Europe

European markets have finished the week on the back foot today as concerns about the spread of coronavirus take the edge off the record highs seen earlier this week in the DAX and Stoxx600.

While we are hearing reports that Chinese companies are returning to work, there is increasing nervousness that the spread of the virus could well cause similar disruptions in Japan and South Korea where cases of the virus appear to be increasing.

In China, car sales saw a 92% fall from  a year ago as the extended shutdown of the economy saw consumers stay at home. Daimler shares have seen the biggest falls given that China is one of Mercedes biggest markets, while Aston Martin shares have also fallen sharply ahead of their full year numbers next week.

The worst performer in the FTSE100 has been Pearson as the company warned that it faced a tough outlook for the upcoming year. For the last five years management have tried to turn around and restructure the business, with results that can only be described as a work in progress.

Last month the shares hit a ten year low after the company announced the departure CFO Coram Williams. Today’s full year results merely confirmed the outlook painted just over a month ago. Overall sales fell 9% to £3.87bn, while profits for the year came in at £266m, down from £590m a year ago.

The downbeat outlook has seen the shares fall back again, and it will now be down to new management to turn around a business that has seen both the CEO John Fallon, as well as the CFO walk away from the wreckage of their restructuring program in the past few months.

We’ve also seen weakness in airline stocks with Air France-KLM losing ground again, while British Airways owner IAG shares are also slightly softer.

The next few weeks are likely to be nervous ones for not only travel based and retail based stocks, but also the automotive sector, and any sector that relies on personal consumption.

While reports of supply chain disruptions are worrying, they aren’t so much of a concern while inventory levels remain high. The problem arises if inventory levels take longer to come down than normal as consumers stay at home and keep their money in their pockets.

Its notable that companies like Burberry and LVMH, with significant exposure to Asia markets have seen large declines in the past few weeks over concern around future Asia demand, however this could also impact UK retailers as well if overseas tourists also stay at home.

Ted Baker is a case in point, struggling at here in the UK, it also has a significant presence in Asia having recently signed some significant deals in Japan and China. The last thing it needs is further disruption to its trading model having only just changed its management team, and written down its inventory by £58m. 

US

US markets have also opened lower today, taking their cues from a slightly softer European session as well as concerns that we may well see more profit warnings coming down the line as the effects of coronavirus become ever more apparent.

The latest flash PMI’s for the US economy and in particular the services sector showed a surprise contraction in February, dropping from 53.4 to 49.4, an unwelcome reminder that while recent data out of the US has been positive, there are still pockets of weakness, and also acting as a reminder that the US economy may well not be completely immune to any coronavirus shock waves. 

Coca Cola which is due to report on its latest numbers next week, warned that the outbreak of coronavirus would cut its current quarter earnings by $0.02c a share, though it caveated that with an expectation that it would meet its full tear forecasts.

Heavy equipment maker Deere Group reported its latest  profits came in at $1.63c a share, well above estimates of $1.25c a share, while revenues also beat expectations.

Dropbox also shot out the lights with its latest numbers, the shares surging over 15% to their highest level since last November after profits came in at $0.16c a share, beating the consensus on profits as well as revenues.

Keeping fit doesn’t appear to be as popular as it used to be if Fitbit’s latest numbers are any guide, as the company fell to a loss of $0.12c a share in its latest quarter. Confirmation of its acquisition by Google can’t come soon enough it would seem, as consumers turn to cheaper devices.  

FX

After four days of declines the pound has enjoyed a bit of a respite after the latest flash PMI’s showed that economic activity picked up in February, building on the gains seen in the January numbers. It’s not immediately apparent why the pound has been as weak as it has been this week, but some of the weakness could be down to this week’s rather hawkish speak by UK chief negotiator David Frost that the UK was not going to be dictated to with respect to EU level playing field rules, particularly since the UK in a number of ways already maintains higher standards, and should be free to diverge if it so wishes.  

This week’s economic data has been largely positive for the UK so this rebound is long overdue given that it minimises the prospect that the Bank of England would be minded to cut interest rates next month.

It had been a decent week for the US dollar, hitting its highest levels against a basket of currencies since April 2017 earlier this week, until this afternoon’s PMI numbers dealt it a huge uppercut, sending it to a three day low. For most of the week investors were choosing it as the currency haven of choice, along with the Swiss franc which has also performed well this week. Despite today’s setback it is still probably the best bet in a very dodgy neighbourhood, even with the US 30 yield hitting a new record low, below 1.9%.

Commodities

Gold prices have continued to push higher, touching their best levels since 2013 as new cases of coronavirus spread across Asia. It is becoming increasingly apparent that as the outlook becomes more uncertain there could well be further upside for the yellow metal, with the $1,800 level increasingly possible by year end.

The rise in oil prices over the last few days has come to a jarring halt in the last 24 hours, having hit its best levels in one month, earlier this week. An expectation that any after effects of the coronavirus might well be transitory has helped with the rebound, however the spread of new cases has called a halt to the recent rally, along with a weak manufacturing PMI number out of Japan.

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Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.