For the international stock markets, the month of January is heading to a close with a moderately positive result, confirming the good underlying trend inherited from 2019.
However, last week ended with a session with some selling pressure, which could be a prelude to a correction in the short term, induced by two contingent factors, the US President’s Senate impeachment trial, which has just begun, and the spread of the Corona virus that developed in China. While the proceeding against the US President could be resolved quickly and seems to have a foregone conclusion, given the Republican majority in the Senate, the assessment of what is really happening in China is much more complex. Meanwhile, the official figures on the spread of the virus should be taken with the benefit of doubt, as in reality the number of cases could be far greater, moreover, the timely and appreciable prompt reaction of the local authorities could support the thesis that the active substance escaped from a research laboratory, and that its danger is greater than that of 2003. However, having implemented a sanitary cordon around 20 large cities populated by 60 million inhabitants, it appears that such a drastic measure will not fail to adversely affect the growth of Chinese GDP in the first quarter, after a 2019 that recorded the lowest growth rate in years.
Certainly it is premature to consider this event as a “black swan”, that is to say a totally unpredictable event that can negatively influence the world financial markets, but it is better to wait a few sessions before considering the possible continuation of the correction presenting a buy opportunity and also to understand the technical time necessary for the development of a vaccine. Remaining cautious also appears to be indicated by the sudden drop in yields on 10-year US treasury securities, which fell from 1.94% to 1.62% in just a few sessions. A positive development could instead come from the next decisions of the PBOC, which after having pumped RMB 510 billion into the Chinese credit system in December and after reducing the banks’ reserve requirements by RMB 800 billion in January, could accelerate its contribution to the QE already implemented by almost all the other world central banks.
In summary, as soon as the current contingency which should prove to be short-term is overcome, the stock markets will proceed to positively discount the marked phase of monetary expansion implemented by the respective authorities which will result in a moderate improvement in the overall economic situation during 2020. Quantifying the downside risk from a technical point of view, one could consider the support levels indicated by the indices, such as 3150 points for the S&P 500 and 3600 points for the Eurostoxx 50.
Nicola Bravetti Data Source: Bloomberg
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