Stock Markets Remain Vulnerable To Short-Term Correction

Stocks markets remain vulnerable to short term correctionMarkets are susceptible to some profit-taking

Equities were surprisingly resilient last week in light of ongoing concerns related to the consequences of the coronavirus. Global equities extended the rally, driven by Beijing’s tariffs cuts, which was considered as a further step towards de-escalation of the trade war. Strong corporate results, both in the US and Europe, were also supportive for equities. With regard to the virus outbreak in China, the fact that the exponential growth rate of new cases has slowed down raises hopes that it can be brought under control. Moreover, the People’s Bank of China injected liquidity via repo operations, which was also supportive for the stock market.

We continue to argue that markets are susceptible to some profit-taking, mainly for two reasons. First, we expect adverse impact on corporate profits from the unprecedented quarantine measures taken by China, which might also be adopted by other countries in the future. Second, markets have risen to all-time highs and look vulnerable to a short-term correction. The positive news is that any stock-market weakness should be short-lived, as the negative impact of the quarantine measures should start to quickly fade in Q2 at the latest. Against this backdrop, we would consider any weakness as a buying opportunity and maintain both our cyclical tilt and constructive view on equities.