(Note that these are solely the views & opinions of KVP, & do not constitute any trade or investment recommendations.)
Macro Dragon: Coronavirus, Fed & Bernie Sanders to win Mon 3 Feb Iowa Caucuses
Welcome to WK 5 & Happy Macro Tues
High impact potential week with a lot on. Yet key focus likely to rest on the Novel Coronavirus (2019-nCoV / Wuhan Coronavirus) which could see the Fed, BoE, US earnings & the Iowa caucus on Mon Feb 3 being initially ignored by the markets
On top of that we also have month end & start – which could generate some near-term noise… lets take the Coronavirus, Fed & Sanders in reverse…
Lastly its worth noting that China is officially out for the wk & it also looks like there is definitely going to be an extension on the Lunar Holidays – whether that flows in CH equity markets that were set to open next wk or HK which are set to open on Wed… remains to be seen… Worth noting Taiwan also not set to open until Thu, whilst both SK & AU got back in today…
Mon Feb 3 will be the Iowa Caucus for Democratic Candidates
As we have been saying for a long time both on Macro Dragon, as well as a house view from SaxoStrats – there is a massive under-pricing of the potential US political risk in the system.
Since last year in the now put to rest Macro Monday – we stimulated that the biggest structural risk to the US equity bull market was likely a Warren or Bernie win. Early days, yet Warren’s rise into year-end 2019 seems to be mean-reverting, where as “The Burn” star is ascending – KVP was dead wrong on the heart attack (i.e. was just a touch of “chest pain”) being the final nail in the coffin for Sanders & a gift to Warren.
So on Mon, if we do get a Bernie Sanders or Elizabeth Warren win – the US equity markets would do more than wet their pants, a -2% to -3% down day is very possible with the potential context of a -20% to -30% pullback being possible if we get Sanders/Warren going all the way to the White House. So don’t mistake this for a call on the US president (even though KVP feels that Bernie likely stands the best chance against Trump, why? From their base perspective, only chance of beating “crazy” is “more crazy”… still early days… & lets not forget how the US Democratic Party tried to put Bernie to Pasture in 2018 – they literally flushed him down the toilet while Hilary was busy deleting her
+30 million +30K emails. Bottom line is, if either Warren or Bernie continue to gain steam, it will continue to be priced in as bearish for US equities.
This implies once again, long duration as yields fall lower, long precious metals (as they should be the inverse of yield, though KVP will admit the price action in PM over last wk have been abysmal… think the US/Iran reversal not only burnt a few hands yet perhaps left a few stumps). And it could signal a weaker USD, if US equity outflows trump US Bond inflows – as we’d see the probability of a Fed cut increase.
And yes, just in case its unclear - US political risk could have a much more damaging risk-off to US equities than the coronavirus.
Key risk here – & what the bulls would argue – there is no miss-pricing at all, Biden is the celestial Democratic Party nominee… he is Obi’s boy & the closet thing to a moderate among his fellow democratic nominees. Biden will win Iowa, New Hampshire… etc… And if Bloomberg gets in & wins (watch out for Mar Super Tuesday), then that’s just gravy on these excellent Cajun ribs (hmm… cannot wait to break this fast).
One last point – on politics, people get extra emotional & quickly fall into the KVP emotional / rational law (or ER Law for short) – your magnitude of extreme emotions will be in inverse proportion to your magnitude of rational reasoning. This is why KVP never places purchase decisions, such as lifting the new Bentley GTS convertible (in cherry red of course) or eating a tub of strawberry cheesecake (B&J of course) when in a poor emotional state.
Its not about what is ethically right or wrong, its about the probability of pathways on what people think/feel is right to them based on everything they know & don’t know at the time.
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 have very different lives.
So, we could still hypothetically get a Biden or Bloomberg nomination, & perhaps even - election victory! This would be considered bullish for markets (Maybe even more bullish than a Trump win), yet Bernie could be crushing the primaries for the next 4-5wks before then, giving us a lot of moves lower.
On the Fed… Its Simple…
Macro Dragon flagged what was both our 2019 year-end & 2020 year-start view on the Fed: The Half-Life Fed & Min. One Cut By 1H20 which basically stipulated that we get one Cut – likely in Jun or Apr, that likely gets flagged in Mar or Apr. Currently the market is pricing in a 12.3% of a HIKE not a cut.
The upcoming growth headwind that will hit China, Asia, EM & then DM will only raise the probability of at least a 25b insurance cut, as well as potential accelerate timing &/or magnitude of those cuts.
Which brings us to…
…The Wuhan Coronavirus… a.k.a. 2019-nCoV... a.k.a. Novel Coronavirus
KVP originally flagged the SARs like Coronavirus on last Tue’s Macro Dragon [then again on Wed & Thu before the Lunar New Year break here in SG], in what in hindsight was a gross miscalculation on the potential severity of this current virus outbreak.
The focus here will be more strategic, than say tactical – i.e. don’t mistake intra-day or even a string of session risk-on days for the virus being nipped in the bud, nor longer a concern for global macro & the region. It goes without saying in situations like these things are fluid, dynamic & the data is both incomplete as well as should be taken with a grain of salt.
Risk is also that as KVP previously underappreciated the potential risks, he may be overshooting on the potential upcoming risks.
With all that said, lets cover this from an updates perspective, then extrapolate onto what KVP feels he can say with high certainty & what he feels less certain about. The Macro Dragon will continue to stay on point on the developments.
Latest Updates Since Our Check-In Last Thu:
- Official confirmed cases seem to stand at c. 4,500 as of this Tue Asia afternoon with deaths approaching 110 & fully recovered c. 65. Here is the site that is monitoring the situation (feeds from WHO, CDC, NHC & Dingxiangyuan) – as with everything pros & cons with the data feed.
- The entire Hubei province that houses Wuhan’s city of 11m people is on lock-down, the province is home to c. 60m people. If there is any nation that can "handle" these kind of massive lock-downs… its China (can you imagine this in Texas, USA? or New York or London around Christmas / Thanksgiving time? - i.e. the best yet still diluted equivalent to the annual Lunar New Year Holiday)
- What it does tell us though is according to the date here the cases confirmed has been averaging c. +50% a day since the initial 278 on Jan 20
- Now, let’s not confuse cases confirmed with a spread of infection… they are not the same thing. Intuitively it makes sense that there are people who already had the virus, who were not confirmed cases. At some point call it Feb 3 (+2wk since the Jan 20 when they started to take the data), reading the increase as spreading infections will make more sense.
- Just from a math perspective to drive home this point, if we extrapolate from yesterdays confirmed cases of 2700 at a 50% growth rate a day, you get to +100,000 by Feb 4, then +1,400,000 by Feb 10th… then 1.2bn by Feb 26th (keeping in mind China pop is 1.4bn)
- In the meantime if you say cut that in half & assume a rate of 25%, then that get you to 2.8m by Febt 27th… vastly different numbers. Also note, that these extrapolations are linear & don't take into account the slowdown in the contagion that will naturally come from the province & city lock-downs, holiday extensions, emergency treatments centers going up, etc...
- Also the real number (infected) is likely much higher than what we are officially getting – i.e. officials cannot really know what it is… China is a massive country & of course people were already very much on the move going into CNY (+3bn trips, etc). KVP would not be surprised if we do get to 6 figures on this before its over & 5 figures (over 10K) is pretty much a given - its basically from Feb 3 to Feb 10th that we SHOULD start to really see a slowdown in confirmed cases
- It took us c. 100days for SARs to start stabilizing… that implies we have c. +50-70 days to still go, depending on where you start your inception count of the Virus (i.e. Dec 30 or Dec 16). Whilst again very early to determine too much, the key risk so far on the Novel Coronavirus seems to be more about its potential to spread, rather than the mortality rate. Whilst on the one hand +17-18yrs has seen massive improvements in technology, medicine & ability to reach people - that net-pro likely has to be weighed again the vast area, people & logistics that are China
- So assumptions here are key. Plus we also know that…
- The entire Hubei province that house's Wuhan’s city of 11m people is on lock-down, the province is home to c. 60m people. If there is any nation that can handle these kind of massive lock-downs… its China (can you imagine this in Texas, USA?)
- The Lunar New Year Holidays have been officially extended – thinking here is likely, officials don’t want people moving back to their home & work - who may be infected without knowing it. To be honest, KVP would extend this until at least 10th of Feb, to get us on the other side of the up to two weeks incubation period of the 2019-nCov. And yes the government (& corporations) would subsidize the lost wages for employees… stimulus will come from a fiscal perspective... yet likely later in 1Q / early 2Q once things are more firmly in control (i.e. makes no sense to do a stimulus when you need people staying home, not working, not moving around & basically conducting activities that can lead to the spread of the virus)
- IF necessary an extension to mid or end of Feb is not off the cards
- So whilst HK markets are set to open on Weds as per schedule, China’s have been delayed until Mon. Would not surprise KVP if they get delayed further, depending on the situation on the ground. Them not being extended could potentially be read as constructive.
- Note Taiwan is still scheduled to get fully back in on Thu
- Other measures are also being taken not just in CH & HK but in the region… i.e. 14days work from home if you have been to China. Declaration forms on where your kids have been over the Lunar New Year, etc… School holidays being extended to mid February… whilst others are conducting daily temperature readings, etc.
- We have gotten more confirmed cases abroad, yet all still mid-single digits with HK & TH leading the fray with 8 (they are some of the top destinations out of Wuhan)
- Key part to monitor is potential acceleration in case confirmations (implying potential outbreaks) in other parts of China – i.e. outside Hubei. And again, any acceleration in say the US from confirmed cases… could see quite a big market sell-off
- In 2015 Ebola (among other things) was part of a c. -10% pullback move in the S&P… & we already highlighted the political risk on Mon Feb 3 – Iowa caucus… will the bulls feel the burn?
So what are some things that we can currently say with high certainty (high probability) in all this..
Ripple Effects of 2019-nCOV
- Growth expectations are going to be hit massively from China, Asia, EM & have ripples into DM. We started the year with the consensus view being that growth in RoW, EM, EZ & CH would be on the uptick vs. the US, especially on the company earnings front. We are now going back into the same old game of US to outperform vs. RoW growth wise (with great potential political risk) & now potential corporate earnings wise. So this means the headwinds for China & thereby EM plus the world are going to be something that was not even a factor 1-2wks ago, this still has to be priced into analyst, portfolio managers & policy makers forecasts.
- This likely leads to cuts being priced into the Fed & potential quicker move. So long duration & long precious metals should flourish. And we could see quite a big unwind in EM, China & Asia exposure. US EQ to outperform (if we don’t get the Burn or Warren) vs. RoW, Nikkei / Kospi / Taiwan / China likely best skew downwards… And oil/energy to be very much on back foot given links to global growth concerns (by the way.. KVP senses there is a massive killing to be made in Natural Gas - one just has to do the WORK)…
- At some point there will be a great buying opportunity once the Virus is under control – yet we could easily be min 2 wks to more likely 2-3 months before than happens. And yes, there will be some form of fiscal & monetary stimulus to consumers from the PBOC… more delays & safety measures can be expected - and to be honest will be downright prudent. Better to get 1-2% shave off of GDP, than end up with several hundred thousands to millions infected & then getting not just a recession but potential social unrest & anarchy
Have a great wk everyone, good luck on the month close & start, stay healthy as well as keep your mind open to opportunities
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 & vaccine/cure for the virus... to really turn things around quickly
Some Anchor Pieces from #SaxoStrats: