China's stocks are about to start trading again. They could nosedive
Posted February 2, 2020 7:59 a.m. EST
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With a significant chunk of China still on lockdown, the country's stocks are set to begin trading again. They could face a big sell-off as the number of coronavirus cases continues to tick up globally.
Stock exchanges in Shanghai and Shenzhen have been closed since January 23 for the Lunar New Year. They're expected to reopen on Monday.
"Given that the market is coming back and needs to catch up, I'd be surprised if the market is not down significantly right at the open," Bhanu Baweja, global head of emerging markets strategy for UBS' investment bank, told me.
Last week, South Korea's Kospi — which was open for four trading days — lost 5.7%. Hong Kong's Hang Seng, which was open for three, shed 5.9%. On Friday, the Dow plunged more than 600 points, or 2.1%, in its the biggest drop since August.
The latest: The coronavirus outbreak has killed at least 305 people and infected more than 14,300 as it continues to spread in China and beyond. As the situation escalates, so do concerns about the impact on the global economy.
China is scrambling to contain the fallout from the virus, and has indicated that it will step in with economic support once the crisis is contained. For now, though, Beijing will focus on preventing any panic, Baweja said.
"Once you've stabilized the crisis itself, that's when you think about recovery," he said. "Think about it: If you write a fiscal check for Wuhan right now, who's going to spend that money?"
Shares of Chinese companies should fall in the meantime. First quarter earnings are all but certain to take a hit, and many businesses remain closed. Tencent, for example, has told its roughly 54,000 employees that it will extend its holidays until February 9.
Watch this space: Oil and other commodities have been battered by the coronavirus, with Brent crude, the global benchmark, logging its worst month since November 2018. When those assets start to recover, take it as a sign that investors are starting to move on.
The Democratic primary comes into focus
With the first big event of the Democratic primary on Monday, investors are starting to titter about US politics again.
The latest: Senator Bernie Sanders and former Vice President Joe Biden are delivering their final pitches to caucus-goers in Iowa. The two men are considered the frontrunners, but Pete Buttigieg or Elizabeth Warren could deliver a surprise.
Wall Street would much prefer Biden to Sanders, who has vowed to take on big banks, raise taxes on corporations and the rich, curb stock buybacks and outlaw fracking. Ed Mills, Washington policy analyst at Raymond James, warns that traders may be underestimating the odds that Sanders could prevail.
"They're not convinced he could win the nomination," Mills told me. "They're not convinced he could beat Trump. And they're not convinced, were he to beat Trump, [that] he could enact his agenda."
Should Sanders emerge the winner of the Iowa caucuses, that — coupled with coronavirus fears — could send stocks lower this week, Mills said. The health care, energy and financial services sectors are the most exposed.
But he doesn't expect anxiety on Wall Street to really set in unless Sanders sweeps the early states of Iowa, New Hampshire and Nevada. "If he's three for three, each incremental election would hold more weight," Mills said.
Strategists will be watching closely. Goldman Sachs told clients in a recent note that the contests in the coming weeks "are likely to be important events and a source of volatility" for markets.
"The 2020 Democratic primary contest looks very competitive, and market participants have been attuned not only to the outcome of the 2020 Democratic primaries but also to the timing of when the selection of the likely nominee will become clearer," the investment bank said.
Monday: Iowa caucuses; ISM Manufacturing Index; US construction spending; Alphabet earnings; China's stock markets reopen
Tuesday: US factory orders; Allergan, BP, Clorox, ConocoPhillips, Ford, Match Group, Snap and Disney earnings
Wednesday: ISM Non-Manufacturing Index; US trade balance; ADP private employment; GM, Carlyle Group, Coty, Merck, Spotify, GoPro, Peloton, Qualcomm and Yum China earnings
Thursday: Reserve Bank of India interest rate decision; ArcelorMittal, Dunkin, Estee Lauder, Fiat Chrysler, Kellogg, New York Times, Philip Morris, Twitter, Tyson Foods, Vista Outdoor, Yum! Brands, Activision Blizzard, Baidu, Lions Gate Entertainment, Pinterest, Uber and Wynn Resorts earnings
Friday: US jobs report