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Apple Sparks Risk-Off Trading



Risk sentiment took a hit during Asia Pacific trading hours after Apple issued a profit warning due the impact of the recent coronavirus outbreak in China.


Prior revenue guidance for Q1 2020 is unlikely to be met, the company said, pointing to slower growth of demand in China than previously anticipated due to the recent coronavirus outbreak. Apple also said it was facing supply chain issues, likely due to the large-scale shutdown of Chinese factories.


As we know, the Chinese economy has effectively ground to a halt since the coronavirus outbreak took off in mid-January, as people avoid work and travel due to fear of contracting the potentially deadly virus. Although most workers are supposed to be back at work now following the Lunar Year Holiday, multiple reports in recent days have said that factories are still not able to restart production due to lack of workers.


Market Reaction


Risk assets, including global stock markets, commodities such as crude oil and risk-sensitive currencies including AUD, NZD, CAD and CNY were all hit on the news. Likewise, haven assets JPY, gold and US & German government bonds all saw inflows.


It is worth noting that in recent days, broader market risk sentiment has been underpinned by a drop in the number of new coronavirus cases being reported in China and further monetary stimulus from the PBoC. Markets had been taking this as an indication that the worst is likely over and that we can return to business as usual (i.e. stocks moving higher).


Many analysts had criticised this attitude towards the crisis as complacent. Okay, the worst of the spread may be over (as indicated by the falling number of new cases… if you believe Chinese numbers) but we are still faced with a severe hit to the global economy due. As I said above, the whole of China effectively went into quarantine, and it will take some time for Chinese people to feel confident enough to go back to life as normal. That implies economic activity will be subdued for a while yet.


Moreover, we don’t yet know how bad this hit to the global economy is going to be. Stocks can keep grinding higher on PBoC stimulus and falling numbers of cases all they want, but Apple issuing a profit is a stark reminder that revenues at many a global company will now face an abrupt decline in Q1 2020.We expect more profit warnings to follow, just as we expect global economic data for February to take a hit. Although the rate of the spread of the disease appears to now be under control, downside risks to risk assets remain high.



As such, markets are likely to remain choppy, as sentiment improves suddenly following positive headlines or worsens suddenly following negative headlines. Staying vigilant is key in these kinds of markets, as is keeping on top of all of these fundamental themes. 


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