Monday Musings: February 18, 2020

Feb 18, 2020

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Public Trust Credit Team
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The coronavirus has begun to affect companies with Apple and HSBC making negative pre-announcements to temper Q1 2020 expectations

On Monday, Apple announced that it was going to miss its revenue guidance because of the effects of the coronavirus. For Apple, the issues with the virus are on both the supply and demand side with weakening demand because of quarantines and store closures set to affect iPhone sales, and large suppliers like Foxconn facing challenges finding workers due to travel and quarantine restrictions in the Mainland, effectively bottlenecking iPhone production. Apple generates roughly one fifth of its revenue from China, but the announcement shows that very real negative effects are beginning to emerge for U.S. companies from the virus’ surge in China. On the banking side, HSBC generates ­­­35% of its reported revenues from Hong Kong and 5.5% from Mainland China. The bank stated that the recent coronavirus outbreak has been causing disruptions to the bank’s staff, suppliers, and customers, particularly in mainland China and Hong Kong. The Hong Kong economy entered a technical recession in the second half of 2019 as it faced social unrest, and most economists expect it to record negative GDP growth all the way to mid-2020. The bank has already warned that it will need to take additional expected credit losses in its Q1 2020 results and that it expects a weaker first half of the year due to the coronavirus outbreak. The bank did caution that the impact on its financial results could vary materially depending on the time it takes to contain the virus. HSBC announced a very large restructuring plan earlier today as it seeks to simplify the group and increase returns.

Big Pharma at work to develop a coronavirus vaccine

A subsidiary of Johnson & Johnson, Janssen Pharmaceutical, is expanding its partnership with the Biomedical Advanced Research and Development Authority (BARDA), a part of the office of the U.S. Department of Health & Human Services (HHS) to assist with a treatment solution for COVID-19. Together, BARDA and Janssen will work to screen a catalog of existing antiviral molecules for activity against SARS-CoV-2 because COVID-19 is developed from SARS-CoV-2, a group of viruses called coronaviruses. At the same time, Gilead Sciences is working fervently to see if an existing agent that was initially developed for Ebola, Remdesivir, may work against the virus. The company is currently ramping up production of the compound in hopes that it could be effective against the new virus.

The Japanese economy suffered a major blow in Q4 2019, magnifying the probability of a technical recession next quarter

Japan reported shockingly poor economic results on Monday with a Q4 annualized GDP coming in at -6.3% QoQ, well below survey of -3.8%. This marks the fastest annual pace of contraction in six years as the October 2019 consumption tax hike had a much greater impact on consumer and business spending than previously anticipated. Both private consumption and business fixed investment were the leading contributors to the significant decline in output, falling by an annualized pace of 11% and 14% respectively. The dismal growth numbers come at a time when the Japanese economy is suffering an unfamiliar shock related to coronavirus fears, which has led to a dive in inbound tourism and weak export momentum given the low level of activity and demand in China. This has given rise to heightened worries amongst economists of a technical recession in Q1 2020 as the virus threatens to further weigh on an already weak domestic demand. Prime Minister Shinzo Abe’s government has already announced a new fiscal package set to take effect later this year and while this may offer some support to demand, the government will likely need introduce even more fiscal stimulus to prevent the economy from falling into a deeper downturn. The Bank of Japan maintains the stance that it will launch further easing “without hesitation” if necessary, but this will prove difficult given that interest rates are already in negative territory and another rate cut would have devastating impacts on the country’s vulnerable financial services sector.

U.S. consumers appear poised to keep spending this year with the University of Michigan Consumer Sentiment survey printing near post-crisis high

On a more positive note, the consumer sentiment survey for February came in at 100.9, just off its post-crisis high and beating economist estimates. Amid all of the uncertainty and a decline in manufacturing, consumers continue to make this late stage economic expansion possible in the U.S. There are still many exogenous factors that could pressure the economy, but the latest data available shows that consumers are starting the year strong.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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