Global equities staged a relief rally this week as investors saw early signs that the scale of the coronavirus outbreak outside China would be significantly more limited than the contagion within China, and also that the pace of spread in China has not been as extreme as many feared.
In addition, the prompt response by Chinese policy makers this week to provide liquidity stimulus through the injection of CNY1.2 trillion via reverse repo operations helped offset flagging confidence, while sentiment was also buoyed by reports of anti-viral drugs being potentially available ahead, with Wuhan set to start clinical trials of Gilead’s remdesivir.
Over the year to date, we have held a moderate risk-on position in our overall equities position, with a neutral position in Asia ex. Japan equities.
While some individual stocks have hit bargain entry levels due to virus fears, for the broader Asian equity market, one key unknown remains the period of time for which the extensive travel curbs and production shutdowns in China would be in place while policy makers race to contain the still-escalating coronavirus outbreak.
These containment measures form a demand-side hit to the economy and have wide-ranging ripple effects on supply chains and businesses. Commodity and bond markets better reflect these uncertainties, and the relief risk-on moves in these asset classes this week have been more muted than in equities.
The US presidential election is coming into focus for investors as the Democratic Party primaries begin in earnest, with the Iowa caucus having concluded earlier this week.
Over 97% of the Iowa precincts have reported at the time of writing, and it appears that Pete Buttigieg (26.2%) has likely narrowly edged out Bernie Sanders (26.1%) to win Iowa, followed by Elizabeth Warren (18.2%) and finally Joe Biden (15.8%).
The Iowa result is important because the US Democratic primary is a path-dependent process, and the winner in Iowa tends to enjoy a significant boost in national prominence and higher chances at subsequent milestones. Since 2000, every Democratic nominee has won Iowa, including Al Gore (2000), John Kerry (2004), Barack Obama (2008), and Hillary Clinton (2016).
We see the results from Iowa to have mixed implications for markets, which explain the neutral reaction so far.
One negative is that the lack of a run-away winner in Iowa points to prolonged uncertainty ahead. It remains unclear if a moderate Democrat (Buttigieg, Biden or Bloomberg) is more likely to win the nomination versus a progressive candidate: Buttigieg who narrowly won Iowa performs poorly in national polls, while Biden who is strong nationally suffered a very poor result in Iowa at fourth place, albeit with more than 15% of votes which leaves him in the running. Bloomberg is still an unknown quantity in this race.
Progressive candidate Bernie Sanders entered the Iowa caucus as the most likely candidate judged by prediction markets to win the nomination. Although his odds have been cut after the results, he remains the odds leader.
On the other hand, one positive for markets is that the absence of a strong challenger after Iowa has incrementally improved Trump’s chances for re-election. Joe Biden, who is polled to be the most competitive against Trump in a general election match-up, suffered a disappointing start. The widely reported issues with quality control and errors in counting the Iowa votes also hurt the Democratic Party’s reputation nationally.
As the US Democratic nomination process intensifies, we see scope for more volatility ahead, especially as Sanders and Warren – progressive Democrats who are campaigning on less market-friendly agendas – remain in contention and as Trump’s approval ratings remain stubbornly low with his odds of re-election persistently in question.Disclaimer applicable to recommendation
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