There once was a time in the past
When market bears quickly amassed
Positions quite short
While they would exhort
Investors, their holdings, to cast
But these days the story has turned
So bears that go short now get burned
A global pandemic?
It’s just academic
Investors remain unconcerned
One has to be impressed with the current frame of mind of global investors as they clearly feel bulletproof. Or perhaps, one has to be impressed with the job that central bankers around the world have done to allow those feelings to exist.
The coronavirus is quickly becoming back page news, where there will be a tally of cases and deaths daily, morphing into weekly, as the investment community turns its attention to much more important things, like how many new streaming customers each of the streaming services picked up in Q4. It seems the fact that China’s economy is going to feel some extreme pain in Q1 is being completely dismissed. At least from the market’s perspective. And this is where the central banks get to take a bow. It turns out that overwhelming liquidity support is all one needs to make people forget about everything else. It is truly the opioid of the market masses.
So as you sit down this morning you will see that equity markets around the world are on a tear higher, with every market that has been open today in the green, most by well more than 1%. And don’t worry; US futures are all more than 1% higher as well. Everything is clearly fantastic!
Last night, the PBOC fixed the renminbi more than 0.5% stronger than the market would have indicated, thus demonstrating they would not let things get out of hand. Then after a weak opening, where equity indices there fell more than 2%, the government stepped in along with official buyers and turned the tide higher. Once this occurred, equity markets elsewhere in Asia took their cues and everything rallied. Risk was no longer anathema and we have seen that across all assets as havens come under pressure and other risk assets, notably oil has rebounded. The lifecycle of a negative event has grown increasingly shorter as central banks continue to demonstrate their willingness to do ‘whatever it takes’ to prevent a sell-off of any magnitude in any equity market.
This is not just a US phenomenon, but a global one. To me the question is: Is this peak financialization of the global economy? By that I mean are we now in a period where the real economy, the one where cars and other stuff are manufactured and food is grown, has become completely secondary to the idea that companies that do those things need to be entirely focused on their capital structure to be sure that they are appropriately overleveraged? While I recognize that I am old-fashioned in my thoughts, I cannot help but believe that we are going to see a pretty significant repricing of assets at some point in the not too distant future. In truth, despite the market’s insouciance with regard to the ongoing coronavirus outbreak, it is entirely possible that it continues to expand for several more months and that China, the second largest economy in the world and one representing 16% of total global economic activity, does not grow at all in Q1 while supply chains are closed and manufacturing around the world grinds to a much slower pace. Many recessions have been born of less than that. Just remember, trees don’t grow all the way to the sky, and neither do economies!
So let’s turn back to the other things ongoing in this morning’s session. Broadly speaking, the dollar is under modest pressure along with Treasury bonds and the Japanese yen. After all, safe havens do not boost your returns when Tesla is rallying 20% a day! There has been limited data today (Italian CPI +0.5% Y/Y) so FX markets are watching equities. Yesterday saw a big surprise in the US ISM data, which printed above 50 for the first time since July and has a number of analysts reconsidering their forecasts for slowing growth. The dollar definitely responded to this yesterday, rallying across the board as Fed funds futures backed off taking the probability of a rate cut by the Fed in July down to 85%. Remember, Friday that was at 100%.
Yesterday also saw the pound suffer significantly as the initial saber rattling by both the UK and the EU continued, which helped push the pound back to its key support level of 1.2950-1.3000. But as I said yesterday, this is simply both sides trying to get an advantage in the negotiation. While anything is possible, I continue to believe that a deal will be reached, or at the very least that a delay agreed on a timely basis. Boris is not going to jeopardize his power on this principle, remember he’s a politician first, and principles for them are fluid.
In the EMG bloc, pretty much every currency has rallied today as investors have quickly returned to those currencies with either higher yields (ZAR +0.6%, MXN +0.5%) or the best prospects assuming the coronavirus situation quickly dissipates (KRW +0.6%, CLP +0.6%, THB +0.5%). And in truth, I don’t think it’s any more complicated than that.
In the US this morning we see December Factory Orders (exp 1.2%), generally not a major data point. There are no Fed speakers scheduled today which means that FX is going to be a secondary story. All eyes will be on equity markets and I expect that as risk assets are acquired, the dollar (and yen and Swiss franc) will continue to soften slowly.