Growing concerns about the economic impact of the coronavirus dominated headlines this week. Global equity markets and cyclical sectors underperformed whilst bonds rallied. As the outbreak continues to escalate, the World Health Organization has declared it a public-health emergency of international concern, but said restrictions on commerce weren’t necessary and that it had confidence in China’s ability to control the virus.
The U.K. formally quit the European Union late on Friday night, closing the chapter on nearly half a century of integration with its European neighbours. Britain now enters a transition period of at least 11 months as it negotiates future relations with the EU. During that time, the U.K. will legally be outside the bloc, but little will change for citizens on either side. Staying with U.K. news, the Bank of England kept the key interest rate unchanged at 0.75% and maintained its asset purchase program at GBP435.00bn, both in line with market expectations.
In the U.S. the Federal Reserve (Fed) left its interest rate target unchanged, as expected, emphasising the desire to return to the 2% inflation target. On the economic front, the fourth- quarter GDP showed that the U.S. economy grew at a 2.1% annual rate. Consumer spending slowed modestly, but growth was supported by an uptick in residential fixed investment, government spending and a narrower trade deficit.
China extended its Lunar New Year holiday to 2 February whilst the Shanghai Stock Exchange will commence trading on 9 February. Manufacturing PMI in China recorded a drop to 50.00 in January, compared with a level of 50.20 in the previous month. This was in line with market expecations.
For the week, global equity markets were weaker. In the U.S., the Dow Jones (-2.53%), S&P 500 (-2.12%) and Nasdaq (-1.76%) Indices were all softer. Similarly, European and Asian markets were weaker with the Euro Stoxx 50 (-3.66%), FTSE 100 (-3.95%) and Nikkei 225 (-2.61%) all negative. The Shanghai Composite Index remained closed for the week as China extended its Lunar New Year celebrations.
Market Moves of the Week
In local news, talk of Cosatu’s proposal to absorb Eskom’s debt and the ANC’s endorsement of changing a proposed constitutional amendment that would enable the government to seize land without paying compensation made headlines during the week.
Cosatu wants workers’ pension funds to be used to bail out Eskom because it believes this would yield improved investments in the country in the long run. It said the funds should be allocated, provided there was a commitment that the power utility wouldn’t be privatised and that jobs wouldn’t be lost.
The ANC’s national executive committee endorsed changing a proposed constitutional amendment that would enable the government to seize land without paying compensation. The ANC’s desired change would prevent courts from intervening in such expropriations and give sole decision-making authority to the minister of agriculture, land reform and rural development.
The JSE All Share Index ended the week down -2.06%, with all the major sectors negative over the week. The rand came under pressure, trading at R14.99 to the U.S. by Friday close.
Chart of the Week
Markets remain intently focused on the latest viral outbreak in China and its possible economic consequences. Past episodes of similar viruses suggest a typical trough in economic activity within 1-3 months after the outbreak. As for markets, the outbreak has weighed on China-related assets and sent oil, copper, and Treasury yields lower. As the chart of the week shows, historically, the "panic effect" generated by epidemics has put sizable pressure on risky vs. safe assets, typically taking an average of 4 weeks for the S&P 500 to start recouping losses over the US 10y during such episodes. European equities (EURO STOXX 50), which are roughly twice as reliant on China for sales as US equities (S&P 500), have also typically rebounded as early as 3 weeks after prior outbreaks.
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