EU MORNING: Equities Suspect Coro-NO-virus

  • Risk-on triggered despite virus fears
  • FX markets lag robust risk sentiment
  • An ECB preview 
  • Earnings season cranks up

Risk unfazed it seems

The potential mutation and adaptation of the deadly Coronavirus has been effectively ignored by major equity benchmarks as markets surged back to all-time highs. It seems that risk sentiment is considering much of the widespread news and talk of a potential SARS 2003 outbreak as predominantly fearmongering, and that the situation will eventually return to normal, as it has historically.

This has driven investors to use yesterday's broad sell-off as an opportunity to get their positioning right well before earnings season gets underway. For the ASX, it was a solid session with gains of +0.94% and oil and gas giant Santos (STO) delivering record annual production, sales, and seeing production costs come in at the bottom of guidance.

In Europe, FTSE ought to follow the strong start in Asia, pointing 22pts higher at time of writing according to futures. Similarly, DAX looks set to surpass record highs on a robust 78pt open. While confirmed cases and fatalities associated with the virus don't exactly appear to be slowing, I wouldn't be surprised if risk sentiment homes in on central bank rate decisions and earnings soundbites, which should increasingly come into focus over the next fortnight. 

FX tentative ahead of central banks

Over in FX, G10 failed to partake in the risk-on move with price action somewhat subdued amid a broad reversal of yesterday's USD strength. USDJPY managed to inch its way back to 110, but without great conviction, while USDCNH sustains around 6.9 having traded as low as 6.85 through the week. AUDUSD was also well held after posting weak consumer sentiment of -1.8%, continuing to point to the downside ahead of a pivotal, market sensitive Aussie employment report. 

Amid incredibly subdued trading conditions, FX volatility is unlikely to trough until the implications of Coronavirus clear out, but could get interesting walking into a minefield of central bank meetings. 

None other than the BoE's meeting on Jan. 30, which is now set up for a very, very interesting finish given the conflation of yesterday's less than disappointing UK Employment Report, dovish communications from multiple MPC members and this Friday's UK PMI print - arguably the most pressing data point of them all. So even though GBPUSD saw a slight relief rally into 1.3040, depending on Friday, it could be a very different story come Jan. 30. 

ECB preview 

Little risk here of any rate change given Lagarde's recent appointment. Instead, markets will be looking to soundbites around the start of the ECB's Strategic Review and what's entailed.

As Lagarde rebuilds consensus among members and identifies the efficacy of negative rates, the dovish risks around ECB policy should start to become more muted. Especially when you mix in improved sentiment seen over the past few PMI prints. With 5bps of tightening also priced-in till the end of 2021, it's unlikely markets catch a significant hawkish surprise. 

Ultimately, it's probably best to stay neutral trading EURUSD through ECB given Friday's PMIs are more pressing, and low option implied vol. suggests trader convictions wait to digest the details of the ECB Strategic Review, and receive a more pronounced assessment of forward risks. 

Reporting season 

Netflix (NFLX) - 4Q results did little to tear down a heavily overweight Main Street and bullish outlook, but did initially see the share price shaky before broader risk sentiment pulled up most tech stocks. While most lines beat expectations, it was the net addition of 8.3m international subscribers that demanded significant attention. It just goes to show that a deeper focus will be put on international expansion as Netflix attempts to capture subscribers across unsaturated and heavily populated emerging markets like India, Korea and Turkey, especially in the face of an increasingly competitive Disney. 

Santos (STO) - rose to a 0.79% gain after a solid 4Q report that saw record annual production beat prior corresponding period by 28% and production costs fall at the bottom end of guidance. The oil and gas giant in Australia has clearly outpaced Q4's rally in Brent Crude, demonstrating not only its high sensitivity to oil, but also, the attractiveness of its extremely efficient operational set-up.  

On the horizon, majors in Johnson & Johnson, Texas Instruments and Hyundai are set to report later onwards.