Submitted by Michael Every of Rabobank
Happy Valentine’s Day as well as Happy Friday. As markets try to focus in on the latest developments on the Coronavirus they see that events of truly global importance once again rely on Chinese state statistics – and thus, like a Valentine’s Day box of chocolates from Forrest Gump, you never know what you are going to get.
What they can also see is that the leap in new cases yesterday was due to a new testing system, which was being put forward as a revised “stock” and not a “flow” argument. Moreover, today the total number of deaths stands at 1,383, which is showing a much smaller increase from yesterday’s 1,369 than the 242 who apparently died the day before. Not so pleasing is that there is genuine confusion on how many people are being tested; how they are being tested; how they are being classified; and how many people are actually dead. This kind of confusion is something markets have learned to live with over a little matter like Chinese GDP; it’s not so easy when it comes to something you live or die with, like a virus. Regardless, under the new methodology being applied in China we now have 64,437 cases, so edging closer to the kind of 75,000 total that The Lancet was warning about recently as likely as of 25 January, and which looked like science fiction to some at the time. We also have 4,920 new cases recorded, which while well down from the 15,407 yesterday is still more than double the trend being shown before that.
Of course, there are some voices out there in The Street literally saying that if only one adjusts the data this way or that, or even ignores the new methodology and looks at the less efficient results being done in limited batches beforehand, then the underlying virus trend is once again bullish: Bloomberg leads with “New Virus Cases Slow”: No, they don’t! What we see is that under revised methodology the stock is higher and the flow of new daily cases are now double what they were before. New cases may have slowed from yesterday’s revision-boosted total, but we don’t know what the trend will be ahead under the new system, and what we *can* see is that Covid-19’s scale is far larger than had been originally portrayed.
Meanwhile, Vietnam has just quarantined 10,000 people near Hanoi after a cluster of cases has emerged, obviously trying to stop its infecting the sprawling city itself. Let’s hope it works, because we also have an advisor to the WHO, Ira Longini, estimating Covid-19 could potentially spread to two-thirds of the planet and five billion people. (“Coronavirus Could Infect Two-Thirds of Globe, Research Shows” reported Bloomberg yesterday.) Of course, that sounds like total science fiction too – but where were we six weeks ago? Imagine that even with a 1% final fatality rate, as opposed to the 2.1% we see almost every day in China (in a way natural data series rarely occur), that would be 50 million people, double that of 1918’s Spanish Flu. Imagine the personal tragedy and the economic disruption. It’s also closer to ‘The Ugly’ scenario that we described among four potential virus futures (“The Bad”, “The Worse”, “The Ugly”, and “The Unthinkable”) in a special report released yesterday.
Yet for markets, it’s still all business as usual, even when the physical economy and the physical activity of banking are being disrupted. The Nikkei is down this morning, but the Hong Kong Hang Seng is up; US 10-year Treasuries are still round 1.60%; and CNY is still stronger than the Lucky 7 level, for example. Indeed, the one currency that seems to be acting as if the virus has some real meaning is EUR, as EUR/USD is edging towards a test of 1.08, but that economic sclerosis arguably long precedes Covid-19 being at root due to EU-19. Meanwhile, some parts of China are truly carrying on as normal. For example, as Reuters reports “Chinese companies tap ‘virus bonds’ to raise billons quickly”, noting that of the USD2bn in cheap funding rushed to issuance so far, only 1/3 is being used to fight the virus by purchasing masks and air-purification systems, for example, while the rest is being used to bolster balance sheets. “A top glass maker, for instance, plans to deploy the bulk of the money raised to repay bank loans, and a property developer is raising money mostly to restock cash and repay debt.” In other words, little physical preparation to deal with a return to business as usual; and a use of cheap funding to repay other debt.
This should really be showing us the limits of central banks to fight a virus:
“Here is cheap money, take it!”
“Thanks. I will use it to repay debt.”
Which is, of course, the whole process of QE and NOT-QE so far too – just with added:
“Thanks. I will speculate wildly on asset prices,” and
“Here are some dodgy assets, take them off me at face value.”
“Thanks for those. Here is cheap money in exchange.”
Nonetheless, that solid bedrock seems to be all we have propping both markets and the global economy up, long-term consequences be damned.
On which note, it seems odd timing for major central banks like the Fed to be even temporarily allowing a scale-back of liquidity additions starting from today. It may not prove to be a Valentine’s Day massacre immediately, but with the virus still out there, and fears of it spreading faster than it is spreading, it certainly looks like Valentine’s Day meshugga.