The spread of the coronavirus continued to dominate news this week, with more cases confirmed daily across the globe. The human cost is immeasurable for those affected. For economies, companies and assets though, the impact is becoming more apparent.
South Korea declared an economic emergency and Singapore unveiled a $4.6 billion (bn) fiscal stimulus programme as they struggle to cope with the effects of the virus. The prognosis for Japan, meanwhile, doesn’t look much brighter. It reported its worst economic contraction in six years during the fourth quarter of 2019, after a hike in sales tax curtailed domestic consumption. And that’s before counting the cost of coronavirus in this current quarter. Japan could be on the brink of a technical recession, especially if the virus is not contained ahead of this summer’s Tokyo Olympics.
According to the World Trade Organization (WTO), ailing global trade looks set to worsen too. Its forward-looking Goods Trade Barometer was already depressed, as a result of tariffs and uncertainty around global trade tensions towards the end of 2019. Now it seems this subdued start to the year could be prolonged and deepened, as the coronavirus hinders the movement of goods internationally.
It wasn’t all bad news though. German business sentiment data (PMI) surprised on the upside. In particular, the manufacturing index jumped up to 47.8 in February versus consensus expectations of a decline to 44.8. It’s wise to remember though, that a reading below 50 indicates an expected deterioration in the business environment. Furthermore, the headline numbers mask the sector’s trajectory, given the disruption to supply chains caused by the coronavirus. Markets also shrugged off better sentiment data in the UK, with the pound barely budging against the US dollar or the euro.
More than an Apple needed to cure corporate ills
At the company level, Mondelez and Apple are the largest global firms to signal the coronavirus’s threat to business by cutting revenue guidance. Oreo-cookie maker Mondelez and iPhone manufacturer Apple have suffered from supply issues and lower Chinese demand since the outbreak. Although both have recently reopened their Chinese manufacturing plants, neither is back to operating at full capacity. Shares in Apple’s suppliers and partners suffered in sympathy.
Elsewhere, the effects of the coronavirus forced the Chinese government to rescue debt-laden conglomerate HNA Group this week, with plans to sell off its airline assets. HNA-affiliated companies welcomed news of the bailout. As the week drew to a close, Qantas and Air-France KLM became the latest airlines to warn of the virus’s impact on profits and passenger numbers. JCB, the digger manufacturer, cut production due to a shortage of components from China. The effects on Jaguar Land Rover’s supply chain, meanwhile, forced the carmaker to fly car parts from China in suitcases in order to supply Europe. Desperate times call for desperate measures.
All this serves as a reminder of the interconnectedness of the world. The old adage, ‘When America sneezes the world catches cold’ seems more applicable now to China’s health. But the world could end up with something much worse than a cold.
To Thursday’s close, the S&P 500 was down 0.21%, the FTSE World Europe ex-UK finished 0.04% lower, while in Asia, the Hang Seng fell 0.74% and the Shanghai Shenzen CSI 300 gained 3.51%. The corona-led risk-off tone in the markets propelled the price of gold to a seven-year high mid-week, and the US Treasury 10-year yield to fall back below 1.5%.
Battle of the budget
The long-term EU budget planning summit began in Brussels on Thursday. These talks for the European bloc are usually contentious, pitting beneficiary countries against the largest payers; the biggest spenders against those wanting to limit splurges.
This time, we have on the one side, the self-proclaimed ‘frugal club’, comprising Netherlands, Austria, Sweden and Denmark, calling for restraint. On the other side are central and southern European countries wanting to protect spending on agriculture, for example.
With a stark north/south divide, there is not much solidarity evident or signs that they are ‘United in Diversity”. This makes negotiations challenging. At the same time, the committee must also align funding to the ambitious European Green Deal to combat climate change. Matters are complicated further by the spectre of Brexit and the £9bn p.a. hole left in the coffers after the UK’s departure. A difficult budget balancing act indeed.
Myriad M&A
Following a sluggish start to the year, there was some global dealmaking of note this week. Shares soared in Wanda Sports, the China-based sports marketing firm, on news that it may sell its Iron Man Triathlon business to a private equity firm for $1bn. Alstom, the French high-speed rail maker, is on track to buy Canada’s Bombardier Transportation for €6.2bn. There is also now a bidding war for Australia’s Caltex, the convenience stores, petrol stations and oil-refinery operator, between the UK’s EG Group and Canada’s Couche-Tard.
Some major deals were also announced in the financial sector. Asset managers Franklin Resources and Legg Mason are joining forces in a defensive move against the rise of passive investing. The deal will cost Franklin $4.5bn in cash. For the same reasons, Jupiter is to acquire smaller asset manager Merian Global Investors for £370 million. Italy’s Intesa Sanpaolo has launched a surprise €4.9bn bid for rival UBI Banca – a rare deal in a sector that has resisted consolidation. Finally, in the biggest deal by a US bank since the financial crisis, Morgan Stanley will buy discount brokerage ETrade for £13bn.
And finally …
Mix tapes. Those of us around in the ‘80s and ’90 will likely have made one – a homemade compilation of much-loved songs recorded on an audio cassette tape. Making a mix tape required time, effort and patience. Then there was the added pressure if it was a romantic gift.
Mostly consigned to charity shops and landfill now, many of us are glad to leave our early music tastes firmly in the past. One German woman, however, was recently reunited with a mix tape she made for a holiday trip in 1992. Having lost it on a beach in Spain, she bizarrely came across it in an art exhibition in Sweden, a quarter of a century later, after it was found by a UK artist. And it still played!
The longevity of the physical tape, however, puts some of the one-hit wonders included on it to shame. ‘Mr Vain’ by Culture Beat, for example, and ‘More and More’ by Captain Hollywood Project? No, me neither. One classic its owner should have included? The enduring '80s anthem, ‘Never Gonna Give You Up’.