With US markets closed for Presidents Day, markets in Europe have got off to a positive start to the week, with the German DAX making a new record high in early trade, taking their cues from an expectation that Chinese authorities, as well as the Singapore and Hong Kong governments might well embark on some form of fiscal stimulus in the coming weeks, as investors reflect on valuations after the new record highs seen in US markets last week, as well as the Stoxx 600.

The continued rise in equity markets on both sides of the pond, appears to run counter to the narrative of a global economy that is likely to be much weaker over the course of the rest of the year, due to the continued ripple out effects of the coronavirus, which is likely to act as a significant brake on economic activity, not only now, but for the next few months.

While this slowdown may well prompt further easing from global central banks, with China cutting a key rate overnight, and the recent falls in yields more broadly which has prompted the move into stocks, those who suggest that there will be a v-shaped rebound once the virus has been contained may well be being overly optimistic.

The fact that Chinese authorities are looking at delaying the National People’s Congress next month and have also cancelled the Shanghai Grand Prix in April suggest that the impact on the Chinese economy is likely to be longer lasting than thought, with the prospect that the Chinese economy could well contract in Q1.

This will inevitably impact the global economy, and Europe in particular where data last week showed that the German economy stagnated in Q4 while the French and Italian economies contracted. With this morning’s Japanese data also showing significant economic weakness in the last quarter, and that’s even before the effects of the virus become apparent it is becoming increasingly clear the coronavirus outbreak is unlikely to make things better, and will in fact make things worse in the short to medium term.

With a number of key European sectors relying heavily on the Chinese economy, this could have significant repercussions on the ability of these companies to hit their guidance forecasts.

In company news travel companies are in focus this morning, with airline stocks seeing declines in Asia, while fresh news of various outbreaks on cruise ships has seen the shares in Carnival Cruise Lines slip a little this morning. Reports of further cruise ship infections over the weekend are likely to impact future bookings for this particular sector, with Carnival shares already trading near four-year lows, having fallen over 15% in the past month.

NMC Health shares are also lower after the news of three board resignations this morning, including Chief Investment officer Hani Buttikhi who has stepped down with immediate effect, as the company continues to grapple with the controversy that has surrounded it since the publication of the Muddy Waters report at the end of last year.

Tullow Oil shares slipped over 5% after the company announced that its Marina-1 exploration well in Peru had reached total depth without coming across any hydro carbons. The well would now be plugged and abandoned.

The pound put in a strong performance last week, despite the unexpected departure of UK Chancellor Sajid Javid, only weeks ahead of what would have been his first budget.

That task now falls to Rishi Sunak, and the rise in gilt yields would appear to suggest that markets believe that we could see a fiscal boost in the months ahead. With Sajid Javid expectations around this had been tempered somewhat, however last weeks events have altered perceptions. Being able to borrow for 10 years at 0.6% and for 30 years at 1.5% offers a compelling case for a longer-term view on large scale investment projects, and as such the likelihood that the Bank of England could well be done when it comes to any further rate cuts.

On the data front the case for a rate cut has also been a weak one, despite a lacklustre end to the end of 2019, which prompted some speculation that the Bank of England might cut rates at the end of last month.

This week’s wages, unemployment,  inflation and retail sales data are expected to point to an economy that is in fairly decent shape, though the recent wet weather could prompt a soft patch in the February data, next month.

US markets are closed for Presidents Day

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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.