Apple Is Gut-Check Test for Traders Who Absorbed Every Blow

(Bloomberg) -- Apple Inc., the embodiment of market buoyancy for the last nine months, is testing how deep the resilience actually runs.

The world’s tech giant warned Monday it may fail to meet this quarter’s sales guidance thanks to slower production and weaker demand due to the disease known as COVID-19. U.S. equities fell after Wall Street opened Tuesday to growing anxiety over the virus’s economic impact.

For the moment, it’s spurring a reassessment of pro-growth bets from value shares and inflation trades to developing economies. In a market that has shown itself resistant to all manner of impediments and closed last week at a record, it remains to be seen if the impact lasts more than a few hours.

“There are now the genuine questions of the extent to which the virus can be contained, which opens up a whole new can of worms,” Stephen Innes, a market strategist at AxiCorp., wrote in a note.

Equity markets worldwide have clawed back about $3.6 trillion of the $4.5 trillion wiped out between the close of trading Jan. 20 -- just before a slide in Hong Kong shares kicked off concerns among traders -- and the Feb. 3 trough.

But the rebound has occasionally looked fragile. HSBC Holdings Plc said this morning it’s cutting about 35,000 positions and taking $7.3 billion in charges, while more carmakers have been forced to halt productions.

The virus is the third-biggest tail risk after the U.S. presidential election and a bursting of the bond “bubble”, according to Bank of America Corp.’s fund-manager survey conducted this month. The poll released Tuesday showed global growth expectations for the next year has tumbled to a net 18% from 36% in January, driven by a drop in sentiment toward Chinese output.

The bond market is flashing an ominous signal again as worsening growth expectations invert a key slice of the yield curve. That’s bad news for those clinging onto reflation bets on the back of a still solid U.S. labor market. Over the past month, a Bloomberg gauge of inflation-linked bonds from developed nations has lagged a measure of comparable nominal notes. It’s a sign of traders are paring back bets on consumer price gains.

Weaker expectations for the business cycle over the near term may spur a reversal in cyclical shares that have rallied anew versus their defensive peers.

Meanwhile, value equities -- which tend to be riskier -- have reached the cheapest versus growth shares in two decades, suggesting ample room for a rebound. But choppy sentiment is stalling their recovery.

“We are near a point when sharp reversals in growth relative to value have happened in the past,” Evercore ISI strategists led by Dennis Debusschere wrote in a note. “For now though, we will wait for evidence of a calming of COVID fears before suggesting investors position for a sharp factor reversal.”

Over in the credit market, global yields remain at historic lows and even riskier debt has seen spreads compress. Some fund managers are starting to sound the alarm as economic risks threaten corporate cash flows.

Virus-related fears have been cushioned by expectations for Chinese stimulus. But even the nearly $1 trillion rebound in China’s stocks is drawing skeptics, especially after the central bank moved to withdraw some money from the financial system on Tuesday, citing “ample liquidity.”

With the country’s economy running at an estimated 40% to 50% of its capacity last week, earnings estimates in emerging markets are falling, while developed nations have posted a smaller drop so far.

“Investor concerns about the effects the coronavirus outbreak might have on future guidance expectations have thus far been dismissed by investors,” Michael Hewson, chief market analyst at CMC Markets UK, wrote in a note. “If Apple says they are likely to miss their forecasts then investors will need to pay attention to other companies with large exposure to the Chinese economy as well.”

--With assistance from Rita Nazareth.

To contact the reporters on this story: Justina Lee in London at jlee1489@bloomberg.net;Cormac Mullen in Tokyo at cmullen9@bloomberg.net

To contact the editors responsible for this story: Sam Potter at spotter33@bloomberg.net, Sid Verma, Chris Nagi

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