Market themes for the week ahead

China On Sick Leave

A leap in coronavirus cases in Hubei gave markets pause - for all of 24 hours. Then attention shifted back to the global case-count and the rally resumed. But while investors are focused on containment, the world's second-biggest economy is idling.

President Xi Jinping may have urged officials to refrain from "more restrictive measures," to limit the economic fallout but that's happening anyway.

Steel mills lack supplies for want of drivers. Empty restaurants are throwing out food, while out at sea, freighters are scrambling to re-route perishables, including several hundred containers of chilled chicken feet. Automaker GAC allows only half its employees to work each day at its Guangzhou headquarters, and it's a similar story at many other firms.

Hope rests on the central bank, which has shaved 10 basis points off the interest rate on reverse repurchase agreements.

A trillion yuan in reverse repos mature on Monday - a chance for the PBOC to keep money markets awash with cash. That money could become even cheaper should the benchmark lending rate be cut again on February 20. So virus or no virus, Chinese shares which have almost recouped last Monday's falls, could continue to cruise higher.

Graphic - China TSF, GDP and markets

Ask Doctor Copper

If there are expectations of a V-shaped recovery from the coronavirus-led downturn, someone forgot to tell commodity markets.

The market cap of iron ore giants BHP and Rio Tinto is down around $10 billion since January 22. A similar message from copper, whose record as a boom-bust indicator has earned it the "Dr Copper" moniker. Comparing its price against gold can point where growth is headed; very simply, if you think the economy's tanking, you dump copper and buy gold. So, gold has risen against copper before every previous growth scare. That gold/copper ratio is currently near four-year highs. And across China, consumer of half the global copper supply, the metal is piling up in warehouses.

Brent crude, another growth barometer, also languishes 15% below January peaks, despite a supply cut by oil producers and suggestions of more reductions ahead. Producers' group OPEC reckons 2020 crude demand will be 200,000 barrels per day below previous forecasts, and industry body IEA expects oil demand in the first quarter to fall for the first time in 10 years.

So who is right: gloomy Dr Copper or world stocks which are back near record highs? Coming days may tell.

Graphic - Gold/copper USD per troy ounce ratio

Stocks Melting Up?

Whoever might be panicking about the coronavirus impact, equity investors seem to have shed all nervousness. A fortnight ago they were scurrying for safety but now they are pushing world stocks back to record highs. Even euro zone shares are at 12-year highs, notwithstanding the bloc's anaemic economy.

The swift turnaround is all too familiar to those following the decade-long equity bullrun - after all, even the threat in January of a Iran-US war only briefly dented markets. And with vast central bank stimulus seen helping the world economy to quickly recoup virus-led damage, asset prices probably do have a floor under them.

What's worrying is the speed at which investors are tossing aside negative news. Is it the fear of missing out that's causing investors to stampede into stock markets, regardless of fundamentals: a classic melt-up? Many reckon markets have gotten dangerously ahead of themselves. Market volatility measures are dropping again - should the melt-up hit a hurdle, a meltdown could be brutal.

Graphic - World Stocks

Euro Trashed

Euro zone shares are surfing the waves but the forecast for the euro? A perfect storm.

After the currency suffered its worst start to a year in five years, consumer confidence and PMI figures on Thursday and Friday should determine which way it blows.

China is Germany's biggest export market so a sickly economy there matters, considering Deutschland AG is already flirting with recession. At the upcoming G20 meeting in Saudi Arabia, European finance ministers will warn their counterparts of "a larger than expected slowdown", Reuters reported. Markets will focus in particular on what ECB chief Christine Lagarde says, considering policy easing expectations are back in play.

German politics too are being clouded by confusion over Chancellor Angela Merkel's succession after next year's election. The euro started 2020 at $1.124 but has slumped to near 3-year lows around $1.08. Bad economic data could push it below that cliff.

Graphic - Euro trashed!

The Warren Way

Berkshire Hathaway, the conglomerate run since 1965 by billionaire Warren Buffet, is expected to report record profits when it releases its fourth-quarter earnings results on February 22. Yet it's where the money is coming from that will be of the most interest to investors, even if they don't own Berkshire shares. That's because the company owns more than 90 businesses; ranging from Acme Brick Company to underwear maker Fruit of the Loom to private aircraft rental company NetJets, they are a broad representation of the US economy.

An earnings beat driven by its manufacturing or insurance divisions would be a sign the US economy is still expanding at a healthy pace, investors say.

The other big question is what the company plans to do with the roughly $128 billion it has sitting on its balance sheet as cash. That outsized cash position is one reason why Berkshire Hathaway stock is up 10.4% over the last 12 months, less than half the 22.7% gain the broad S&P 500 index has racked up. The company has a preference for big acquisitions at a price discount, but at current market valuations that's a tall order.

That could slow its ascent towards Wall Street's trillion-dollar club. At $555 billion, its value is some $50 billion behind Facebook. Visa and Mastercard are snapping at its heels.

Graphic - Berkshire Hathaway vs S&P 500