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IG Markets: Notes on Australian markets today

Stock markets across Asia have taken a spill today, after Apple Inc. stated in a press release this morning that it expects its profits this quarter to be impacted by the effects of the coronavirus.

Kyle Rodda, Market Analyst, Australia

The day's key takeaways:

- Apple Inc. flags potential profit hit from the effects of the coronavirus

- Was the Apple news priced-in? Market sentiment remains hopeful

- Monitoring some potential red flags from the US Treasury market

- RBA minutes reveals central bank more dovish than previously thought

- ASX down with stocks in Asia; technicals point to a potential pullback

The run down:

Stocks are down in Asia, with US futures, after traders received some sobering information about the fundamental impacts of the coronavirus this morning. Apple released a press statement pre-Asia-open, stating that it expects its profitability to be hit this quarter, due to the disruptions to supply chains, as well the weaker consumer demand in China, brought about by the coronavirus. The story was practically inevitable: the world’s biggest company has supply chains sprawling throughout China, and the Chinese are the company’s single biggest growth market. So Blind Freddy could have seen that eventually, the effects of the coronavirus would eventually turn up in the bottom line of Apple Inc. Intraday price action suggests the perfunctory knee-jerk response from market participants: dump a little risk, bid up safe-havens. But given this situation was surely well anticipated by the market, the question in the bigger picture is, rightly or wrongly: will this fundamental hit to the world’s largest company really derail the stock market’s meteoric rise?

One is inclined to think, for better or for worse, that this is just another speedbump for the market, rather than a stop-sign, or outright dead-end. The markets are still clearly of the view that ultimately the coronavirus will prove a temporary delay to an anticipated rebound in the global business cycle. And as the number of cases of the virus falls, so too does hope grows that its impacts will be fleeting. Acknowledging stocks really aren’t the best representation of market fundamentals, thanks to the Fed’s monkey-business, better gauges of market sentiment are portraying improved sentiment regarding the longer-term global growth outlook. For one, measures of implied volatility have stayed far-away from recent highs, and any level that would suggest the market is dominated by any semblance of fear. And regarding price action: a bid remains underneath growth-proxy assets, with October’s pre-reflation-trade lows proving well defended by buyers, and suggesting that on balance, the market is still betting on better growth.

This view could be challenged in coming days, it must be said. And if it does, it will inform market participants as to whether the generally resilient outlook being implied in market pricing at the moment holds up to lasting scrutiny. The US Treasury market might be the key barometer here, with other growth-sensitive markets quite possibly to follow the lead set by bond traders. US Treasuries have caught a bid today off-the-back of the Apple news, with yields falling right across the curve. The yield on the benchmark 10 Year note is down just shy of 4 points today, and sits only 4 points away from the lows registered at the end of January. Problematic, too, is the fact the 3M/10Y spread has fallen into inversion territory again. It could all be a passing phenomenon, of course. But if those September/October (pre-reflation-trade) lows give way in US Treasuries, that might prove the indicator that points to a real deterioration in the market’s growth outlook.

In local macro, the RBA released the minutes from its last meeting this morning. The market has seemingly judged the document to convey a slightly greater dovishness from the RBA, at least compared to what was expressed by the central bank at its actual meeting. While holding the line that it expects economic activity to pick up in Australia in the year ahead, the minutes went into reasonable detail outlining some of the concerns and risks facing Australian consumers, and their potential consequences to the broader outlook for the economy. “The forecast recovery in consumption growth remained a key uncertainty for the outlook,” stated the RBA, especially in light of the unknown impacts of the bushfires and the coronavirus outbreak. The unequivocally cautious tone adopted by the RBA flew somewhat in the face of the highly optimistic one observed by the RBA earlier in the month, with the AUD/USD dropping through 0.6700 following the release of the minutes, as the market priced in a marginally greater chance of another RBA-cut.

The ASX200 is down with stocks across Asia, and US futures markets. Sentiment has been punctured, with there being little appetite for taking on risk amongst traders today. IT stocks have led the market lower today, in percentage terms, in part due to the Apple update this morning, but also because of a massive 14 per cent fall in Altium shares, after that company too flagged a potential hit to its profitability from the Coronavirus. Growth sensitive stocks are generally lower - though the materials sector is in the green today, after BHP announced a record half-year dividend, and as iron ore prices rose overnight in response to yesterday’s PBOC rate reductions. Overall, the ASX200 is showing signs of being tuckered out right now: upside momentum has slowed, and the index looks to have made a little double-top on the daily chart. The 7100 level presents as a potential key support level now, and may well determine whether a broader pullback is in play.

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