases, ThinkMarkets, growth rate = 37%, estimates only!

Extrapolating a ~37% daily compound growth rate from the small smaple of reported figures, infection levels could - as unlikely as it seems - reach the magnitude of 2003 SARS by the end of January. Until global markets see stronger signs of containment (Chinese authorities announce first cured patient), risk sentiment is unlikely to trough in the near-term, and will continue to um and argh as we navigate this risk.

Implications of earnings season heats up

It's panning out to be a very interesting week for how markets assess the health of the US economy (and global economy to an extent) because not only are macro risks at play, but also, a deluge of earnings reports are due to be released over the week.

Should the Coronavirus spread unabated and the collective narrative for earnings disappoint, we think cautious risk appetite most likely prevails and major equity benchmarks see their worst week for a while. But, to caveat that, earnings season so far has arguably been positive with banks broadly beating expectations and global growth on the mend. 

Companies to look out for?
27/1 Mon pre-market: Sprint
28/1 Tue pre-market: Pfizer, 3M, United Technologies, SAP, Xerox, Lochheed Martin, Paccar
28/1 Tue post-close: Apple, AMD, Starbucks, Ebay
29/1 Wed pre-market: Boeing, GE, Mastercard, AT&T, Mcdonalds, General Dynamics, Novartis
29/1 Wed post-close: Tesla, Microsoft, Facebook, Paypal, Sands, Mondelez, LMVH
30/1 Thu pre-market: Coca-Cola, UPS, Verizon, Blackstone, Biogen, Shell, Northrup Grumman
30/1 Thu post-close: Amazon, Visa, Levi's, Electronic Arts, Amgen
31/1 Fri pre-market: Exxon, Caterpillar, Chevron, Honeywell, Phillips 66

Buongiorno Italy risk

The spread between Italian 10yr and German 10yr bonds, often known as the BTP-Bund spread, was predominantly quiet during the course of 2019 owing to the fact that Italian political risk had for the most part subsided. The widening or narrowing of BTP-Bund spreads are usually indicative of European risk, and in turn, EURUSD directionality, during times of political stress. The chart below captures 2018 when European sovereignty was on the tip of the tongue for every European.  

The Italian PD-Five Star coalition government is starting to look fragile, amid the possibility that Lega could grab victory at the Emilia-Romagna regional elections. A Lega victory is seen as market-negative and increases the risk of a snap election. EURUSD could start to feel the weight of keeping its head above 1.10 as BTP-Bund spreads sit at multi-year lows and point higher. 

EURUSD (purple). BTP-Bund (blue). 
Source: Eikon, ThinkMarkets