US helps shares shrug off symptoms of virus

Shares fought back from their worst fall this year and government bond yields bounced off three-month lows.

Damien Boey, Credit Suisse Australia equity strategist, at their offices in Sydney. Picture: Britta Campion

Shares fought back from their worst fall this year, government bond yields bounced off three-month lows and commodities started to recover, even as the coronavirus outbreak in China surpassed that of severe acute respiratory syndrome (SARS).

Officially confirmed deaths from the virus in China rose by 25 to 132 as the number of confirmed cases soared to 5972 versus a peak of 5327 cases from the SARS outbreak in 2003-04.

But after tumbling 2.5 per cent over the Australia Day long weekend, the global flagship S&P 500 index bounced 1 per cent, giving a positive lead to nervous global markets. Apple rose 2.8 per cent in regular trading and a further 1.5 per cent after hours as it beat earnings estimates.

While initially falling 0.2 per cent after CNBC reported the White House told airlines it may halt US-China flights, S&P 500 E-mini futures turned up 0.4 per cent after Bloomberg reported that an administration official said the White House hadn’t spoken to airlines about a suspension of flights.

With futures pointing to another rise in the US market ahead of the Federal Reserve interest rate decision overnight, Australia’s benchmark S&P/ASX 200 rose 0.5 per cent to 7031.5 points after diving as much as 1.7 per cent after the long weekend.

“I still sit in the camp that there is far more to play out in the (coronavirus) scare, and the impact on Chinese economics will be real,” Pepperstone head of research Chris Weston said.

“The duration of the scare will dictate the effect on confidence and consumption, but most believe China will meet any worsening of economics with a determined fiscal and monetary response.”

Technology stocks led broad gains in Australia although Treasury Wine Estates shares plunged 26 per cent after a profit warning driven primarily by its underperforming US operations.

Hong Kong resumed trading after the Lunar New Year with a relatively moderate 2.3 per cent fall in the Hang Seng index, Japan’s Nikkei 225 rose 0.7 per cent and South Korea’s KOSPI gained 0.8 per cent.

China’s sharemarket remained closed for holidays but FTSE China A50 futures bounced 1.8 per cent after plunging as much as 8.7 per cent in the past two days as the viral outbreak worsened.

China’s offshore yuan appreciated slightly after falling about 1.7 per cent in recent days.

Brent crude oil futures rose 3 per cent to $US60.30 a barrel amid expectations of deeper production cuts by OPEC after the price hit a three-month low of $US58.50 this week, while London Metal Exchange copper rose 0.9 per cent to $US5751 a tonne after a 10-day fall - its longest on record.

Singapore iron ore futures bounced 2.6 per cent to $US85.41 a tonne after plunging 8.5 per cent in the past two days. The Australian dollar bounced to US67.77c after hitting a four-month low of US67.37c, helped by a further lessening of expectations of a near-term rate cut by the Reserve Bank.

The market-implied chance of the RBA cutting its official cash rate by 25 basis points at its February board meeting next Tuesday sank to 10 per cent from 24 per cent a day earlier and 62 per cent before the release of stronger-than-expected jobs data last week.

Economists at JPMorgan and RBC Capital Markets pushed out their expectations of the next rate cut to May and June respectively, but the market continues to expect a rate cut by June.

With less chance of a near-term rate cut by the RBA and a sell-off in US Treasuries as demand for havens receded, Australia’s 10-year bond yield rose 7 basis points to 1.02 per cent after dropping 14 points to a four-month low of 0.944 per cent on Tuesday.

But strategists warned that potential economic fallout from the coronavirus outbreak could cause a sustained rise in volatility that may force investors to reduce their exposure to shares.

“The biggest issue for financial markets in 2020 is the risk of volatility rising,” said Credit Suisse Australia strategist Damien Boey. “A coronavirus less deadly than SARS was enough to cause volatility to rise off its lows, because priced uncertainty levels were far too low to begin with.

“As volatility rises, we would expect the primary beneficiaries of the low volatility regime to suffer.”

Stock indexes favoured by passive investors were likely to underperform, according to Mr Boey.

“The risk is that high and rising volatility unleashes a wave of market deleveraging, undermining the economic growth outlook, and supporting — in a relative sense — quality growth stocks.

“To be sure, bonds and related exposures are extremely expensive, but we see a scenario where rising volatility, however caused, drives the equity risk premium up faster than the risk free rate, with perverse consequences for the cyclicals-defensives equation.”