Thursday, January 30, 2020

Tesla posts second quarterly profit in a row; is the BoE dovish or not?

Tags
  • Dollar
  • Euro
  • Pound
  • Stocks
  • Oil

Market Recap: Coronavirus outbreak continues to weigh on stocks in Asia

US stocks remained relatively flat on Wednesday as upbeat earnings reports balanced out concerns about the coronavirus outbreak in China. Apple's shares added 2.09% to end Wednesday's trading session US$324.34 per share. The death toll from the coronavirus outbreak reached 170 on Thursday morning and the number of confirmed cases swelled to more than 7,800.

Tesla beat analysts’ estimates in both sales and profits to post its second quarterly profit in a row thanks to record vehicle deliveries. Coupled with a 500,000-delivery forecast for the year, its shares surged after-hours to as high as US$654 per share, or a 13% gain. Microsoft also reported better-than-expected quarterly sales and profit thanks to a faster pace of growth in revenue from its Azure cloud computing segment. Microsoft shares rose as much as 4.58% to US$175.74 per share in after-hours trading.

ADSS_Morning_Brief_Stats_Image

The dollar index inched only slightly lower on Wednesday as there were little surprises from the Fed's first monetary policy meeting for 2020. As expected, the Fed left interest rates unchanged and raised its IOER by 5bps to 1.60%. The central bank also downgraded household spending to moderate from strong. Fed Chair Jerome Powell said that he is not comfortable with inflation staying persistently below the 2% target, which likely helped put some pressure on the greenback.

ADSS_Morning_Brief_Stats_Image

Meanwhile safe haven assets rebounded on Wednesday after suffering losses on Tuesday. Gold, yen and US treasuries all gained across the board. Benchmark 10-year yields declined 7bps to 1.58%.

ADSS_Morning_Brief_Stats_Image

ADSS_Morning_Brief_Stats_Image

Crude oil prices were mixed on Wednesday. Investors were optimistic that OPEC would extend crude oil output cuts to provide support amid the coronavirus outbreak, although a rise in US crude inventory dampened optimism for crude oil prices. Brent crude futures gained 30cents to close Wednesday's trading session at US$59.81 per barrel while WTI crude futures lost 0.28% or 15cents to end the day at US$53.33 per barrel.

ADSS_Morning_Brief_Stats_Image

In Asia, stocks look set to fall on Thursday after the WHO called a meeting of its Emergency Committee to consider issuing a global alarm as the deaths and confirmed cases from the coronavirus outbreak continues to rise. The Nikkei and KOSPI both started Thursday 0.41% and 0.71% lower.

ADSS_Morning_Brief_Stats_Image

Electronic Arts (1am), Visa (1am), Western Digital (1am) and Amazon (1.30am) are set to report their quarterly earnings tomorrow (January 31st) morning (all timings in GMT +4).

Important economic releases for the day include the Bank of England’s (BoE) decision on monetary policy at 4pm (GMT +4) with the press conference following at 4.30pm (GMT +4). Inflation rate (Personal Consumption Expenditure) and GDP for Q4 2019 will released at 5.30pm (GMT +4) 

Today’s Analysis: Will the BoE cut rates at Governor Mark Carney’s final meeting?

The Bank of England (BoE) is set to make its decision on monetary policy at 4pm (GMT +4) today. But investor sentiment looks to be mixed on whether there will be a rate cut from the central bank at the end of today's meeting. Overnight Index Swaps (OIS) indicate that the financial markets are only pricing in a 45.6% probability for a rate cut, down from 75.6% two weeks ago.

ADSS_Morning_Brief_Stats_Image

While speculation has grown that the BoE will cut rates in today's meeting, the British economy has shown signs of rebounding in January after the December general elections in which the Conservatives regained their majority in parliament. Purchasing Managers' Index (PMI) reports by Markit has shown that the UK's manufacturing sector is recovering, with preliminary estimates placing the sectors PMI reading at 49.8 in January from 47.5 in December. The services sector also came out strong in January, with PMI reaching 52.9 from 50.0 in December. A business sentiment survey conducted by Lloyds jumped to 23 in January versus 10 in December, implying that business sentiment in the UK has improved since uncertainty surrounding Brexit has lessened. The better-than-expected PMI data and possibly improving business sentiment is likely to delay the BoE's rate cut to later in the year, which will likely drive the sterling higher on the release of the monetary policy decision.

ADSS_Morning_Brief_Stats_Image

But the central bank is unlikely to drop its dovish tone since the available data that covers the period following the December 12th elections is still limited. Monetary Policy Committee (MPC) members Michael Saunders and Jonathan Haskel will likely continue to keep their dovish bias and call for a 25bps cut while other members are likely to vote to leave rates unchanged. This will bring the MPCs vote to 7-2 in favor of leaving interest rates unchanged. The sterling should fall slightly as a result.

ADSS_Morning_Brief_Stats_Image

The BoE's forecasts should also remain mostly the same or within expectations. GDP forecasts for Q4 2019 will likely show that the British economy stagnated, while 2020's quarterly GDP forecasts should still continue to show the economy in the UK stabilising through 2020 thanks to reduced risk in the global economy and reduced uncertainty on Brexit. But downside risks such as the coronavirus outbreak in China and a possibility for the UK to exit the EU at the end of 2020 without a trade deal in place will likely be cited.

Our base case scenario implies that there will be no rate cut from the BoE, while BoE officials are likely to maintain its dovish bias. As a result, sterling is expected to strengthen initially before falling slightly, with the EUR/GBP cross falling towards 0.8410, before recovering slightly towards 0.8440.

ADSS_Morning_Brief_Stats_Image