The official toll death of Coronavirus has increased further during the weekend to more than 900 and we had more international firms giving a cautious guidance during the last hours with even Iphone maker Foxconn facing severe production disruption.

What is important to spot is that currently there are about 400 million people locked down in China. According to some independent researches the number of people who died from this plague might be as high as 50k. Of course, no one knows because Chinese authorities are probably giving false estimates not to alarm the population, but some researchers have figured out that Wuhan has 40 crematoriums, which can each burn 5 bodies every two hours. They have been working 24 hours a day for 17 days, then it adds up to 50k ish. In addition, according to some experts, meteorological data shows a massive release of sulfur dioxide gas from the outskirt of Wuhan, commonly associated with buring of organic materials (levels elevated compared to China).

We start to believe that the coronavirus outbreak is worse than China is letting us know and the impact on growth will be more severe than what we have seen on recent estimates.

Most European indices have now erased their late-January virus sell-off, the Eurostoxx 600 had the strongest weekly gain since 2016 while the FTSE UK has been the notable laggard, given the weak price action in commodities.

Interesting to note that the SPX is up 3.5% Ytd but 196 names out of 500 have either done 0% or are down, while 293 (~60%) have underperformed the index, including Facebook, Electronic Arts, Cisco, Nike and Disney.Passive trading is still the main driver for these markets and Healthcare sector has also helped the markets as it had the 2nd largest weekly inflow ever on the virus scare as shown on chart.

Investment banks are continuing to revise China’s 2020 growth forecasts in response to the latest developments but the market doesn’t seem to care much.

The latest one has been JPMorgan which is now seeing a significant slowing in Q1 Gdp even assuming that the contagion peak will be in March and recovery in production will be quite sharp starting from today with most factories reopening in many provinces. The new baseline scenario is for a growth of just 1% in Q1 (from 6.3% at the beginning of the year and 4.9% at the beginning of last week) with a potential drop to -4% in the worst case scenario with the reopening of factories postponed to a further week and longer disruption in production/transportation and shipping.

S&P Global Ratings on Friday said that China accounts for 1/3 of global growth and a 1% slowdown in the country’s growth rate is likely to have a material effect on global growth.

In the meantime, another reliable economical indicator is trading to the lowest level since 2016 with 40 consecutive days of declines: the Baltic Dry Index.

Baltic Dry Index

The other major indicator of global growth is oil price.

WTI oil price is hovering around key levels which may trigger negative gamma effect, currently close to $50 per barrel. Several analysts are currently forecasting further drop even to $45 per barrel if Macro conditions don’t improve. According to the latest rumors, it seems that around 20% of total oil demand in China was already trimmed, with Chinese refineries processing 15% less crude before the crisis.

Interestingly, Brent’s crude 3-month price spread is deeper in contango, which means that forward price is higher than spot price, encouraging investors to keep crude in storage for more profitable resale in the future (severe contango generally bearish). There was a very serious shift in the forward curve, now pricing in substantial concerns about oil demand destruction.

Brent Contango

OPEC+ is still waiting for an answer from Russia. In an emergency meeting Saudi Arabia recommended a further supply curb of 600k barrel per day until June, also extending the current 2.1Mln barrel per day cut, which is already in place, until the end of the year (current supply curb should expire in March).

As we said over our last newsletter, while DM Central Banks are on hold with a dovish tilt, EM are increasingly cutting rates in an effort to boost EM growth. The Central Bank of Russia cut interest rate by a quarter-point  to 6% as expected on Friday, the sixth straight cut in this cycle. Also, the Governor anticipated another potential future cut, as inflation slowdown is overshooting forecast. The Ruble already lost almost 3% year-to-date, after strengthening 11% vs dollar in 2019 (it makes sense 2019 bullish EM FX)

Quick update on Fixed Income. So far, Credit Investment Grade and High Yield underperformed the recovery of Equities while Synthetic Credit CDX markets jumped back in line to the S&P500 (chart). This is probably due to the strong issuance activity of Corporates year-to-date (there are more issues to buy).

If bond inflows continue with current pace, they could reach 918bn$ vs the previous record of 481bn$ in 2019.

So far, Investment Grade issuance is up 40% vs 2019, while HY issuance is as much as the double vs 2019. Interestingly, we still see a high risk of falling angels although the number of rising stars has exceeded fallen angels in 15 out of the last 16 quarters (chart).

S&P500 (blue) vs IG (light) vs HY (blue)                                                     

Downgrades from IG to HY (pink) vs Upgrades (blue) from HY to IG

Mixed Macro data on Friday.

Ugly news from Europe, Germany in particular. German Industrial production was down 3.5% vs -0.2% consensus MoM, and also down 6.8% vs -3.7% consensus YoY in December. In addition, German Factory orders were down 2.1% vs 0.6% consensus MoM, and also down 8.7% vs -6.6% YoY. Without any doubt, European orders were pretty weak and declined on 2019 average. Further, we saw sharp weakness in France as well, with Industrial production down 3% vs 1% consensus YoY and Manufacturing production down 3.2% vs 1.2% consensus YoY in December. The German Current Activity Indicator (alternative measure of GDP) for December is down to 1.4% YoY. It means Auto and European weakness is not over yet.

Further weakness in Asia too. China announced to delay January trade data for a month, after having released softer PMIs in January (ex-virus impact) while in Japan the real GDP tracking estimates is currently hovering around -3.7% QoQ.

This morning January China CPI jumped at 5.4% vs 4.9% consensus, with inflation rising the fastest in more than eight years last month (mainly due to the virus)and food prices jumping the most since 2008. Higher prices are then expected in the next months as the situation deteriorates.

In US, the so-much feared Nonfarm payrolls, the most important measure of US labor market health, jumped to 225k vs 165k consensus in January, exceeding all estimates, along with the jobless rate ticking up to 3.6%, near a half-century low, and average hourly earnings up 0.2% from December, slightly lower than consensus, but up 3.1% YoY above estimates. All these translate into a strong job data. Then usual reaction Equities down (it makes sense less likelihood of additional rate cuts, less extra liquidity), dollar up, Fixed income unchanged.

US employment ratio 25 to 54y participation rate             

Change in Nonfarm payroll

Today’s Macro

  • Japan Bank Lending, Trade Balance
  • December Italy Industrial Production
  • February European Investor Confidence