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WEEKLY MARKET ROUND-UP – 07/02/20

Red alert: China’s stock market plummets on first day back

On Monday (3 February) the Chinese stock market saw its biggest fall in four years as it reopened after the Lunar New Year Holiday.

The Shanghai Composite Index fell around 8%, despite the People’s Bank of China’s (PBoC) attempt to mitigate the impact of the coronavirus outbreak on its economy, with plans to inject around $173bn (£132bn) of liquidity into the markets.

The Chinese stock market had been closed since 23 January, a period in which the number of people affected with the virus exceeded the total infected with Severe Acute Respiratory Syndrome (SARS) globally in 2003. Unlike in 2003, China has acted quickly, shutting down a number of cities, including Wuhan where the outbreak originated, to try and limit the spread of the virus.

Lessons learned

The world’s second largest economy is expected to experience a slowdown in consumption and production from the travel restrictions and the closure of factories, offices, restaurants and cinemas. 

Not surprisingly, the Chinese stock market stumbled as it caught up on recent events.

Paul Craig, portfolio manager, says: “The lesson from past epidemics is that demand quickly picks up once an all-clear is sounded. Chinese leaders are betting that draconian quarantines and travel restrictions will stem the viral tide fairly quickly so they can stick with their present ‘selective easing’ stance and avoid a big stimulus.

“The next couple of weeks will determine whether this policy mix is adequate or if Beijing will need to unleash more liquidity support for a faltering economy,” he says.

Tesla: Heading for a crash?

Shares in Tesla jumped around 40% on Monday and Tuesday of this week alone to be more than 100% up so far this year. With a market cap of around $164bn, Tesla is now worth substantially more than Ford, General Motors and Fiat Chrysler, which are hardly worth $100bn combined.

This week, all it took was for one enthusiastic analyst to suggest that its valuation could soar past £1trn in the next five years and the shares took off all over again.

In reality, the company sold just 367,200 vehicles last year and made an annual loss of $862m, while the world’s number one carmaker, Toyota, sold some 10.7m vehicles. One commentator suggested Tesla shares are now as overbought as Bitcoin once was.

Meanwhile, Tesla remains the most shorted stock in the US; some 18% of its shares are held by short-sellers according to analysts.

Siemens rides out slump

Investors were sanguine over the news on Tuesday (4 February) that Siemens, the giant German engineering conglomerate, had suffered a 3% fall in profits amid a continuing slump in the automotive, machine-building and energy sectors.

Net profits for the last quarter of 2019 came in at €1.1bn with orders of €24.8bn, down 2% on the previous year. Siemens’ shares edged only slightly lower on the news while shares in Siemens Gamesa and Siemens Health added 2.3% and 1.6%, respectively.

Investors seem optimistic about Siemens’ plans to merge its struggling energy division with its stake in Siemens Gamesa to create Siemens Energy, which will list on the German stock exchange in September.

Meanwhile, Siemens’ annual shareholder meeting was upstaged by environmental protesters.

BP raises dividend before Looney takes charge

Shares in BP jumped some 4.5% on Tuesday (4 February) making their best one-day gain in over a year when profits beat forecasts for a twelfth quarter in a row, the company raised its dividend by 2.4% and reported the completion of a $1.5bn share buyback programme.

The news coincided with the last day in the job for departing CEO Bob Dudley who now passes the reins to Bernard Looney. BP still reported a 26% drop in fourth-quarter profits thanks to some $2.7bn in charges. However, cashflow rose more than 10% in 2019 (to $25.8bn), despite lower commodity prices thanks to improved production.

The news contrasted with that coming out of other oil majors in recent days. Rivals such as ExxonMobil, Royal Dutch Shell and Chevron all reported sharp drops in 2019 annual revenues due to softening demand.

City watchdog worried about the pound

The Financial Conduct Authority (FCA) is investigating a sharp jump in the pound on Thursday (30 January) seconds before the Bank of England (BoE) announced it was holding interest rates at 0.75%.

Sterling rose against both the dollar and the euro, with the matter referred to the regulator by the central bank on concerns the decision might have been leaked. It follows a similar referral in December, when an audio feed of the interest-rate decision that was a few seconds ahead of the video conference was leaked to hedge fund traders.

In January, both the US and UK central banks held interest rates, although US Federal Reserve (Fed) Chairman Jerome Powell acknowledged “uncertainties about the outlook remain, including those posed by the new coronavirus”.

Prime mover

Online giant Amazon reported a 21% increase in net sales in the final quarter of 2019, pushing its shares more than 12% higher and the company back through the elusive $1trn capitalisation barrier.

The better-than-expected fourth quarter results included a 50% rise in Prime membership and confirmation that the cost of expanding its one-day delivery strategy was slightly under its fourth quarter forecast of $1.5bn, despite an increase in orders. This helped ease concerns that the cost of the expansion could wipe-out gains elsewhere. Although it noted an increase in hiring costs, and a rise in infrastructure and marketing costs for its web services business.

Amazon first broke through the $1trn mark in September 2018, but it struggled last year and missed analysts’ earnings expectations in the third quarter as its heavy investment appeared to be eating into its profitability.

Chart of the week

Bottoming out? Latest CBI data confirms that UK business sentiment has bounced back since the general election, helping the Bank of England to keep interest rates on hold in January.