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business briefing

Briefing highlights

  • Market woes
  • China’s central bank takes measures
  • Markets at a glance
  • Bernard Ebbers dies at 78
  • What to look for today
  • Required Reading

What investors should watch

It’s not the coronavirus alone that should be weighing on the minds of investors but the “potential interaction” of the ramifications with other things now playing out in the markets.

That’s how Matt King, Citigroup’s head of credit products strategy, sees it, as fears of the economic fallout of the coronavirus rattle the markets.

“What we find particularly troubling is the potential interaction between the shock from the virus, already stretched market valuations and central banks approaching the local limits of their ability to prop up markets,” Mr. King said in a report.

"While history suggests markets will eventually rebound quickly once the incidence of new cases subsides, the risk-reward seems to have deteriorated significantly in the meantime."

Mr. King suggested, too, that markets should be on higher alert.

"Like most people, our base case is still that in a few weeks’ time, new infections are seen to peak and the shock from the coronavirus, like those of SARS and MERS before it, is consigned to the history books," he said.

"But given the risks not only from the disease itself but also the way in which it interacts with market valuations and central banks’ limitations, for now it still feels as though investors are comparatively complacent."

Fears surrounding the coronavirus have rippled through markets, affecting stocks, commodities and currencies.

Here are some recent views from other observers on how the virus could affect economies and markets, notably where Canada is concerned:

“There seems to be an appreciation now that even the best-case scenario for the coronavirus isn’t good. Just the efforts to contain the outbreak will be very destructive to growth. We can see Chinese economic growth being cut in half in the first quarter – about 3 per cent year over year instead of the 6.1 per cent reported in the fourth quarter of last year.” Jasper Lawler, head of research, London Capital Group

“The coronavirus outbreak in China has rattled markets and will likely be a noticeable but temporary drag on the Canadian economy. Fears and uncertainty over how long the outbreak will last and how many people will become infected will affect Canada through three channels: commodities, currency and global consumption. Commodities in particular will feel the pain as prices fall due to general market jitters as investors move money to safer assets, and to declining industrial demand as the Chinese economy seizes up and air travel to and from China is restricted. The price factor is Canada’s primary concern, as most oil exports are directed toward the U.S., not China.” Brendan Meighan, economist, Moody’s Analytics

“While markets fret over the impact of the Wuhan virus, the [Canadian dollar] has little chance to recover. Commodity prices have been devastated … but both [oil and copper] markets look oversold and risks have to be tilting back towards a consolidation, at least, if not a rebound. U.S./Canada spreads remain more [Canadian dollar]-supportive than price action would suggest. Our predictive, week-ahead model suggests some stabilization in [the U.S. versus Canadian dollar] ... Much will hinge on how virus headlines unfold from here for the [Canadian dollar]. Political factors (Democratic primaries) may add to [U.S. dollar] volatility over the coming week (Iowa caucuses Monday).” Shaun Osborne, chief foreign-exchange strategist, and Juan Manuel Herrera, foreign-exchange strategist, Bank of Nova Scotia

“Very early estimates have suggested China’s Q1 GDP growth could be reduced by at least 1 percentage point. (For reference, the country’s year-over-year growth in the second half of 2019 was 6 per cent). Some of that will spill over into Canada via lower commodity prices – West Texas intermediate oil prices, for instance, are down nearly US$7 per barrel over the last two weeks- while the transportation sector will see a more direct hit with some airlines cancelling flights to China. Global industrial supply chains could also be impacted the longer the clampdown on economic activity in China persists.” Nathan Janzen and Josh Nye, senior economists, Royal Bank of Canada

“Probably the most vulnerable sector to the coronavirus, and fears related to it, is the tourism industry. Casting back over the past 20 years shows that the single biggest drop in visitors to Canada (from all countries aside from the U.S.) was during and after the SARS episode in 2003. Visits from abroad fell 25 per cent year over year over a six-month period – they then snapped back in the following two years. Note that when looking at the sheer number of visitors (i.e., not the growth rate), the lowest tally in the past 30 years was in May, 2003. On the flip side, the highest tally of non-U.S. visitors ever was in July 2019 (even in seasonally adjusted terms). That figure had been sagging notably in following months, and may be poised for a steeper correction now. In the latest year available (2018), China accounted for 11 per cent of all non-U.S. visitors to Canada, amounting to 757,000 people. That was just behind second-place Britain.” Douglas Porter, chief economist, Bank of Montreal

“Maybe as much as anything, the outbreak is the nudge needed to get investors to do some selling, which might have been due anyway after a lengthy run. As we noted last week, valuations have stretched out … In fact, we’re again in a situation where, at least by this basic measure, the only time stocks were more expensive was during the late 1990s tech bubble. A little cooling off was probably in order.” Robert Kavcic, senior economist, BMO

“With China poised to slow markedly, at least for Q1, their purchases from the rest of the world will undoubtedly cool rapidly as well. Many are looking back to the 2003 SARS episode for a playbook, and there was about a 4-per-cent drop in Canadian exports to China that year. But there has been a fundamental shift since 2003. China’s share of both the global economy generally, and Canadian exports specifically, has ratcheted higher over those 17 years. In 2002/03, China accounted for at most 1.5 per cent of total Canadian exports. In the past 12 months, that ratio stood at almost three times that share at 4.3 per cent. (And that’s even including the impact of various constraints placed on Canadian goods, which chopped the ratio from a peak of more than 5 per cent in late 2018.) Adding to the mix, there’s the very real threat of trade diversion, owing to the recent Phase One deal between the U.S. and China.” BMO’s Mr. Porter

“Markets have been gripped by the ongoing exponential growth in the coronavirus outbreak, but the ultimate magnitude and duration of its impact is still highly uncertain because the characteristics of the virus is still highly unknown at this point. But what is concrete and known is that the steps being taken by policymakers will have at least a sharp negative impact on growth in the near-term. The process of growth downgrades by our economists have already begun.” Daniel Hui and Paul Meggyesi, foreign-exchange strategists, JPMorgan Chase

“Compared to previous pandemics, the coronavirus has escalated more quickly in terms of infections but also the policy response (China factory closings). Lockdowns and lockouts make the hit to Asia output large, but could render the outbreak more containable. If output buckles just intra-quarter, the market impact could be less persistent and more localized as investors focus on a Q2 to Q4 return to reflation. The risks are two-fold: Markets are generally expensive and well-owned rather than cheap, and if factories don’t reopen after Feb 9, a major but regional and brief demand shock could become a more damaging global supply shock.” John Normand, head of cross-asset fundamental strategy, JPMorgan Chase

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China props up system

China’s central bank moved to prop up the financial system, and analysts say further stimulus will be needed.

The People’s Bank of China pumped the equivalent of US$21.4-billion in liquidity into the financial system.

This came as the Shanghai Composite reopened after the long holiday, only to tumble 7.7 per cent.

“The central bank signaled more rate cuts are on their way,” said economist David Rosenberg of Rosenberg Research.

“More stimulus surely will be on its way because this Chinese equity market decline is not done,” he added.

Markets at a glance

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Ticker

Euro zone factory activity contracts

From Reuters: Euro zone factory activity contracted again in January but did so at its shallowest rate since mid-2019, according to a survey that suggested the worst may be over for the bloc’s battered manufacturing industry. IHS Markit’s final manufacturing purchasing managers index rose to a nine-month high of 47.9 in January, just above a preliminary reading of 47.8 and edging closer to the 50 mark that separates growth from contraction. It was 46.3 in December.

Factory activity growth sluggish

From Reuters: Canadian manufacturing activity expanded in January for the fifth straight month as a measure of new orders rose and business optimism strengthened, but the pace of growth remained sluggish, data showed. The IHS Markit Canada manufacturing purchasing managers’ index rose to a seasonally adjusted 50.6 in January from a four-month low of 50.4 in December.

U.S. manufacturing activity rebounds

From Reuters: U.S. factory activity unexpectedly rebounded in January after contracting for five straight months amid a surge in new orders, offering hope that a prolonged slump in business investment has probably bottomed out. The Institute for Supply Management said its index of national factory activity increased to a reading of 50.9 last month, the highest level since July, from an upwardly revised 47.8 in December.

OPEC said to consider more cuts

From Reuters: OPEC and its allies are considering a further cut in their oil output of 500,000 barrels per day due to the impact of the coronavirus on oil demand, two OPEC sources and a third industry source familiar with discussions said. The Organization of the Petroleum Exporting Countries and allies including Russia, known as OPEC+, are considering holding a ministerial meeting on Feb. 14-15, one of the OPEC sources said, earlier than a current schedule for a meeting in March.

Ebbers dies at 78

From The Associated Press: The former chief of WorldCom, convicted in one of the largest corporate accounting scandals in U.S. history, died just over a month after his early release from prison. Bernard Ebbers was 78. The Canadian-born former telecommunications executive died Sunday in Brookhaven, Mississippi, surrounded by his family, according to a family statement. WorldCom Inc. collapsed and went into bankruptcy in 2002, following revelations of a US$11-billion accounting fraud that included pressure by top executives on subordinates to inflate numbers to make the company seem more profitable. The collapse caused losses to stockholders, including those who had invested through retirement plans. Ebbers was convicted in New York in 2005 on securities fraud and other charges and received a 25-year sentence.

Hong Kong economy contracts

From Reuters: Hong Kong’s economy contracted for the first time in a decade in 2019 as violent anti-government protests and trade tariffs between Washington and Beijing took more steam out of the economy in the final quarter of last year. The worst is yet to come, with no end in sight to the protests in the Chinese-ruled city and a new coronavirus outbreak in mainland China. The economy shrank by a seasonally adjusted 0.4 per cent in October-December from the previous quarter, versus a revised 3-per-cent contraction in July-September. On an annual basis, the economy shrank 2.9 per cent, compared with a revised 2.8-per-cent fall in the third quarter.

Also ...

What to watch for today

On tap are quarterly results from Google’s parent, Alphabet Inc.

“The stock has enjoyed a bullish run recently as it set a series of record highs in 2020,” said CMC Markets analyst David Madden.

“Traders will be keen to find out if non-core areas of the business are performing well, especially in light of the increase in capital expenditure. The tech giant isn’t short of cash, but traders will want to see that funds are used efficiently.”

Required Reading

Market takes hit

Calgary’s commercial real estate market is taking another big hit with Strategic Group buildings in limbo, Rachelle Younglai and Jeffrey Jones write.

Seafood industry losses

The coronavirus outbreak is causing job losses at seafood plants and hitting lobster dealers on Nova Scotia’s south shore, as cargo flights to China are grounded and the price of the province’s most valuable shellfish tumbles. Greg Mercer reports.

Brexit happened

Read Eric Reguly on how the great hollowing out for Britain is about to begin.