Equity bulls strike back

The bulls strike back: we’ve got record highs in the face of potentially a black swan event. What could possible go wrong…? This is what happens when central banks are happy to pump and investors are utterly conditioned to buy dips.

Global equities are bouncing as investor angst about the coronavirus outbreak appeared to lessen in the face of stimulus fever and a lack of any serious escalation in the rate new cases. Trump’s acquittal is taken as good news for risk, though the result was never seriously in doubt. China is halving tariffs on $75bn of US imports, signalling at the economic desperation facing the country.

US stocks made fresh record highs, with the S&P 500 rallying more than 1% for a second day to 3,334. The Dow rose nearly 500 points. 

Asia was higher overnight shrugging off thousands new confirmed cases in China that has taken the total to beyond 28k. Hong Kong and Tokyo both rose over 2%. Makers of instant noodles and toilet paper are doing well because of shortages. There’s always a profit to be made. As yet there’s not been serious escalation in either the rate of new cases, or a batch of US or European cases. A few in London or New York would spook local markets, but - touch wood - we’ve not had that yet.

European equities continued the good news story. The FTSE 100 took part in the rally and pushed up another half of one percent to north of 7500,  with the DAX up a similar margin to close in on record highs again.

Stimulus - China is already pumping billions into the economy. News may be bad, but investors are always looking - whether it’s to the Fed or PBOC - to the stimulus response. Investors are conditioned to buy dips.

Strong US data also helped bolster sentiment towards US equities. ADP payrolls at +291k was the best number since May 2015 and comes in nonfarm payrolls week. We should issue the usual caveat that ADP numbers are not always the best guide for the NFP, but nevertheless, it's a good omen for labour market strength. Donald Trump's random tweet about jobs looks less random now. Mild winter weather boosted the numbers too.

And still the economic impact is still unknown but undoubtedly huge. Bulls are happy that whatever the damage, central banks have their back and will inject enough stimulus to offset the effects. We note oil markets are less likely to benefit directly from stimulus than equities and so crude remains soft despite a bounce.

Tesla mania turned swiftly to depression as the stock tumbled 17% to $734 and extended the losses by a further 1% after hours. Tesla said the coronavirus would delay Shanghai deliveries - we’ve been waiting for this, it’s no massive surprise given the situation on the ground. 

This is what happens when a stock goes parabolic - it rises too far too fast, then gets whacked. It’s the only result possible. What we see is mean reversion to more stable valuations. Tesla is not worth $900 now - it might be in the future, but certainly not now. $600 is more realistic whilst still pricing in growth potential. There are still risks in executing strategy, from China EV demand, as well as from debt and potential cash calls. Even at $700 the stock is priced for perfect performance over the next 5 years. The shape of the chart now looks very intriguing and investors may find more attractive entry points before long. Fundamentally overvalued, but that doesn’t mean it can’t go up again.

Oil has cleared a couple of big levels as it tries hard to rally. Bulls have taken out $51 and the last swing high but has pulled back a little and now we see a big test around the neckline at $51.75. Clearance here and to $52 calls for recovery to previous swing high at $53.25. Failure suggests we retrace to a $50 handle.

Bulls are hopeful OPEC will extend and deepen production curbs. A planned two-day session of technical talks has entered a third day. There may be disagreement over quotas and the scale of cuts. OPEC+ needs to be aggressive with its action or be left simply counting further costs. 

In FX, the US dollar is on the front foot still. USDJPY is making a stab at 110 having cleared the moving average cluster.

EURUSD is back to 1.100 having once again tested the big support level at 1.0990. This level is holding for now but bang on the door enough times and it may come crashing down. German factory orders slumped, only confirming the industrial recession in Europe’s economic powerhouse. GBPUSD is struggling to catch any bid north of 1.30.