Apple warns, HSBC wields axe, European equities lower

Apple rattled markets after warning it will miss revenue guidance this quarter due to the coronavirus outbreak. This is just enough reason for the market to come off a touch today in Europe and the US. US traders return from their 3-day weekend so it’s back to normal but with an Apple-sized warning to welcome them back. European shares were mildly higher yesterday but are tracking Asia lower this morning.

Asian shares were lower as Apple upset the wagon a bit with its warning on revenues. Hong Kong was down 1.4% along with Tokyo by a similar margin. European equities opened sharply lower.

South Korea warned of economic emergency due to the outbreak – only a day after the market got worried about Japan following its dire Q4 GDP print. Singapore has announced a stimulus package. Slowly it is dawning that this outbreak will have a material economic impact beyond Hubei province – but equity markets will still be lapping up stimulus and buy-the-dip will remain strong as long as cases continue to slow. 

Apple says it won’t hit its Q2 revenue guidance of $63-67bn due to the Covid-19 outbreak in China. In warning in this way Apple has neatly summed up the knock to global growth stemming from both reduced output and consumption.  

Firstly, how anyone is surprised by this is beyond me. Clearly there is going to be a hit to both output and consumption in the world’s second largest economy and the world’s growth driver. This is bound to hit earnings of companies exposed – Apple being the bellwether.  

Most of Apple’s products are made in China, while the country accounts for about 16% of global revenues. 

The $4bn spread in the original guidance was already as wide as a barn door, reflecting uncertainty at the time of the Q1 results at the back end of January. 

The warning points to the two key ways the outbreak will impact growth. First output: Apple says iPhone supply will be constrained due to a slower ramp in production following the late return following the new year holiday. Two, consumption: demand for all products in China has been sharply hit. 

Apple warned about China a little over a year ago and after the stock initially sold off, investors soon shrugged it off. I’d anticipate a similar reaction to this. 

HSBC is swinging the axe - 35,000 jobs to be cut over 3 years, risk weighted assets scaled back by $100bn and $4.5bn in costs saved by 2022. Interim chief Noel Quinn is making his mark - he wants the job full time so it’s a case of go big or big home. Shares fell over 2% in Hong Kong and will weigh on the UK market. Buybacks will be suspended but the dividend is maintained while maintaining a CET1 ratio of 14-15%. 

This restructuring is very painful and will result in a lot more pain: about $7.2bn in costs is to fall this year and next from restructuring and disposals. But this is as far-reaching an overhaul as you could have imagined and one that’s essentially seeing it walk away from investment banking in the US and Europe. This is a pivot to Asia on a grand scale. Whilst scaling back RWAs by 45% in the US and by 35% in Europe (ex-UK), HSBC plans to accelerate investments in Asia and the Middle East and shift more resources to those regions. 

Q4 was a bloodbath in terms of profits as HSBC swung to pre-tax loss of $3.9bn, thanks to a total hit of $7.3bn from writing down assets in its investment and commercial banking arms in Europe. To be fair it’s the ideal time to bury these assets. For 2019, reported profits attributable to shareholders were down 53% to $6bn. Revenues rose nearly 6% on an adjusted basis to $55.4bn thanks to growth in the retail banking and wealth management arms. 

There was a notably strong performance in Hong Kong despite all the troubles – adjusted profits rose 5% to $12.1bn. Asian revenues rose 7% to $30.5bn, with adjusted profits up 6% to $18.6bn - accounting for the vast bulk of the group’s $22.2bn in adjust profits. 

Unlike some peers HSBC has a clear path to hitting its return on tangible equity target of 10-12%. Barclays admitted it won’t hit its target this year, RBS lowered its sights. But as with every European bank it seems we are just in this cycle of constant restructuring rinse and repeat every few years. Ultimately there will need to be more consolidation. 

In FX, sterling showed some of its soft underbelly ahead of employment data due later, the first in a busy week for UK data with labour market and wage data today, CPI inflation tomorrow, retail sales on Thursday and flash PMIs on Friday. GBP/USD has flirted again with the 1.29 handle but the pull of the 1.30 round number remains the dominant force. 

Meanwhile the euro has tested fresh lows overnight as the bears remain in the hot seat. EUR/USD touched 1.08230 in the Asian session. German ZEW economic sentiment due at 10am GMT could be another excuse for the pair to move closer to the 1.07 handle. Anything sub-1.0880 has the bears in control – bulls need to clear the swing high at 1.0860 first. Carry is killing any attempt to break out. 

Oil was weaker under $52 as risk assets were offered on the Apple warning, retreating under the key $52.20 level first after reaching a high above $52.50 yesterday. Support hangs around $51.40.