Macro Dragon: China’s back, Coronavirus, “The Bern"

2020-Feb-03

Macro Dragon: China’s back, Coronavirus, “The Bern"

2019-nCoV Update Mon Asia Mrn 3 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 Fri 31 Jan, here on Thu 30 Jan, here on Wed 29 Jan & here on Tue 28 Jan.
• Whilst overall KVP retains his bearish tactical skew - despite what seems to be a much more constructive open this Asia Mon Morning than he was expecting - there is no doubt work to be done for the buying opportunity that will come… when that is… again remains hard to say… as there will be a bounce purely based on technicals & mean reversion (So more tactical)… yet the bounce on fundamentals (so more strategic) could definitely be harder – some areas such as Macau gaming & other aspects of tourism are going to take months, perhaps quarter or even +1yr to get back to previous levels, even once the virus is nipped in the bud (still seem a long way from that). Also the travel bans are still on the upswing & while those can be reversed in due course, psychologically, sapiens are super tribal – even amongst their own fellow countryfolk
• China has injected a lot of liquidity to kick of the wk with over USD 170bn, that is no doubt lending a calming hand to things this morning… & as we wrap up today’s Macro Dragon US EQ futs are now up +0.70% to +0.8%... emnis at 3247… Hang Send is +0.45% to 26400ish.. & the A50 China Futures listed in SG are +0.76% to 12930, Shanghai Equites are down c. -7% at 3725, gold -0.4% 1583, Silver -0.8% 17.90. Weather too many people were bearish or/and the plunge protection team are out in full force remains to be seen. What’s interesting is on the flips side we have USDCNH going above 7 again, which does not correlate with the rest of the better than expected price action. As we like to say as a form of patience & humility, early days.
• Again as we’ve said a number of times on Macro Monday, don’t mistake intraday or even bullish complete sessions in Asia for the risk of the virus being over – we still have about half a wk to one wk to go on our max tactical bearishness based on everything we know now & likely still need to see a few trading sessions out of China. Key risk here is KVP is vastly underestimating how effect the response & measures on the ground have been, as well as the markets propensity to buy the dip – even in Asia which will be hardest hit from this deflationary spiral.   

Quick update & thoughts on the Virus since the Fri check in:

• Most provinces in China have wisely extended the lunar new year holiday to next wkd – this should ideally take them/us out of the danger zone of the 2wks incubation period & lower the risk of carriers returning back to work & where they live as they crisscross a country of +1.4bn, close to 5x the size of the US’s population.
• The travel restrictions globally are on the rise – be it governments outright barring Chinese citizens, or people who have been in Hubei province over the last 2wks or airlines closing down routes. This trend is still set to continue, from a strategists-traders perspective – its amazing to see how slow some governments & people are to appreciating just how severe things could become. Also politically there is no upside from having the virus cross into your borders & seeming incompetent for it
• We have gotten our first death out of China, in the Philippines – which seems linked to a Chinese national who came from Wuhan. Obviously a death in the US, would be take a lot more seriously by the financial markets.
• As of this Mon morning, the “official figures” are at c. 17,300 confirmed cases, +360 deaths & c. 500 recovered. KVP reckons closer conservative number of infected is likely +25,000 to 50,000 on the mainland… & before its all over we are likely going to be in the 6 figures… yet efforts on the ground definitely having a positive impact…
• Out of China the countries with confirmed cases over 10 are: Japan 20, Thailand 19, Singapore 18, Hong Kong 15 (still amazing to KVP only 15 in HK), South Korea (15), Australia 10, Germany 10, Taiwan 10.
• Its worth noting there also seems to be another outbreak in China, that is linked to poultry… a bird flu… which IF it becomes transmittable to humans (probability is not zero, yet nor is it high)… is way deadlier… Main point is it seems China is just getting everything thrown at it. When it rains, it pours. Yet countries are like human beings, generally speaking the biggest growth & breakthroughs come through adversity & challenges. KVP would not be surprised if there are a lot of long-term structural benefits from all this – Wuhan & Hubei changing from being synonymous with Industrial China to being cutting edge on Healthcare & Biotech (i.e. where weaknesses become strengths). At some point we will get structural big policy stimulus response, maybe even announced this or next wk or in sequence – would expect usual suspects of infrastructure, yet think this Coronavirus is going to be the best thing to have happened to the Chinese health care & medical system – which net-net, should end up benefiting its people tremendously
• Also look for names like Tencent (Gaming) & other digital, delivery, non-face-face companies that could benefit from a less extrovert period of societal activities. Think streaming, Baba, Baidu, etc..

…”Moto Moto… so nice, you had to say it twice”…

This is a replay segment from Fri’s Macro Dragon – again due to its importance, key part to bear in mind here is what time-horizon are you playing & do your horizons/views match your exposure

• 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 economy, policy makers & companies – Jakobsen is envisaging a potential scenario where the Fed cuts 3x this year! 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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…A few other Key Things This WK…

• Key economic data – with US ISMs, AHE & NFPs being super key. These Data points are pivotal enough to potential disconnect the US Equity market focus away from the Coronavirus in the near-term. Note we got US ISM Mfg. figures due later today & Non-Mfg on Weds.
• This also means we get final PMIs across the board globally.
• We have China Caixin & trade date this wk – bottom line though, any data coming out of China at the moment is a complete wash & waste of time. I.e. there are big cuts on estimates in the works – even post markets eventually rallying, the deflationary shock of the 2019-nCov Virus could stay with us for months… in some areas (tourism) maybe quarters or up to a year plus
• RBA Tues – market currently increased prob of a cut to just under 25%, which could take the rate to 0.50% (0.750%). We also have rate decisions out of Thailand (who we know want a weaker Thai Baht), Brazil (dovish skew & mkt expect 25bp cut to 4.25%), India & the Philippines – again dovish skew, yet in this case only cut expected on BSP’s side to 3.75% (4.00%). Russia also is expected to cut rates by 25bp to 6.00%. Note there is likely not going to be one major central bank that will not at some point comment on watching the effect of the virus, i.e. deflationary impact to China => EM Asia = > RoW… it’s a good excuse for them to keep things accommodative.  
• Likely end of the Democratic Tax-Paid & Wasted Impeachment fiasco, where we have learnt nothing new & only lost time, money & patience with the bi-polarization that is clearly In US politics. Solution here is easy, just don’t pay congress… they’ll learn to work together real quick . Incentives drive everything & right now the wrong incentives (basically free remit to still get paid, yet without doing their job of making America better for its people) are for them to keep digging their heels deeper. The disconnect between US politics (& granted a lot of places globally, Australia’s Scott Morrison comes to mind) & its people is colossal – one could say its almost like they are living on different planets… & they are for all intents & purposes  
• Continued focus on the Novel Coronavirus, 2019-nCoV, with Chinese Markets being back open from today Mon 3 Feb – despite quite a lot of provinces smartly (& As we suggested on Macro Dragon early last wk) extending the lunar holidays to Feb 9-13, taking us over to another wkd. Center of the storm & limited upside will continue to be Asia… at some points it’s a buy that extends beyond intraday bullish squeezes… yet KVP does not feel we are there yet. Yet chance favors the prepared mind, so do get out your radar list & playbook for when things start to change on a more structural basis…
• Biggest risk to US equities & hence global equities, is actually likely not the coronavirus but a Bernie Sanders win tonight in the US Iowa Caucuses. The results should be out Asia Tues morning between 10:00 to Noon SGT/HKT/CST. A Biden victory on the other hand would be greeted very positively by US equities.

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Have a fantastic wk ahead everyone, good luck on the month start, stay healthy as well as keep your mind open to profitable & abundant opportunities. Life happens for us.

Namaste,

-KVP

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Some Anchor Pieces from #SaxoStrats:

• Jakobsen & SaxoStrats team with our 2020: Outrageous Predictions

• Our latest 1Q 2020 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