Macro Dragon: 2019-nCoV [Coronavirus], Fed & Thoughts...
Global Macro Strategist
Summary: In today's Macro Dragon we tune into the Novel Coronavirus (a.k.a 2019-nCoV / Wuhan Coronavirus) for the latest update & thoughts from @KVP_Macro. We also touch on the Fed & reflect on a few other calls that were previously flagged - on one of them, KVP is likely to pull a 180... based on the thesis that things are likely to accelerate & get worse with the virus, before they start getting better. Macro Dragon = Daily Cross-Asset Global Views
Macro Dragon: 2019-nCoV Update, Fed & Thoughts
2019-nCoV / Novel Coronavirus Update…
- In yest’s Macro Dragon we not only discussed the things one could possibly infer with high probability from the ripple effects of the outbreak that is still very much live, yet also flagged the key Mon 3 Feb Iowa risks tied to the US elections – continue to think US political risk is about as mispriced as WeWorks was (& likely still is)… We also touched on the Fed which is very much on today in the US (early doors Thu morning).
- Overnight US & EZ equity markets ignored the wk’s earlier concerns on the Wuhan Coronavirus, despite the steady climb in confirmed cases - SPX closed up over +1% to 3276.
- Have to admit, to KVP the official "confirmed cases" are just way to linear in growth – i.e. we are averaging +50% / day confirmed cases a day on the mainland since the start of the official count. Intuitively the incoming data should not be as smooth… we should experience some exponential volatility to the upside… before again see that trend lower in the future. With that said, if one takes the 3Day moving average of the confirmed cases growth rates, then we are accelerating.
- Either way we should be getting to over 10,000 "confirmed cases" in China over the next 24-48hrs… from the current + 6000 cases, + 150 deaths & +110 fully recovered. Again the actual real numbers are higher... but key thing here is to monitor velocity (magnitude & direction).
- Outside of China we are starting to see an appreciation of the virus’ ability to spread from human to human, with likely +60 confirmed cases already.
- We are also seeing foreign countries taking their nationals out of Wuhan (City of 11m, granted likely good chunk of them already fled prior to last Thu full transportation & Quarantine lock-down) & the Hubei province (c. 60m folks).
- Moves out of HK suggest that a full closure of the border between HK & CH is in the works (some parts have apparently been closed). And you know things are bad when NK is closing its borders. And in an odd twist that would have Genghis Khan rolling in his grave, Mongolia has closed its borders to China. Still all jokes aside… & despite any near-term equity/risk-on moves… make no mistake the Novel Coronavirus continues to spread... we are still not close to the end game.
- The likely danger zone should be over in the next 7-14 days (Feb 5 – Feb 12)… as that should cover the 2wks incubation period from when things really started to get public & global attention here (Jan 21-22)…
- In a perfect world, we should start seeing a slowdown in confirmed cases from earliest 1-2wks in Feb.
- Yet it should be noted there is always a lag in these things being taken up from a policing & monitoring perspective. E.g. Believe there was plane that landed in the UK from Wuham last wk… & there was zero checks… just flyers to passengers. So incubation period outside of China may be closer to +3-6wks from those Jan 21-22 dates… as we still have folks leaving plus unless you have a fever, nausea, etc… hard for airport/border checks to catch anything – i.e. its like carrying the common flu virus before you get aches, runny nose, sore throat, headaches, etc…
- So until then, one can likely say with a high probability that we are only going to get more confirmed cases… we likely don’t just cross over to 5 figures in the mainland but 6 figures (i.e. +100k) before all this is over & few hundred outside of China. Thailand likely leading here being a big travel destination for China – so for those savvy enough to jump on the USDTHB trade – there could still be some tailwind here at 30.80 lvls, remember BoT also wants a weaker Thai baht. Yes, at these 30.80 lvls we have come a ways from the 30.06 lows… yet this puppy is likely to clear 31.00 & test the 31.40 – 32.00 range. The chart is a bulls dream showing classic breakout higher. Key thing would be to have a potential time stop here, with the end of the thesis either being the target being hit and/or virus getting under control (stabilization in the confirmed cases, potential cure/vaccine, etc).
- It’s worth noting, contrary to Hollywood flicks – this is not a virus that explodes one’s head. Everything we know so far (granted on incomplete data) suggest biggest risk here is really the contagion of the virus, rather than the mortality rate of those that get infected. At some point China will nip this outbreak & there is likely to be a buying opportunity in the lead up to that… yet think structurally we are not yet there - have to see a stabilization in the numbers both in China & outside of China.
- Tactically KVP continues to think the upside is capped in equities for the time being – Key Risks to KVP’s current skew here are likely; completing underestimating the control that authorities are getting over the outbreak, a dovish Fed tonight & Biden or Buttigieg win on Mon’s 3 Feb Iowa caucuses (i.e. KVP “Feel the Burn” or “Wonder Warren” theses are bricks).
…Other Reflections, Updates & Thoughts….
- Taal Volcano alert in the Philippines was brought down to a lvl 3 on Sat 26th Jan & now the focus is more about collateral damage & ofcourse the displaced people around the areas affected. This likely puts an end to the potential thesis we had on the USDPHP peso… which as we flagged still ground up to a high of 51.09 from the c. 50.576 close on the Fri prior to the Volcano eruption.
- The DollarYen technical breakout higher, obviously ran into the virus clad post that is 2019n-CoV, was a false breakout. For another one to be in the works we need to take out the recent 110.29 high, as well as ideally get two weekly confirmation closes above 110 (we only got one last time). KVP is now actually skewed to the downside on a different trade view that is a play on the virus – would prefer treasuries… yet ideally touch higher & on the other Side of tonight’s Fed risk.
- Will either release a high conviction trade view on this later today or tmr morning Asia… So short from these 109.20 lvls… stop would be above recent highs… so say 110.38, with first target at 107.38, second at 106.38 & the third at 105.38
- Would also move the stop to each prior lvl . So for instance on taking the first profit Tgt of 107.38, move stop to entry, on Tgt 2, move stop to 107.38, etc..
- Lastly time-stop on this is key… so 7-14days as its predominantly driven by the virus getting worse & the cascade of deflationary forces not just on the world but more importantly Japan. Those looking for a structural longer term trade should adjust size & lvls accordingly.
- Key risks is obviously hawkish Fed, Biden win & Virus cure / placation occurring much sooner than expected…
- One last important point, price action in both DollarYen 7 Gold has been abysmal in rgds to risk-off… i.e. seems to be undergoing a disconnect with the moves that we see in treasuries… to put it differently if treasuries get back to say 1.75-1.80 post the Fed tonight… then being short treasuries is likely a way more convex trade for playing the cockroach theory on the virus… plus you are also aligned with the meta trade & trend of them all – that every lower structural move in yields…
- Hong Kong got back in today (Taiwan tmr) & to be honest at currently -2.50% cash equities, its trading much better than KVP was expecting. We saw a reversal in US equity futures in the Asia morning, originally down c. -10 to -15bp.. 7 now up +25-35bp… so we could have seen some hedges being unwound… given that HK was out on Mon & Tue.
- Worth also noting that China A50 futures [CNGO on the Saxo platform] that trade in SG (Mainland mkts don’t open till Mon) are currently up +1.62% to 13208. As per our point yest:
“Lastly, don’t mistake the destination, for the volatility, in getting to that destination.
I.e. the mean does not equal the variance.
Most of us end up leaving this amazing blue planet,
yet most of us end up manifesting very different lives while here.”
Mon 3 Feb could be a big wake up call for the US voter & more importantly for us on Macro Dragon & SaxoStrats, US equities & market risk contagion. The bar for US equities to rally back up to making news highs going into next wk is very high (low probability, easily sub 10% possibly sub 5%)... we'd need some combination of a Fed cut, a Biden or Buttigiege win (as opposed to Sanders or Warren) & vaccine/cure for the virus... to really take us back to challenging recent US equity highs. Also note as of the +1.0% move in the S&P last night, we are not even -2.0% from all-time highs.... you almost cannot make this stuff up.
Have a great day / wk everyone, good luck on the month close & start, stay healthy as well as keep your mind open to profitable & growth filled opportunities.
Some Anchor Pieces from #SaxoStrats:
- Jakobsen & SaxoStrats team with our 2020: Outrageous Predictions
- Our latest 1Q2020 Quarterly Outlook: The Great Climate Shift
- Eleanor on a Meta trend: Climate Deeply Embedded in Risk & Opportunity
- Garnry on The Godzilla theme: Green stocks are the next mega trend in equities
- KVP on the Fed: The Half-Life Fed & Min. One Cut By 1H20