Macro Dragon: Macro Dragon: Digesting the Coronavirus, Fed & BoE...
Global Macro Strategist, Saxo Bank Group
Summary: Once again - & likey the norm for a while - we tune into the latest updates & thoughts around the Novel Coronavirus (a.k.a 2019-nCoV / Wuhan Coronavirus). We also preview on the BoE & the likely non-consensus legacy cut that will be Mark Carney's last meeting as governor. We then also lightly touch on the Fed statement overnight - with comments on the Virus as well as Repo / Liquidity operations. Macro Dragon = Daily Cross-Asset Global Views
Macro Dragon: Digesting the Coronavirus, Fed & BoE...
2019-nCoV Update Thu Asia Morning 30 Feb…
- We’ve expanded our thoughts this wk with a combination of updates, potential scenarios around opportunities & risk surrounding the Novel Coronavirus (a.k.a. 2019-nCoV / Wuhan Coronavirus) here on Tue 28 Jan & here on Wed 29 Jan.
- Since yesterday we have seen a combination of travel bans, border shutdown & airlines starting to cancel their flights to China. We have also seen foreign nationals from the Americans, Canadians, Japanese, French etc… being flown out in special chartered planes – and into what seems to be quarantined / secure locations for their 2wks incubation period.
- We have also had the 2nd wk in which the WHO (World Health Organization) have met to deliberate on the Virus – they will meet again today to decide whether or not it warrants an international emergency (Don’t get KVP started on this).
- Think there is a probability greater than 50% (say +70%) that WHO do declare an emergency, as we have continued to see increases in confirmed cases in now over 20 countries. As of this morning Asia, we have double digits in Thailand (12), Hong Kong (11) & Singapore (10). Hong Kong & Macau (7) numbers are still way too low imho, as these would have been some of the easiest go-to destinations for mainland Chinese not just for the Lunar Holiday celebration yet more importantly once the lock-downs of Wuhan & later Hubei were initiated last Thu Jan.
- The WHO meeting today is scheduled for 13:30 Geneva time which should be 21:30 SGT/HKT/CST & 08:30 ET. As per their statement:
The Committee will advise the Director-General on whether the outbreak constitutes a Public Health Emergency of International Concern (PHEIC), and what recommendations should be made to manage it.
The Director-General’s decision, following the Committee’s advice, will be made public on WHO’s website and via a press conference. The recommendations will also be made public.
- This statement is likely to have quite the near-term market impact (be it intraday or opening us up for a few sessions of risk off & once again remember Mon is Iowa Caucuses & mkts could “Feel the Burn”, i.e why take on a lot of risk on Fri given the political event risk in the US on Mon?) – bearish if they deem in a PHEIC & bullish if they don’t.
- KVP continues to think the numbers & situation is worse than we currently know, until we get past the 2wk incubation period globally – from when the news really broke last Mon/Tue… we are still in the hot zone. Post that, we are likely to start seeing a deceleration in the confirmed cases which brings him to…
- 7711. That’s the updated number of confirmed cases from China this morning (with Death count at 170). And if that 7711 number is robust, its shows a pretty big deceleration % wise from what we have seen so far (e.g. +29% from Tue 6000, compared to the +51% average growth rate so far since the 20 Jan tally that kicked off with 278).
- The bulls will take this as good news, i.e. the infected will start to stabilize & soon we could see a big deceleration in confirmed cases, less deaths, uptick in those recovered, etc. Besides they will argue, every virus outbreak has ended up being a buy (SARS, Ebola) & the markets rally before things stabilize.
- Plus they will point out that the virus is actually quite mild in regards to % deaths compared to say SARS & MERS, the key risk is on the spreading… but this is just a harsher form of the Swine Flu that through 2009 & 2010 ended up affecting 65 million Americans – the vast majority who never even knew they had it (Kudos to Axis for that). On top of which, nothing ever seems able to sink this equity market, it’s the Teflon Don – everyone is waiting to buy the dip from -3%, -5%, -7.5%, -10% etc… - rates are accommodative, the US consumer is still spending & estimates are still for a growth uptick this year.
- The bears (Of which KVP is currently still one) will call BS, saying it’s way too early to see that kind of deceleration & to start running victory laps. They will point out also that there is an additional +12,000 suspected cases – which is likely a plant the seed technique for when the confirmed numbers are gonna jump. They will point out that we now have as of this morning four countries outside of China with +10 (TH, HK, JP, SG) confirmed cases – the known knowns, we are still waiting for the knowns unknowns (i.e. statistically other would be infected & take type to be confirmed cases) which will not be clear until at least Feb 10.
- They will also point out that prior to the the local officials publicly announcing the virus, Wuhan carried out a number of festivities – which would have involved people from all around China & out of China (i.e. classic save face & own interests, over others – reminds KVP of the Senior Management around Fukushima who overruled recommendations from lower staff to turn off the reactor as a safety measure), this in addition to the 15hr window before the Wuhan lock-down came in place – has likely seen at the very least hundreds of thousands of people come out of that region in the last few wks – remember the Hubei province is an industrial Hub of 60m, with Wuham being a city of 11m.
- It is also worth noting that so far of the +206 Japanese nationals that have been brought home on Wd 29 Jan - 3 have been found to be infected with the Virus (taking us to 11). There is a further 210 due to land this Thu morning. Assuming there are none infected on that flight (conservative), that is still 3 / 416 = 0.72% infection rate (i.e. crudely assumes that is the total number of JP nationals)… Not trying to infer too much on the actual infection rate, but it still implies its likely much higher for locals who would not be as introverted as expats in regards to moving & coming in contact with a lot more people. What will be interesting to see is total number of expatriated expats & how many of them are testing positive for the 2019-nCoV… that will give us a much cleaner look at the data on the ground
- Lastly, there will be a near-term deflationary shock to China & regional growth from this that is not yet being factored into street estimates – we have already had companies such as Apple & global retailers flagging that China earnings are going to take a hit. Hence also why preference for playing downside on this theme, is through Asia exposure: Long USDTHB, short Nikkei or CH Equities, Short USDJPY & perhaps the exception to the regional related exposure is long USTs.
…Federal Reserve Overnight… Now all about Wed 18 Mar’s 11% Cut prob
- What was interesting to note on the press conference – as well statement is Powell’s tell. And it happens time & time again in regards to the discussion around the repo, liquidity & balance expansion. Whilst they talk about maintaining repo liquidity until at least April, he must be from another planet if they think they can then turn the tap off. Either they don’t appreciate the significance of their hand in elevating markets, don’t care or feel it’s the best case scenario since the world is neck deep in QE.
- Otherwise nothing new imho… KVP still stands on at least “one safety cut” by E-1H20… ideally Apr at earliest or Jun at latest (i.e. Mar & Jun see updates to projects). There was a great question on the Virus to which he said they are were monitoring the situation closely & clearly there would likely be near-term effects on Chinese output & probably its neighbors.
- Here is a link to the Statement and the Press Conference. Next meeting is Wed 18 Mar & we’ve gone from a 12% probability of a hike to now an implied c. 11% chance of a cut – the universe is catching up to KVP.
…Will Carney’s last BoE meeting end with a “legacy play” for a cut?….
- Latest implied prob of a cut for the BoE are off the highs of over 60% and are now closer to 46% for the BoE’s meeting later today. It will also be Mark Carney’s last meeting as the Governor of the Bank of England.
- KVP’s view here is the personal circumstantial factors are a lot more important to looking for an edge on the decision. Yes UK data has been decelerating aggressively from c. mid Jan before a strong bounce back in the last wk or so (big beats in flash PMIs 49.8a 48.8 for mfg, & 52.9a 51.1e for serv.) – so Jan Citi UK economic surprise Index basically looks like a big “V”.
- Still it’s a close one & highly anticipated, KVP is a 5-4 in favor of a cut. Note the consensus view is 6-3 vote to hold rates at 0.75%
- We previously touched on this here, Macro Dragon: Its about the BoE, not the ECB...
- Here is the link to their statement from their last meeting on 19 Dec 2019.
Have a great wk everyone, good luck on the month close & start, stay healthy as well as keep your mind open to profitable & abundant opportunities.
Mon 3 Feb could be a big wake up call for the US voter & more importantly for us on Macro Dragon, US equities (i.e. we are only -1.9% from Jan 22 ATH of 3338) & market risk contagion.
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