It started in China’s Great Plains
Where factories for supply chains
Were built wall to wall
But now they have all
Been shuttered to stop Covid’s gains

However, the sitch has regressed
While China, their data’s, repressed
Thus Covid’s now spreading
And everywhere heading
No shock, stocks worldwide are all stressed

I know each and every one of you will be incredulous that the G20 meeting of FinMins and central bankers this weekend in Saudi Arabia was not enough to stop Covid-19 in its tracks. I certainly was given the number of statements that we have heard in recent weeks by central bankers explaining that if the virus spreads, they will save the day!

But clearly, whatever power monetary or fiscal power has, it is not well placed to solve a healthcare crisis that is rapidly spreading around the world. This weekend may well have been the tipping point that shakes equity investors out of their dream-induced state. While the steady growth in numbers of infections and fatalities in China remains constant, something which seems to have been accepted by investors everywhere, the sudden jump in Covid cases in South Korea and, even more surprisingly, in Italy looks to have been just the ticket to sow doubt amongst the bullish investment set. And just like that, as markets are wont to do, fear is the primary sentiment this morning.

A quick market recap shows that equity markets worldwide have been decimated, although Europe (DAX -3.5%, CAC -3.5%, FTSE 100 -3.2%, FTSE MIB (Italy) -4.6%) has felt the brunt more than Asia (Nikkei -0.4%, Hang Seng -1.8%, Kospi -3.9%, Shanghai -0.3%). And US futures? Not a pretty picture at this point, with all three down more than 2.5% as I type.

Benefitting from the risk-off sentiment are Treasury bonds (yields -8bps to 1.39%) and bunds (-6bps to -0.50%), while the barbarous relic itself is up 2.4% to $1682/oz. And you thought gold was no longer important!

Finally, in the currency markets, the dollar is king once again, gaining against all comers but one, quite sharply in some cases. The yen has regained some of its haven status, rallying 0.25% this morning, although it remains far lower than just last Thursday. But the rest of the G10 is under pressure with NOK (-1.0%) falling the most as oil prices (WTI -4.0%) are getting crushed today. By contrast, CAD (-0.45%) seems almost strong in the face of the weakness in oil. But aside from the yen, the rest of the bloc is lower by at least 0.25%, and there is nothing ongoing in any of these nations that is driving the story, this is pure risk aversion.

In the EMG space, the story is more of the same, with the entire space lower vs. the dollar today although the biggest losers may be a bit of a surprise. Pesos are feeling the heat with both Mexico (-1.2%) and Chile (-1.1%) the worst performers in the space. The latter is a direct response to the weakness in copper prices, while the former has multiple problems, with oil’s decline just the latest. In fact, since last Thursday morning, the peso has fallen nearly 3.0% as we are beginning to see the very large long MXN carry position start to be unwound. It seems that long MXN had the same perception amongst currency investors as long the S&P had for equity investors. The thing is, at least according to the CFTC figures from last week, there is still a long way to go to reach neutrality. We are still more than 12% from the peso’s all-time lows of 22.03 set in early 2017, but if Covid continues to evade control, look for that level to be tested in the coming months (weeks?).

And that’s today’s story really. There are some political issues in Germany, as the ruling CDU finds itself in the middle of a leadership contest with no clear direction, while Italy’s League leader, Matteo Salvini, is hurling potshots at the weakened Giuseppe Conti government. But even under rock solid leadership, the euro would be lower this morning as would each nation’s stock market. Perhaps of more concern is the news that China, despite the ongoing spread of Covid-19, was relaxing some of its quarantine restrictions as it has become clearer by the day that the economic impact on the mainland is going to be quite substantial. President Xi cannot afford to have GDP growth slow substantially as that would break his tacit(?) deal with the people of more government control for continued material improvement. It has been a full month since virtually anything has been happening with respect to manufacturing throughout China and we are seeing more and more factories elsewhere (South Korea, Eastern Europe) shut down as supply chains have broken. Shipping rates have collapsed with more than 25% of pre-Covid activity having disappeared. This will not be repaired quickly I fear.

Turning to the data, which is arguably still too early to really reflect the impact of the virus, this week brings mostly secondary numbers, although we do see core PCE, which is forecast to have increased by a tick.

Source: Bloomberg

Of course, the Fed has made it quite clear that they have an entirely new view on inflation, namely that 2.0% is the new 0.0%, and that they are going to try to force things higher for much longer to make up for their internally perceived failures of reaching this mythical target. We all know that the cost of living has risen far more rapidly than the measured inflation statistics, but that does not fit into their models, nor does it given them an excuse to continue to pump more liquidity into markets. In fact, it would not be that surprising to see them double down if today’s declines continue for several days. After all, that would imply tightening financial conditions.

But for now today is the quintessential risk-off day. Look for the dollar to remain king while equities fall alongside Treasury yields.

Good luck
Adf