Macro Dragon: WHO deems the 2019-nCoV / Coronavirus an international threat...

Macro 4 minutes to read

Kay Van-Petersen

Global Macro Strategist, Saxo Bank Group

Summary:  TGIF from the Asia Pacific - as we wrap the week & month up, we tune into the latest on the virus, post yesterday's declaration from the WHO that 2019-nCoV is an international threat. As of Fri morning Asia we seem to be at c. 8,300 confirmed cases, +170 deaths, +140 recovered & still only 4 countries with double digits on confirmed cases (TH 14 JP 11 HK 10 SG 10)


(These are solely the views & opinions of KVP, & do not constitute any trade or investment recommendations. By the time you synthesize this, things may have changed.)

2020-Jan-31

 

Macro Dragon: WHO (finally) Deems Virus International Threat

  

2019-nCoV / Novel Coronavirus Update Fri Asia Mrn 31 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 Thu 30 Jan, here on Wed 29 Jan & here on Tue 28 Jan.
  • As of this Fri morning Asia time we seem to be at c. 8,300 confirmed cases, +170 deaths, +140 recovered & still only 4 countries with double digits on confirmed cases (TH 14 JP 11 HK 10 SG 10). Also it looks like we continue to see a lot of provinces in China extending the Lunar Holiday to Sun/Mon Feb 9/10 – which is a brilliant move & something we were advocating earlier this wk on Macro Monday.
  • As opposed to millions travelling back to where they work/live & potentially still being carriers without realizing it. In the case of SARS it only got infectious post the symptoms showing, the 2019-nCoV is infectious prior to the symptoms, hence the suggested 2wk incubation period).
  • Still KVP is both concerned, amazed & at times gob smacked… that no one seems to be paying attention to the “suspected” 12,000 cases that were flagged yesterday… Which would put the tally closer to above +20,000 which “feels” like a more correct number of the situation on the ground.
  • Still his max bearishness around the virus has a time decays of mid next wk to Mon Feb 10th in rgds to the virus being at peak velocity – based on all the incomplete information we have now.
  • For now it looks like China equities are still scheduled to open on Mon Feb 3 (10:00 am SGT/HKT/CST), which could see further turmoil lower & for regional Asian equities. As a potential barometer the China A50 Futures which have been trading in Singapore throughout the Lunar Holiday are down c. -12% from recent highs at 12950, as of this Asia morning they are ripping up +1.61%. In some ways China equities will give us a truer sense of the heart beat of things on the ground (granted the copper chart is pretty grim) given the big retail segment of the market, in another we have seen Beijing 'suggest' to SOEs backed/linked or associated asset managers, funds & banks to come in & support the market (i.e. buy) - so could be a few sessions before we get the real lay of things price wise. Its worth noting all of KVP checks suggest bearishness, the classic sell now & ask questions later - there seems to be no disputing that at some point things are a bye... yet it feels & looks like folks need to see more blood in the water first - nothing 'screaming' out value. Those of you with counter thoughts/data points to this, pls. ping KVP.   
  • Overnight we finally got the World Health Organization (WHO) releasing this statement – which to be honest, reads a like a covering their tail exercise, whilst placating China. Seriously can’t they just write something short & concise in plain English. In a nutshell they have now labelled it a PHEIC [Public Health Emergency of International Concern] – its amazing you have to get to sentence 30 to get this information, its not even in the title. Right there KVP can already tell that the WHO is ripe for some serious restructuring, the statement reeks of bureaucracy. Not saying they don’t have smart, talented & driven individuals who also have families (i.e. we are all one)… but c’mon cut to the point, less is more. Could also be they need to hire a better PR firm - there you go seize the day & send the WHO the press release that we should have all received.      
  • Here are a few other thoughts around the virus from the rest of the dream team at SaxoStrats – Key summary as captured by our CIO & Chief Strategist Steen Jakobsen, the near-term deflationary shock of the virus is not yet priced into markets, the global economy, policy makers & companies – Jakobsen is envisaging a potential scenario where the Fed cuts 3x this year (-75bp)! Currently for the Mar 18, Apr 29 & Jun 10 meetings the implied probability of a Fed Cut (it was hikes prior to the mtg earlier this wk) are 14%, 28% & 55%.
  • CIO | Chief Strategist Jakobsen Macro Digest: Mind the coronavirus risks
  • Garnry on Global Equities: Coronavirus uncertainty not priced in and US technology earnings superiority & Industries that are hit the hardest by coronavirus
  • Hardy on Global Currencies: Second wave of coronavirus fears broadens

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…Carney goes out with a fizzle…

  • KVP was off with the legacy cut, as the consensus unchanged came through on 7 – 2 skew to keep rates at 0.75%... Dembik nailed it though.
  • Makes you wonder what the three dovish comments from different MPC members (from the 2 that voted for cuts) from early last wk were all about. Was / is it a set up for the next BoE governor or was it optionality in case the PMIs missed? I guess Carney will turn up at the Vampire Squid or similar firm. 
  • KVP, for now, is unsure as to BoE's next move… We are down to a 14% prob. of a cut on Mar 26 which then goes up to 43% for May 7th  & oddly enough for Jun 18 we are seeing a 14 prob of a hike – so we got a kink in the curve – not sure if this is linked to UK / EU negotiations.
  • Here is a link to the latest BoE Statement, next meeting is Mar 26.
  • Cable liked the news +0.55% 1.3093, with EURGBP -0.37% 0.84254. Gilts moved from 0.516% to 0.542% and the UK FTSE 100 was -1.47% to 7316.
  • KVP once again continues to think we are in a multi-generational window of opportunity to get limit long UK assets (preferably through physical on the ground cashflow positive RE & businesses, failing that to liquid equities (property sector worth a sniff), failing that to a multi-year structural long on sterling with big girl/boy lvls). This is ultra-high conviction, UK equities are likely to outperform most global equities over the next 3-5yrs & would be keener on names outside the export heavy FTSE 100 (i.e. stronger sterling will be a headwind against those). So guess there could also be an interesting RV trade there to do some work on long FTSE 250 vs. short FTSE 100?
  • Its worth noting in the context of this high conviction, multi-year (if not multi-decade) structural view on UK assets, BoE policy in the near-term is immaterial - in a nutshell its about a positive yielding currency that is still sitting at multi-decade lows against almost all currencies globally & an economy/nation that will be coming out of +4yrs of uncertainty (hard to make long-term CAPEX & investment decisions), confusion & noise, political incompetence & stagnation. Basically we are in the tail-end of a tunnel of turbulence for the UK, with a fiscal policy response to be expected, loose monetary policy backdrop & finally alongside a majority government led by the competent BoJo - say what you want about Boris (& KVP has in the past), there is a brilliance behind his presented madness & he did a great job when he was mayor of London. At the end of the day, its a relative world & at this current time, the UK could not be better placed to have him at the help - yep, dodged a massive nuclear missile with Labour's Comrade Corbyn. 
  • Worth noting the official house view is bearish on the UK given the negative credit impulse, declining economic data, still unknown time-line in regards to UK / EU negotiations & potential recession. Historically as Jakobsen points out, a recession in the UK has lead to a weaker sterling.

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Final thoughts on TGIF…

Whilst KVP is still max bearish tactically (Asia skew bias) on the Coronavirus fall-out (folks still not paying attention to the +12,000 suspected cases – which would take the China numbers to the +20,000 to 25,000 range – which is likely a lot more realistic than the current formal 8236 as of Fri Mrn.

There is time stop on that bearish tactical skew, which potentially starts to kick in from mid next wk to Mon Feb 3 – i.e. based on everything we know now, that will likely have gotten us past the peak growth rate of the infection.  

A lot of China’s individual provinces have made the brilliant decision (as Macro Dragon suggest at the start of the wk) to extend the lunar holidays all the way to either Sun Feb 9 or Mon Feb 10 – this is great as it would have / should have covered people who had traveled home with the two week incubation period, i.e. rather than having people who could potentially be infectious travelling back across the country.   

Mon 3 Feb (Tue 4th Feb Asia time) 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 -1.6% from Jan 22 ATH of 3338) & global market risk contagion. To be really far, the virus has had minimal effect on US equity animal spirits – which is incredibly taking into account how long the market is.


Have a great wkd everyone, good luck on the month close & start, stay healthy as well as keep your mind open to profitable & abundant opportunities. Its going to be a lucky wkd, KVP can sense it! 


Namaste,

-KVP

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