As global ex-China confirmed cases of the virus increased at an alarming rate, market sentiment rapidly deteriorated as worries of a global epidemic grows. The MSCI Emerging Market Index declined 5.35% in February.

2 months into the New Year and global external shocks showed no signs of slowing down. Just as China reported a slowdown in new cases of COVID-19, South Korea, Italy, Iran, and Japan picked up the ‘slack’ and reported an explosive rise in new cases. This heightened worries in falling global demand and supply chain disruptions, which could pressure emerging markets and mute potential rebounds in economic growth. In particular, most African countries, and a majority of Latin America are expected to suffer due to the softer demand in the world’s second largest economy.

External risks remain, and we stay neutral on EM in the short to mid-term. Until the complete impact on the global supply chain is better understood, we would suggest investors to exercise more caution before investing in the relatively fragile market.

The COVID-19 outbreak remains the elephant in the room for the Japanese economy. With hundreds of locally transmitted cases in the Island by the end of the month, the Olympic Games at the edge of cancellation, many are concerned that the outbreak could send the country into recession.

As the latest economic figures remained relatively weak, especially with the recent epidemic woes, PMI stayed in the contraction zone along with plunging business confidence. Even though the fiscal stimulation has yet to play out as it was scheduled for 2020 Q2, and the monetary support to the markets via asset purchases should continue to provide downside protection, the Japanese economy lacks a catalyst to further advance amidst weak market sentiment.

Due to the virus outbreak in China earlier, Japan is bound to miss the tourist target of 20 million, and the precarious situation of the Tokyo Olympics does not provide much reassurance in the economy. Considering that the ‘black swan’ event of COVID-19 is set to have a material impact on the Japanese economy outlook, we downgraded the outlook for the Japanese equity performance in 2020 from positive to neutral.

As a result, the European STOXX 600 was down by 8.54% (9.21% in US$ terms) in February.

While Brexit matters were overshadowed by the COVID-19 outbreak, EU officials are set to approve the trade talk mandate after the official leave of the UK from the single bloc. EU leaders including Irish foreign minister Simon Coveney urged the UK to start implementing new border rules within months as a matter of good faith, so as to better progress the much needed trade talks before the deadline at the end of 2020.

As for the COVID-19 outbreak, confirmed cases in Europe skyrocketed with the thousands of newly confirmed cases in Italy. Fear in the markets increased, many are also concerned about a supply shock due to the impact of the virus in China. Combining that with the falling global demand and China in particular, the impact on earnings has still yet to be fully realised in European equities.

Fundamentals continued to show improvement. Although Eurozone manufacturing PMI continued to improve, it remained in the contraction zone for thirteen consecutive months, while the Euro Area Economic Sentiment Indicator surprisingly rose to 103.5 in February despite the ongoing COVID-19 outbreak. Overall, we remain less optimistic on the European equity outlook, as fundamentals remain weaker and the actual impacts of the COVID-19 on the European economy have yet to be fully realised.

In February, the CSI 300 Index and the Shanghai Composite Index fell modestly by 1.59% (2.80% in US$ terms) and 3.23% (4.41% in US$ terms) respectively, while the Hang Seng Index also only went down by 0.69% (1.06% in US$ terms).

Chinese official figures showed significant slowdown in new COVID-19 cases at the end of February, which hinted that the epidemic might have peaked earlier in the month. Subsequently, most of the provinces in China have announced gradual resumption of the economic activities, sparking hope that the worst has already been over in China.

That said, economic indicators hinted at the impacts of the virus on the real economy. Business activities were heavily hit with city lockdowns, as indicated by the huge drop in both service and manufacturing PMI to historic lows. The worsening business and consumer confidence could have long lasting effects, potentially dragging down economic growth in 2020. At the moment, we expect monetary policy to further loosen so as to support businesses, and fiscal policies, in particular infrastructure investment, to be enacted at the same time to kick start the economy. Overall, the short to mid-term economic outlook remains relatively volatile in China but seems to be turning for the better.

Equity gains ebbed out amidst COVID-19 worries. With a number of manufacturers including Apple Inc. (NASDAQ: AAPL) already warning investors about a potential supply chain shock due to logistic constraints, many are concerned that the actual impacts of the virus could be wider than markets reflect.

In light of the potential global outbreak, the Fed responded to market expectations, announcing an unexpected emergency rate cut of 0.5%. This is the first time the emergency rate cut is utilised since the financial crisis in 2008, triggered a rise in market panic levels and markets responded negatively to the cut.

Various economic indicators remain relatively weaker, with both manufacturing PMI and consumer confidence index missing market expectations. Despite limited positive signs, monetary easing provides sufficient excess liquidity to support asset prices, which offers better downside protection for the US market.

Overall, the recent fall in equities is driven mainly by worsening market sentiment, rather than worsening fundamentals. Equities are expected to see recovery when market sentiment recovers. Thus, we remain positive on US equity performance over the whole year.

United States

US equities continued the trend of abnormally high volatility. Just as the markets analysed the implications of the surprising emergency 0.50% rate cut from Fed, the breakdown in OPEC+ talks out of the blue triggered a dramatic fall in oil prices, falling by more than 24% over a single day. This triggered global market panic alongside the ever growing issue of COVID-19 outbreak. President Trump held a press conferences to explain the current White House plan for the financial market and economy as a whole, the Fed also announced to inject $1.5T in liquidity to prevent the investment market from drying up. However, markets remained unimpressed. US equities in particular suffered huge losses over the past 5 days ending Thursday, triggering the Circuit Breaker twice over the short timeframe, major equity indexes shed a whopping 15.59-18.84% over the period, Thursday saw one of the largest single day percentage drops since the 1987 stock crash on Thursday. All 3 major US equity indexes entered the technical bear market. The economic data this week still met expectations, earnings forecast remain largely unchanged. Despite fundamentals remaining stable, under impression that the COVID-19 epidemic is bound to happen in the US, market sentiment further deteriorated and valuations fell to minus 2-3 standard deviations from the 5 year average. Next week, retail sales, housing starts and home sales data will be released. The FOMC meeting will also be held during the week, market is currently pricing at least a 0.75% cut to Fed rates.

Europe

Over the past 5 days ending Thursday, the European stock market had one of the worst performances in history. The UK FTSE, French CAC, and German DAX fell 21.89%, 24.56, and 23.30% respectively, while the Italian MIB fell a whopping 30.90%. The oil shock joined hands with the COVID-19 outbreak, causing great fear in the market, the forward P/E of the European STOXX 600 Index even fell to over minus 4 standard deviations from the 5 year average. The COVID-19 outbreak in Europe remains the elephant in the room, with newly confirmed cases showing no signs of slowing down. The WHO finally declared the COVID-19 crisis a pandemic, the epicenter of the outbreak, Italy, has taken drastic measures and put the whole country under lockdown, many fellow European countries banned public events and gatherings for the time being in order to curb the virus spread. In an unexpected manner, the ECB did not follow the Fed and announced no changes to the existing interest rate. Even though the quantitative easing in form of an additional EUR 120 billion Asset Purchase Plan (APP) should continue to provide support to the market, markets reacted poorly and market sentiment remained on the lower end. Next week, Eurozone CPI figures and ZEWS Survey Expectations will be released next week. Market expects CPI to stay flat while the ZEWS expectations should fall into deep negative territory.

China

Compared to the global stock market, the China and Hong Kong stock markets have experienced relatively smaller declines this week. The CSI 300 only fell 4.53%, while the Hang Seng Index dropped 7.03%. Just as the World Health Organization confirmed the COVID-19 as a pandemic, there was greater market panic in the markets outside China and Hong Kong, resulting in greater selling pressure in overseas stock markets. As for China, recent news indicated that the central government may soon reduce the RRR and announce consumption incentive plans and other stimulation measures, the news provided support to the market. Economic data showed that China’s annual inflation rate slightly slowed to 5.2%. At the same time, new RMB loans in February also fell sharply, reflecting the impact of the epidemic on the real economy. Next week, China will release February fixed investment, industrial production and retail sales data, as well as the Loan Prime Rate (LPR).

• Recent activities include : Harris Fraser held a Press Conference on “2020 Global Investment Market Outlook”, Attended Bloomberg Businessweek/Chinese Edition Top Fund Awards 2019
• Columns, media interview and online channels : “TVB News”,“TVB Big Big VIP”, “Now FINTERVIEW”, “iCable Finance”, “iCable News”, “Capital”, “SingTao Newspaper”, “Sing Tao Investment Weekly”, “Headlines News” , “ET Net”, “OrangeNews”, “Quamnet” and online videos produced by Harris Fraser Group. (including but not limited to the above)

United States

US stocks had abnormally high volatility this week. At the beginning of the week, it was reported that major global central banks would work together to stabilize the market. The news reversed the original pessimism in the market, sending US stocks up for the largest single day percentage gain in 14 months on Monday. However, the subsequent announcement of an emergency 50-basis-point cut in the policy triggered market worries that the financial crisis may recur, US stocks have once again plummeted on that day, and in the two following days saw sharp fluctuations in the market. After the Fed decided to carry out the first emergency rate cut of 50 basis points in more than a decade, the yield on 10-year US Treasury bond yield fell below the 1.00% level, reflecting large fund flows into US debt to reduce risk exposure. Another focus of the market is the ‘Super Tuesday’ of the Democratic Party presidential primaries. As the results came out, former Vice President Biden won 10 states and increased his lead, the news brought positive sentiment to the markets. In addition, some candidates, such as Pete Buttigieg and Mike Bloomberg, announced their withdrawal and voiced support for Biden. It is expected that the future development in the DNC primaries will be clearer. Next week, data on the US CPI, Michigan Consumer Sentiment, and the NFIB Small Business Optimism Index will be announced.

Europe

Over the past 5 days ending Thursday, the European stock market remained weak, with UK, French, and German stock markets falling by 1.34%, 2.45%, and 3.42% respectively. The rapid spread of the COVID-19 epidemic in Europe worried markets, investors feared countries like France and Italy might enter recession. In response to the development of the epidemic, Italian Prime Minister Conte said that the scale of aid for the epidemic will be increased to 7.5 billion euros, the funds will be used to support families and businesses hit by the epidemic, so as to ensure that no one loses their job due to the virus. As for economic data, the final February Eurozone service PMI rose slightly from 52.5 in January to 52.6, indicating that the February data might have yet to reflect the impacts of the epidemic. The European Central Bank will hold its interest rate meeting next week, the market focus will be on whether the Bank follows the Fed and deepens monetary easing.

China

Compared to the global stock market, the Chinese and Hong Kong stock markets have performed well this week, with A-shares being the best performer. As the COVID-19 epidemic continues to spread across the world, market is hoping that more stimulation measures will be introduced in the Mainland, including monetary policies such as interest rate cuts and RRR cuts, China's 10-year government bond yield fell to a new low since 2002. While presided over a meeting of the Central Leadership Working Group on Response to the COVID-19 Epidemic, State Premier Li Keqiang called for careful and effective strengthening of the epidemic prevention and control. On the other hand, under the increasing downward pressure on the Mainland economy, the work resume ratio is also an economic data worthy of attention. The Ministry of Agriculture in China stated that the spring planting is on track, and expects to meet the food production target despite the epidemic. China will announce February CPI and PPI data next week.

"When the Fed said something to stabilize market sentiment, confidence returned," said Steven Wong, a senior investment analyst at Harris Fraser Group. "As long as central banks are happy to open the tap, all sorts of economic problems can be solved."

Wong added, however, that it remains to be seen whether markets have hit bottom yet.

Full article: Hong Kong shares rise on global monetary easing bets

United States 

COVID-19 cases across the globe further increased over the week, with situations in South Korea, Japan, Italy, and Iran significantly worsening. In particular, South Korea reported more than 500 new cases on Friday, bringing the total confirmed cases up to 2,337, the largest number of cases outside China. Back in the US, the CDC reported a possible case of ‘community spread’ of the virus in home soil, spreading fear in the market throughout the week. Over the past 5 days ending Thursday, S&P 500, Dow Jones, and NASDAQ fell 11.69%, 11.82%, and 12.15% respectively, which was the worst 5-day-rolling-return since the Financial Crisis back in 2008. Economic data released this week were mixed. The important consumer confidence index came in at 130.7, missing market expectations of 132.0, but still managed to record a slight increase over the January figure. The final 2019 Q4 GDP came in line with expectations, and durable goods were better than expected. Overall, we have yet to see the actual impact of the virus on the real economy and the extent of supply chain disruption. In light of the uncertainty, investors could pay more attention to upcoming data hinting at the virus impacts. Next week, various PMI data, non-farm payrolls, unemployment, and hourly earnings data will be released.

Europe

The COVID-19 epidemic spread like wildfire across the globe, confirmed cases in Italy and Iran skyrocketed over the week, triggering panic selling in the market. The UK FTSE, French CAC, and German DAX fell 8.21%, 8.86%, and 8.92% over the past 5 days ending Thursday. However, ECB president Lagarde downplayed the economic impact of the COVID-19 epidemic, claiming that the long term impacts on the economy are yet to be seen. That said, confirmed cases in Italy has exceeded 600, neighboring countries of France and Germany warned their citizens of the potential outbreak, given the close ties between EU members. Economic data showed surprisingly strong numbers from the German IFO Business Climate Index and the Eurozone business and consumer survey, both topping market expectations despite the looming COVID-19 outbreak on the continent.  Next week, more data on various PMIs, CPIs and retail sales will be released.

China

Risk off due to the global spread of COVID-19 epidemic eventually affected market sentiment in the China and Hong Kong stock markets. Over the week, the CSI 300 Index and the HSI fell 5.05% and 4.32% respectively. As the COVID-19 outbreak initially started in the region, the Chinese and Hong Kong stock markets fell first. Thus, during this downturn, the respective markets suffered less loss than global markets. However, the Shanghai Composite Index still fell below the 100-day and 200-day-moving-average this week. During the week, the net sell via Stock Connect set a record high, and the combined stock market turnover has exceeded one trillion yuan for eight consecutive trading days, matching the previous record in 2015. As China has started to resume economic activities, whether there will be any further large scale outbreak could be answered over the next two weeks, investors could closely monitor the relevant data in the weeks to come. As for Hong Kong stocks, as it is expected that the Chinese government will increase infrastructure spending to stimulate the economy, capital inflow to relevant sectors can be worth noting.

• Recent activities include : Harris Fraser held a Press Conference on “2020 Global Investment Market Outlook”, Attended Bloomberg Businessweek/Chinese Edition Top Fund Awards 2019
• Columns, media interview and online channels : “TVB News”,“TVB Big Big VIP”, “Now FINTERVIEW”, “iCable Finance”,“iCable News”, “Capital”, “SingTao Newspaper”, “Sing Tao Investment Weekly”, “Headlines News” , “ET Net”, “OrangeNews”, “Quamnet” and online videos produced by Harris Fraser Group. (including but not limited to the above)

United States 

The spread of the COVID-19 epidemic accelerated in Japan and South Korea, while the China National Health Commission announced that as at 20 February, there are 75,400 confirmed cases in China. Market sentiment remained weak due to virus woes, and overall global markets underperformed. Over the past 5 days ending Thursday, the S&P 500 and the Dow fell 0.18% and 1.12% respectively. However, the NASDAQ rose by 0.26%. The January FOMC meeting minutes were released this week, showing that the economy was stronger than expected at the end of January, most officials see the current interest rate policy as appropriate for "quite a period of time." However, opposing views still existed within the committee, and Fed Vice Chairman Clarida emphasised that most economists do not expect rate cuts any time soon. According to the Bloomberg interest rate futures data, market predicts that the Fed will cut interest rates at least once before the end of the year. Next week, the United States will release the revised GDP figures for 2019 Q4, the market expects that the annualised increase will be revised slightly upwards from 2.1% to 2.2%. In addition, the United States will also announce the finalized figures of the January Core PCE, the February Consumer Confidence figures, and the University of Michigan Consumer Sentiment Index in February.

Europe

European equity performance was unsatisfactory over the week, with the UK FTSE, French CAC, and German DAX falling 0.22%, 0.51%, and 0.59% over the past 5 days ending Thursday. The Vice President of the European Central Bank (ECB) Guindos affirmed that the Eurozone economy is growing moderately, but mentioned that sluggish trade and the COVID-19 epidemic will lead to increased uncertainty in the economic outlook. As for economic data, the February Eurozone ZEW Economic Sentiment fell from 25.6 to 10.4, while the Eurozone Consumer Confidence Index came in at negative 6.6, which improved over the previous value of negative 8.1 and beat market expectations of negative 8.2. The Eurozone will announce the final figures of the February consumer confidence index and the February CPI next week. The market expects the YoY increase in CPI to fall from 1.4% to 1.2%. If inflation data continues to weaken, it may further solidify market expectations for the ECB maintaining a dovish stance.

China

China and Hong Kong stock markets had mixed results this week. A-shares continued the rebound with large trading volumes. The Shanghai Composite Index reclaimed the 3,000 level, closing at 3,039 on Friday, up 4.2% over the week. The Hong Kong Hang Seng Index met resistance at the 28,000 level and subsequently fell, closing at 27,308 on Friday. Under the influence of the epidemic, the local economy remains under pressure, it was speculated that the Chinese government may increase market liquidity to support the A-shares. This week, the People's Bank of China and the Ministry of Finance increased their efforts to strengthen monetary and fiscal policy amidst the COVID-19 epidemic. In particular, the central bank cut MLF and LPR interest rates respectively. A-share market sentiment remains positive.

• Recent activities include : Harris Fraser held a Press Conference on “2020 Global Investment Market Outlook”, Attended Bloomberg Businessweek/Chinese Edition Top Fund Awards 2019
• Columns, media interview and online channels : “TVB News”,“TVB Big Big VIP”, “Now FINTERVIEW”, “iCable Finance”,“iCable News”, “Capital”, “SingTao Newspaper”, “Sing Tao Investment Weekly”, “Headlines News” , “ET Net”,“OrangeNews”, “Quamnet” and online videos produced by Harris Fraser Group. (including but not limited to the above)