Over the past week, equity markets seemed to have forgotten the coronavirus even existed, harvesting nice gains. Still, the virus is far from gone and global supply lines are suffering from interruptions. Foxconn, a major supplier for the Apple Iphone, is postponing the opening of some of its Chinese factories. Estimates show that only 40 to 60% of its capacity is deployed. Meanwhile, the WHO chief is warning we have possibly only seen the tip of the iceberg, while economists are trying to figure out by just how much the Chinese, Asian and global economies will be hit.
And when speaking of global supply chains, exporting nations’ interests are in play. You cannot help but think of Germany, where last week, data on factory orders for December were quite weak. French industrial production in December was also bad. So what will German fourth-quarter GDP look like? Doubts remain about the industrial champion and its future growth. But the European retail sector is also at risk of running out of fabric imported from China. Fashion chains like Primark and Inditex rely for 30%, and even up to 50%, on Chinese factories. So how can they cope?
It’s a very different picture when comparing European with US data. Last week, the US composite PMI was good and improved, while the labour statistics surpassed estimates. Moreover, the number of people either working or looking for a job in the US climbed once again. This suggested that the labour market might still have room to grow and might embolden the Federal Reserve to let the jobs market run red hot before possibly doing something about rates. In addition, the hourly wages component is not a threat. All this being said, the growth differential between the US and Europe is pretty clear and on the back of this, the single currency weakened against the greenback, falling below the 1.10 level again.
Still, on a global scale, the disruption of production lines remains a threat for the materials sector. Mining stocks have already been hammered, but there might be more losses in store. The industrial metals segment is pretty hard hit, and oil is also in the doldrums. An imminent production cut from OPEC is still uncertain and this morning the price for Brent is not rebounding. Obviously, all this will have an impact on inflation. Low commodity prices will keep inflation at bay and will keep the central banks in a “relaxed” monetary mode. And as long as the presses are printing money, the hunt for scarce yield assets and the hunt for scarce growth assets might continue.