Burdened With Shame

There once was a president, Xi
Who ruled with a fist of F E
But there’s now a nit
That cares not a whit
‘Bout politics while running free

So mandarins now take the blame
For playing along with Xi’s game
Their jobs they have lost
And soon they’ll be tossed
In jail, as they’re burdened with shame

Apparently, at least some of the rumors of undercounting coronavirus infections seem to have been true as last night the latest data showed an extraordinary jump in total cases to nearly 60,000 with a regrettable mortality rate of 2.3%, meaning more than 1350 people have passed away from its effects. Last week, much was made about how this was not very different than the simple flu, but that is just not the case. The mortality rate of the flu is 0.1%, an order of magnitude lower. At any rate, officials in Hubei Province revised the way they were calculating cases (i.e. they started admitting to higher numbers) and suddenly there were nearly 15,000 more cases just like that. In typical dictatorial fashion, the previous Hubei leadership, whose job was to prevent the truth from escaping, has been summarily sacked, and President Xi has a new man on the job, with a clean(er) slate. Talk about a thankless job!

At this point, what has become clear is that the dynamics of the spread of the virus remain uncertain and despite significant efforts by the Chinese, it appears premature to declare the situation under control. Recent market activity, where risk assets were aggressively acquired leading to record high stock prices, may now need to be rethought. Consider that the narrative that had been developing, especially after it appeared the growth of the virus was slowing, was that any impact would be temporary and confined to Q1. If that were the case, then it certainly was reasonable to think that ongoing central bank largesse would continue to push risk assets ever higher. But today it seems as though the definition of temporary may need to be adjusted somewhat, and investors are treading more cautiously. This is a terrible human tragedy and the most concerning aspect is that due to the politics in China, efforts to address it using the broadest array of expertise from the WHO and CDC is not being utilized. The likely outcome of these decisions is that many more will die from the coronavirus’s effects, and economic growth worldwide will be pretty significantly impacted.

And that is the background for this morning’s market across all assets. Risk is very definitely off today as can be seen in equity markets in Europe (DAX -1.1%, CAC -1.2%, FTSE100 -1.6%) and US equity futures, all of which are down between 0.7% and 0.9%. Treasury bonds have been in demand, rising half a point with yields falling 4bps to 1.59% while gold is higher by 0.5%. In the FX markets, the yen is today’s top performer, rallying 0.35% while the dollar outperforms virtually every other currency. And finally, oil prices have been slumping again as the IEA has just issued a report estimating that oil demand would actually shrink in 2020, the first time that has happened since the financial crisis and global recession of 2008-09. The latter certainly makes sense given that China has been the largest user of petroleum and its products. Consider that not only has travel to and from China fallen dramatically, over 100 million people are on lockdown in the country, and industrial output has slowed dramatically given there are no factory workers available to get to the factories.

The initial estimates of Chinese Q1 GDP were reduced to 4.5%-5.0%, but lately I have seen estimates falling to 0.0% for Q1 which would have a pretty severe impact on the global economy. And one of the problems is that data from China doesn’t come out quite as regularly as it does here in the US or in Europe, so there are long periods with no new information. Consider also that the Chinese simply didn’t release the January trade figures (they must be AWFUL) and it would not be surprising if they delay the release of much important data going forward. My point here is that we will have an increasingly difficult time understanding the actual situation on the ground in China, although it will become more apparent as those companies and countries that do the most business there report their data. The greater the deterioration of that data, the greater the problem on the mainland.

Turning to individual currency movers this morning, RUB and NOK, the two currencies most closely linked to the price of oil, are the biggest laggards in the EMG and G10 spaces respectively. Aside from the yen’s gains, the pound just jumped 0.3% after reports that Chancellor of the Exchequer, Sajid Javid, has resigned. Apparently the market was unimpressed with his performance. Boris is actively reshuffling his cabinet today, so there are other moves as well, but this was the only one that moved the market. But elsewhere in the G10, the dollar reigns supreme.

In the EMG space, HUF is today’s biggest winner, rising 0.45% after January’s CPI data jumped to 4.7% annually, well above their 3.0% target, and the central bank said they are ready to use all tools to rein it in. Clearly that implies rate hikes are coming to Hungary. (As an aside, I wonder if Powell, Lagarde or Kuroda are going to be ringing up the central bank there asking how they were able to create inflation.) But away from HUF, any gainers have moved so little as to be effectively unchanged, while the rest of the space, notably LATAM, is under pressure on the back of the weaker China story.

Data this morning brings Initial Claims (exp 210K) and CPI (2.4%, 2.2% ex food & energy), with the latter likely to be closely watched. Weakness in this print will only increase the odds of a rate cut here in the US, likely driving the market to price one in by July (currently a 72% probability). Chairman Powell didn’t teach us anything new yesterday, simply rehashing Tuesday’s testimony and no Senators raised anything noteworthy. Today we get two more Fed speakers, Kaplan and Williams, with Kaplan needing to be closely watched. After all, he is the only FOMC member who has admitted that the growth of the Fed’s balance sheet is having an impact on markets, and could prove to be problematic over time.

But it is a risk off day, which means that further yen strength is likely, and the dollar should continue to perform well overall.

Good luck
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