Financial markets

US epicenter & Dividends

The US is becoming the epicenter of the Covid-19 outbreak. Trump has been downplaying the virus in the beginning and currently has to come back on that. He is becoming more and more unbelievable with the minute. Slowly he is risking his re-election. His impulsiveness can become very costly. An example is him saying last week that with the Eastern weekend all shops should reopen again. How can he say that when the outbreak of Covid-19 in the US is in the early or middle phases and can still take months to be solved??. He should not try to make promises and he should take the disease more seriously. He also made a joke of himself a couple of weeks back saying that Wall Street would be thrilled with the FED cutting rates, after which the market tanked over 5%. In the past he came away with all his impulsive speeches as the economy was doing well and unemployment was very low. He always did measure his success with the success of the economy. He can do that now again, but then he has to admit that he failed. He won’t do that.

Source: https://www.worldometers.info/coronavirus/
No dividends in 2020

As expected, companies are having a rough 2020. Lots of companies will not make profit and should not pay dividends this year. Companies are being helped a bit by pension funds and large institutions asking them to skip the dividend. This makes it easier for all of them to skip it. Normally it is a big deal for a company to disappoint the shareholders, but now the shareholders will understand it. Nearly all banks will suspend their dividends and share buybacks and I also expect a lot of other companies that are hit by Covid-19 and are paying significant (read: over 4-5% dividend) to skip the dividend this year. Also, the ECB has asked banks to skip the dividend till at least the 1st of October of this year, to strengthen the balance sheet in these difficult times.

US Jobs Report

Interesting to watch this week is the job report from the US. The report will be published on Friday and will show how many jobs were lost in April. The expectation is 300k jobs have been lost in March, but the big declines still have to come in April onwards. Also, there are expectations that the unemployment will rise from 3.5% before the crisis towards double digits during this year! These are important possible developments for the stock market. But the most important for the current week is to see if the US, and primarily NYC, get the disease somewhat under control. If not, more severe measures need to be taken and the stock market has significant room on the downside. High volatility is expected to remain and it will be another exciting week!

60+ Lockdown

Currently there is no stopping of COVID-19 and it is escalating in Europe. There are a lot of people who take the measures seriously and do live according to the ‘social rules’ that governments have come up with. But large numbers of people do not. This is a concern and not helping getting out of the crisis. That is the disadvantage of all having stubborn own opinions. Like we all know better how our favorite football team should play, we all are our own virologists. The virus started in December 2019 in China and for a long time it was mainly a ‘Chinese’ virus. China has the virus under control. In Europe numbers do increase rapidly and the situation in hospitals, especially in Italy, is getting very worrying.

Source: https://www.worldometers.info/coronavirus/

Governments are trying to limit the economic damage and do come up with large stimulus packages to compensate company losses and to avoid massive layoffs. Lockdowns can be effective to stop the virus from spreading, but they cannot take forever. The economy can take it for a couple of weeks, maybe 1 or 2 months? But at some point the economic damage is getting too large. Public health comes first. A complete economical disaster will also hurt public health. People are losing jobs, get stressed out, suicide numbers go up, welfare goes down drastically for large groups, et cetera.

Whats next?

The problem for the financial markets is that no one exactly knows what scenarios are likely in the upcoming months. If the virus does not get under control, do countries keep extending lockdowns? Or do they just at some point get out of lockdowns and come up with more creative solutions, in which restaurants and shops can be opened again? And does anybody have a good idea how far we are away from infection peaks? There are no clear answers and the market does not know how to price itself.

60+ lockdown

At some point we might have to accept that we do not have full control over the virus. But the economy needs to keep running somehow. People need to have money to buy bread. The government can only help the people for so long. One thing we know for sure: people above 60 years old are most at risk. Quite a large part of 60+ individuals does not work anymore and not having them in the workforce is not a severe problem. An idea could be to force a 60+ lockdown (and maybe also other people in risk categories). These people cannot leave their homes. Food needs to be delivered to the door, no one should enter their homes. And if necessary for assistance, nurses should be checked on temperature before they come in contact with the 60+ individuals.

Back to normal

With a 60+ lockdow, life can go a bit further back to normal again. People should still work from home if possible. But shops, restaurants, cinemas, et cetera can go open again under certain (strict) rules. Quite some young (healthy) people will get infected but only a small part needs to get to the hospital. Slowly the country builds up group immunity, with not too many mortalities. This is a situation that is acceptable to be in for longer time, like a year. Probably till there is a vaccine. And maybe the virus does go away in summer and everything can go fully back to normal. Countries need to go to more creative solutions instead of going for drastic lockdowns which are panic reactions. Panic reactions are fine for a short time, but not a permanent solution.

Long Toilet Paper

People started panic buying. Not stocks but toilet paper, which is obviously more important to survive. The irrational thing is that people are so scared to get infected, but they all run to the supermarkets. The density of people in the supermarket is so high. It seems people find it more important to buy toilet paper and pasta than to not get infected. People follow what others did in other countries. They were panic buying so it also happens in the Netherlands. It also does not help that prime minister Rutte said not to start ‘hamsteren’ (read: panic buying). It is like publicity. Bad publicitiy is also publicity. Saying the word ‘hamsteren’ is what people hear.

Europe is the new Wuhan

Europe is the new epicenter of the Corona virus pandemic. Which is not so great as Europe is everything but a unity. Every country decides what they want to do themselves. And they are all having different opinions and ways of dealing with stuff. There is no good coordination between countries and everyone tries to save its own ship. Most of Europe is closing its schools, the Netherlands leave them open (just heard they close them as well, but you get the idea). Governments are just trying stuff out, instead of following the examples that are set by China and for example Taiwan. They should consult with those guys and decide on what to do. Ofcourse, China is different than Europe. In China there are cameras to check if you leave the house or not. If you do, you are in problems. In Europe, such things are unthinkable. Current extreme privacy policies are also not helping tackling the problems. Europe is too liberal to follow Chinese disease dealing standards, but still we can learn from them.
A benefit of this all is that the CO2 and nitrogen emissions are going down massively, so that we can pollute the earth further in the next years to compensate (that is a joke).

People went long toilet paper, selling stocks

The stock exchange has been pricing in most of the current trouble regarding the Corona disease. Last week stocks sold off heavily with most indices falling around 20% in one week, after Italy put the country on a lock down. More countries are following now and that was where all the panic was about. The upcoming week will be volatile again. On Friday we saw a huge rally on Wall Street, based on Trump declaring a state of emergency and freeing up $50bln in additional funding. In the end he did not say that much actually, but the stocks moved up hard with the S&P gaining as much as 9%, where at 17:30 the AEX was still unch and the S&P was up a couple of %.

What about tomorrow?

For Monday I expect a retreat back down with the S&P opening down 3-5% and the AEX opening unch. The weekend did not bring much relief and wordwide cases are still rising more day after day. Not in a panicky way but they are steadily increasing day to day. Add to that that governments have restricted traveling further and for example Spain has followed Italy in locking down the country. If these measures show any virus slowing down in the next days/weeks, I expect the stock indices to have bottomed.

Quite some stocks are oversold and are punished severely. Some of them do offer great risk/rewards.

Volatility remains & OPEC disaster

Volatility is staying in the markets for now. Last week we saw an initial rebound in the stock market on Monday, after which we saw a decline in most of the rest of the week. The FED tried to soften the market volatility a bit by cutting the federal fund rates by 50bps to a range of 1-1.25%. The FED tries to stay ahead of economic disruptions caused by the Corona virus. Markets initially bounced quite quickly, but went back down. The FED cannot do much to stop the Corona virus from spreading. It is not the case that investors are losing faith in the economy. They are worried about the virus and the FED cannot significantly change those worries. More central banks are expected to cut rates. Though, the only thing that will really help on the short/medium term are indications that the Corona virus is getting contained and that no new outbreaks are being expected. For now, the outbreaks in Italy, South-Korea and Iran are not yet under control.

Italy taking strong measures

To stop the Corona virus spreading further, Italy has taking some strong measures. Italy is locking down much of Country’s North. Around 16 million people are in quarantaine till at least April 3rd.
In the mean time investors are waiting for the time that daily new infection cases do go down. Below you can see an overview of the new daily cases of the Corona virus (red bars). Over half of the daily cases are currently coming from Italy and Iran. In China the virus seems very well contained.

Source: https://gisanddata.maps.arcgis.com/
Opec disaster

As the Corona virus has been wiping out a significant amount of demand for oil on the short/medium term, the oil price has been crashing. 2020 started with an oil price around $60 and currently we are close to $40. On Friday the oil price went down nearly 10% as Russia did not want to agree to the OPEC production cut. With this, Russia is breaking a long-lasting good relationship with Saudi Arabia and OPEC. Yesterday, Saudi Arabia hit back and announced massive discounts on their crude oil prices for sales to Asia ($4-$6) and to the US ($6). With this, Saudi Arabia is starting a price war on oil which does not benefit anyone. It is possibly a way to try to get Russia back to the negotiation table for oil production cuts. But I do not think Russia likes this behavior at all and will not blink too quickly. Oil prices will open dramatically lower on Monday (probably somewhere between -10% and -15%) and will possibly see heavy pressure in the upcoming weeks.

Corona virus & the Rebound

Where I three weeks ago, as you can see in the article below, was surprised that the market did not price in anything for the Corona virus, I am currently a bit surprised with the aggressiveness of the sell off in equities. Markets do need to price in some risk. The virus does affect trade and world GDP on the short and medium term. On the longer term the damage of this virus is expected to be small. Corona virus is the theme currently. Everyone who reads the news sees that it is all and only about the Corona virus. In the markets, the virus gets hyped and people scare each other off. In quiet times it is all about fundamentals and how the economy is doing. Currently no one does care. Investors have just been selling and selling and because the damage of the Corona virus is difficult to predict, they have just been selling their stocks. People are just following each other and this created the crash of last week.

Heaviest sell-off since 2008

Last weeks selling has been the heaviest we have seen since 2008. In 2008 there was a structural massive problem in the market. With unavoidable huge mortgage losses for banks. The downticks of last week are most likely a correction in the market. In the last years the market has performed very well. Investors are taking profit and are overreacting currently. People do see, like in Dec 2018, that the markets can be risky. Investors might start to focus a bit more on value stocks and get a bit away from the high multiple businesses. Some companies are valued at very high multiples like Tesla, Facebook, Amazon, et cetera. Large amount of downside potential for these stocks. Other stocks that do make steady money and are being priced at reasonable or low multiples have also been punished severely last week.
The baby has been thrown out with the bathwater.

What to expect from the upcoming week?

High volatility on up and downticks. I personally think is likely we will have seen or are seeing a bottom for now in the upcoming days. I do expect that the market does rebound heavily this week. I am not saying we are going to just see a V-shaped recovery. We will probably still see here and there some strong outbreaks of the Corona virus. For the market to keep falling, I think soon we need to see really bad news. Like a massive outbreak in the US with over thousands of cases. My base case scenario is that the Corona virus keeps on spreading but in a somewhat controlled matter. Slowly the hype will slow down with that as well. Large gatherings and more flights might get cancelled but I do not expect full close downs of economies or countries. Something that the markets seem to start pricing in. Some analysts are expecting a quick V shaped recovery. I do not think that will happen quickly. I think we will see a rebound and after that up and down high volatility, followed by a recovery back to the all-time highs in the upcoming months. Some companies will suffer, but with central banks and governments easing, I would expect that investors will start focusing on the strong US economy and a strong expected Chinese economy in the second half of the year. A move back to rationality.

Source: https://www.worldometers.info/coronavirus/

Fort the upcoming days it is interesting to see how the situation does develop in South-Korea, Italy and Iran. Those three countries have been seeing a quick increase in Corona virus cases in the last days. If this accelerates quickly, very strong measures by the government might have to be taken. This can lead to more downticks in the stock market. A stabilization or improvement in new cases, will lead to heavy upticks as long as we do not see new significant outbreaks.

General advice

A general advice: most of you do invest for the long-term. On the long-term, the Corona virus will have little to no impact on returns. Do not panic and sell stocks if you do not have to. Also, no need to check your broker account every minute, hour or day. Do not stress out and keep calm.

Corona virus & Bernie

The Corona virus seems somewhat in control in China. But we currently do see that outside China, many more cases are being reported. There is for example a growing amount of infections in South Korea. South Korea saw a 20-fold increase in Corona virus cases in just 5 days and currently has to deal with 602 cases.

Problems in italy with corona

Next to that, the situation in Italy also becomes quite a nervous one. A couple of days back nearly no one was infected in Italy and currently they do have over 100 reported cases. France is also getting worried with health minister Oliver Veran saying that it is very likely that new cases will be reported in France as Italy does not have the disease under control yet.
The exponential growth in some regions outside China might bring a situation where other countries also do have to take very severe measures like what China did in Huwan. If these outbreaks outside China keep on happening, this will put a lot of pressure on the stock market. Rational fears because  of the slump in world GDP can be expected, but also just fear because of the unknown. In such a case the stock market volatility can creep up quickly.

bernie to take a strong lead

Bernie Sanders has been doing very well lately in the Democratic primaries. Next to that, Sanders is gaining more momentum thanks to the bad performance of Bloomberg in his first Democratic Presendential debate last week. Before this debate, the odds for Sanders and Bloomberg to become the Democratic candidate were more or less equal. Currently Bernie is the one to beat and looks like heading towards nomination. Still, very important events still have to take place. Currently only 71 delegates have been confirmed and Bernie Sanders needs 1991 delegates to win the nomination. Bernie currently leads with 28 versus 22 for Buttegieg. The rest is miles away. Bloomberg has not taken part yet in the Democratic primaries. We are just two weeks away from the very important so called Super Tuesday. It is on the 3rd of March. On that date the greatest amount of states hold primary elections and caucuses. A significant amount of total delegates can be won on that day. A convincing win on Super Tuesday will often lead to nomination in the end.

Bernie burns market cap

Bernie Sanders is bad for the financial markets, but the markets do believe that if Sanders is nominated he will easily be defeated by Trump. This can again be positive for the financial markets. Anyway, if Trump has to deal with Sanders on the general elections, very high volatility can be expected if Sanders would win. A huge sell off in equities will be the result.

What to watch?
  • Super Tuesday on the 3rd of March.
  • Chinese figures in the upcoming weeks. They will give a better view on the impact the Corona virus really has.

Markets near all time highs

The stock markets have been setting new all time highs in the last week. Where earlier on, the markets became slightly nervous and did tick down between 2 and 4%, the markets heavily recovered. There is a general consensus that on every dip the stock market needs to be bought. And no one wants to miss buying the dip. Till it does not work anymore obviously. The interest rates are low and the central banks do time over time indicate they will keep the rally going. They are ready to ‘safe’ the stock markets from falling aggressively.

Corona affecting GDP growth China

Economy of CHina

Meanwhile the Corona virus will have a strong impact on the China GDP growth. China’s first quarter GDP growth can easily be hit by at least 1% point which would bring it around or below 5% on a yearly basis. That is a weak growth for China. In the last weeks, the economy of China has been running on only 1/3 of the capacity. Also, figures from Germany are showing that a recession is a realistic scenario in Germany. Though, US economic figures and company earnings have been strong, indicating that the US economy is not turning down at all.

Markets ignoring the Corona virus

markets on corona

Currently the stock markets does price in that the Corona virus is going to have very little harm. Personally I think that that is not the case. China has the second biggest economy in the world and will have a very weak year. China’s growth is already weakening for a while and I do think that investors do need to worry about the Corona virus. At least more than what they do know. People do all the time compare Corona with SARS. But in 2003 the Chinese economy was only 1/3th of today’s economy. During SARS the stock market did experience a heavy shock initially of 8-10%. I think we will still see a shock of Corona in the financial markets, when investors are going to assess the damage it has done and will do to China and the world economy. For the longer term I do not see many problems, but on the short/medium term I think it makes sense for the stock markets to do care. For some investors it might be a moment to take some profits and move to the sidelines.

These kind of situations will always bring nice opportunities as well. Quite often we see that in a market downturn all stocks, also the very good ones, might suffer significant losses. This brings strong buying opportunities.

Downticks on Corona

Like with Sars in 2003, the Corona virus started to affect the financial market significantly in the last week. The Corona virus has grown rapidly over the last week. On the 24th of January there were 941 reported cases, currently there are over 11k people infected. And according to scientific models, the amount of people carrying the virus might already be above 75k. Due to the incubation period of 14 days and people that are not being reported/investigated yet, the number might be much higher than the official reports which say just over 11k. See below that the Corona virus is so far mainly sticking to the mainland of China. Let’s hope it does not spread further in large numbers.

How the outbreak compares with SARS

During the SARS outbreak, 774 people died. Most of them died in mainland China and Hongkong. Currently the spreading of Corona goes much faster than the speed of spreading of SARS. In the end, ‘only’ 8098 people were infected with SARS. Corona will go far higher than that. The good news is that the mortality rate of SARS might be much higher than we will see with Corona. The death rate with SARS was nearly 10%. So far the Corona virus gets to a death rate of 2.1%. But one should not forget that people who are currently infected might still die because of the virus. The death rate of Corona will because of that creep up further.
Two main questions for the upcoming weeks are to see how quickly the virus keeps spreading and what death rate is represented by the virus. Currently there is a lot of uncertainty around this.

Why are the financial markets falling?

The virus has started impacting countries, companies and with that the economy and the financial markets. Lots of countries and companies have taken action. For example, Lufthansa has cancelled all flights to and from China till at least the 9th of February. Another example is Starbucks, Ikea and Apple closing stores in China. Trade with and within China will be harmed on the short term. This has an effect on companies that do business with or in China and will dampen their revenuues and profits. This is spooking investors and causes the market to fall. The market does not like uncertainty and we currently see a correction happening. Stock markets are always forward looking, so when at some points it seems that the tide is turning, the markets will recover rather quickly. Reasons for that to happen could be that the speed of spreading the virus goes down quickly, some kind of vaccine is ready to be used, the majority of the virus stays in China, et cetera.
With SARS we saw the same. The market panicked and the S&P went down around 8% within weeks/months to recover heavily after uncertainty of the virus decreased and it seemed that SARS was getting under control. The S&P traded just after the SARS virus higher than it was trading before. Most likely something like that will happen again. In case the Corona virus worsens the upcoming weeks, a retreat in stock markets of up to 5%-7.5% seems possible. If the Corona virus is being dealt with, the stock market will probably recover the complete downtick.
The upcoming week volatility will stay high. China’s stock market will open again, and it will be very volatile on it’s first day. Probably opening around 8-10% down. The focus for this week is to see whether authorities have been able to keep the disease mostly in China or not. Do we get large outbreaks outside of China?
To be continued.

Corona Virus & Davos

In the last week, there were two interesting topics. One was planned, the other one obviously not. I am talking about the World Economic Forum in Davos and the outbreak of the Corona virus in China.

World Economic Forum (WEF) in Davos

Since 1971, when the event was created, the event has happened every year in Davos. Davos is a mountain resort in Switzerland. Around 3000 business leaders, international political leaders, economists, journalists, et cetera gather at Davos for five days of discussing global issues. The WEF is funded by over 1000 companies. The theme of this year was: stakeholders for a cohesive and sustainable world. WEF this year focuses on how to deal with climate change; mainly about how to get the carbon emissions down. Trump and Greta Thunberg are the symbols of this discussion. Trump is focused on the economy and job market and does not care too much about climate change. He does not really believe in it and sees dealing with the climate as a side job. Not as a main priority. Greta Thunberg is only 17 years old and became famous in 2018 when she was as a schoolgirl in Sweden striking day after day before the Swedisch Parliament. Her goal was to get more attention to climate change from politics.
Thunberg was at Davos as well. She has been stating over and over again that companies and the world are not doing enough to fight climate change. She is really angry at Trumps ideas. Trump finds the whole discussion funny and said: “she beat me out on Time magazine”. And he told her to focus on other countries than the US.
Anyway, most agree that we need stricter regulations and that we need focus on renewable energy. But there are a lot of different opinions on how far we need to go. We know that oil is needed for many more years and that we cannot go from fossil fuels to renewables overnight. It is a slow process and that needs to be accepted. The WEF in Davos is a useful event as it shapes new discussions and ideas and makes it easy for governments and companies to see where they are currently standing.
Though, there is no immediate effect on stock markets. These kind of forums are very long-term focused and are not expected to bring much extra day-to-day volatility.

Corona virus

The Corona virus has a more immediate influence on the stock markets. It is a disease that was unexpected and comes a bit out of nowhere. As far as we know now, the disease is related to the SARS virus that caught the world in 2003. So far 25 people have died from the Corona virus and over 800 people have been contaminated. The actual number might be much higher. Markets need to price in a certain most likely scenario. Calculating that scenario is very difficult. As such, markets might move on it. What asset does move the most on the Corona virus turmoil?
Oil has been hit the hardest. The reason for that is that China is closing cities. Currently there are already 10 (large) cities closed to the rest of China. To avoid that the disease spreads. Quite some airlines do not fly to the city where the disease was first discovered: Wuhan. The demand for oil is and will be hit by the virus. Less traveling means less oil needed means lower oil price. That is exactly what happened. Crude Oil has dropped this week from around $58 towards $54.50. A decline of 6%. As long as the disease is not contained well, oil price might remain weak. I have read some research reports that the price of Crude oil might drop towards $50 in case the Corona virus becomes a large problem.

To be continued.

De-escalation in the Middle East

After the US killed Soleimani, there was a fear that it could lead to a start of a war between Iran and the US. That fear seemed very overblown when Iran came with their revenge action. The revenge was nothing more than shooting some missiles towards at least two Iraqi bases where US military was based. They did not kill any US soldiers, neither did they damage much. It was a very weak revenge for the killing of Soleimani. It is very clear that Iran does not want a war.

War is in nobody’s interest

Obviously, Trump was happy with this weak revenge. Trump also has no interest in a huge escalation with Iran. He needs to get reelected, and these kind of Middle East wars have not brought much positive in the last twenty years. Trump killed an important terrorist and shows the American people that he is the boss and Iran cannot do much against him.

Commercial airplane shot down

Iran shot down a commercial air plane. It was very shortly after the revenge attack. Iran said they thought they were under attack by the US. They thought the US fired a rocket towards the regime. This was not the case. It was not a rocket, but a commercial airplane.

A disaster. 176 people died, of which many were Iranians living in Canada. A disgrace. Before the US found out that Iran shot down a commercial plane, Iran said it was impossible that one of their missiles hit the plane. Very stupid, everyone knows that this is easily checked with the satellites that the US has.

Did Iran really shoot down the plane unintentionally?

It is not unlikely that Iran shot the plane down on purpose. To get the people’s attention to a different topic. Away from the very weak revenge strikes after Soleimani was killed, towards the tragedy of an airplane that crashed near Teheran. Maybe the Iranian regime wanted to shift this war focus to a mourning focus and in that way easily get away with their military weakness. The regime is worse than worse and willing to do whatever they need to save their face.
It is not that unlikely, but obviously a stupid move. Would anyone believe that the airplane was not shot down after investigations would have been done? Currently, the Iranian regime has to deal with a new wave of protests. Previous protests regarding increasing fuel prices, they could blame on the US sanctions. For current protests there is no one else to blame than the Iranian regime. How are they going to deal with that? Are they again going to shoot down protesters? Maybe they need to shift the attention again to a different topic?

Stock markets relieved

The financial markets have been relieved by the de-escalation of Middle East tensions. Meanwhile the oil price showed a large decline during the second half of last week. Oil had spiked before as the Middle East is a very oil producing heavy region and a chance for a war could put a lot of pressure on the oil production and transportation.
For the moment I expect the financial markets to watch the Middle East situation closely, but to not worry too much. Unless an attack happens where the US suffers. I do not think the markets will be too upset by threatening words between the US and Iran. That is expected to keep on happening now and then. Last couple of days has made clear there is a huge difference between threatening language and an actual act of war.