Markets have recovered most of the losses yesterday after the World Health Organization declared the outbreak a global health emergency and said travel and trade restrictions were not necessary, removing at least temporarily a threat to the world economy, while also commending China for its efforts to contain the disease. Markets were possibly worried about a global shut-down. Worth to remind that Beijing has ordered the lockdown of Wuhan and most cities across Hubei province, which contains 60 million people. That is almost equivalent to the population of Britain and represents the largest response to a health crisis in human history.

After market in US we also had staggering results from Amazon (+10% in after-market, weighting as 3.5% on the S&P total capitalization) mainly driven by outperformance Amazon Web Services, +34% growth vs 30% consensus, the source of about two-thirds of Amazon’s operating income in recent years. Stock up 23% in 2019, up 500% since 2014 and no dividend yield.

The result of the above is that European futures are now indicated up 0.7% after the 1.4% loss made yesterday. In Asia, Nikkei up 1% but Hang Seng -0.4%, Kospi (Korea) -1.4% and S&P Asia -3.3%.

The 3-Month/10-Year US yield curve inverted for the 1st time since October reviving memories of growth fears we had last year. The spread between the yield on three-month and 10-year Treasuries slipped below zero, a day after the Federal Reserve kept rates unchanged. The yield curve has historically reflected the market’s sense of the economy and inflation, and this may be a signal that investors are concerned about policy makers’ ability to counter any headwinds as the deadly coronavirus threatens to disrupt global growth.

Coronavirus is starting to get into analyst’s numbers, below you can spot how JPMorgan has already modified Chinese Q1 growth from 6.3% to 4.9% and it could be downgraded further if the situation doesn’t improve.

The slowdown seems to be accelerating also judging the performance of the Baltic Dry Index which fell for the 10th consecutive day reaching the lowest level in 4 years.

Important also to note that in the most recent Q1 forecasts it was mentioned just one additional week of shutdown at the Chinese supplier factories with a lot of talks of “hopes” and “guesses”… impossible of course to give a clear message but at the same time interesting to see how investors are still playing the catchup on such a difficult environment.

Chinese property developer bonds are getting hit hard as prospective home buyers put off apartment hunting. Developers with relatively weak cash coverage ratios could be hurt most by slowing cash inflows from home sales in China

Asian high-yield dollar bond returns

China is set to boost monetary and fiscal stimulus in a short run. Consider that the Chinese economy is eightfold larger than in 2003 (SARS), estimated around $14 trillion, so the damage on the economy such as tourism, travel manufacturing and logistics etc. should be much higher. Several analysts expect Politburo to announce several measures among which required reserve ratio cuts, rate cuts and liquidity injections. Forecast shows that China might lose 1 to 2% point of GDP because of the Virus. Also Powell expects a global spillover effect from this crisis, with the Fed ready to enforce whatever it takes to boost the economy.

During Governor Carney’s last meeting, the BOE voted 7-2 to hold rate unchanged at 0.75%, strengthening GBPUSD circa 50bps. Still, the report was far from hawkish, suggesting a cut may still be needed (more dovish forward guidance). Importantly, UK GDP growth was trimmed for the next years to 0.8% for 2020 (the lowest since 2009) and 1.4% for 2021, down from November’s 1.2% and 1.8%. Also, inflation should hit its 2% goal by the end of 2021 only if a cut is delivered in the next quarters. The BOE’s forecasts see inflation at 2.2% at the three-year forecast horizon. That’s slightly below the 2.3% forecast in November. It’s very important to mention that the new Governor Bailey will announce a fiscal boost in March (estimates do not take this into consideration).

A quick update on US elections.

As we know election years do typically see increase in economic policy uncertainty with the first potential volatile period when the primaries get under way.

Markets will certainly react to next week’s Iowa caucus but the event is likely to early to demonstrate that any 2020 election outcome has become more or less likely.  Markets could be vulnerable to misprice and therefore be more volatile with lack of reliability of the duration and direction of those reactions.

It is definitely too early to talk about the election potential effect but it is still important to bear in mind that a second Trump term would enhance stability on taxes and could restart the trade war in 2021 while a Democratic win of the Presidency and both houses of Congress would probably mean a significant shift to the left including increased tax policy.

Let’s also consider that  US government is running a $1 Trillion deficit in 2020; it means the US spends $1.28 for every $1 that it collects in revenue. Also, the current massive deficit, 4.3% as a share of GDP is set to last through 2030 at least. It would be the longest stretch of budget deficits exceeding 4% of GDP over 100 years. In this context, US growth is slowing to 1.7% in 2021 from 2.3% average through 2018, with unemployment at record low in 50-year, circa 3.5% in December.

The situation here is pretty clear. On one side Republicans want to extend those tax cuts (so far, fiscal easing lasts until the end of 2025); on the other Democrats are calling for tax increases. Low interest rates have provided a fiscal cushion and kept deficits from growing faster. Is this all sustainable? Just bear in mind some stats and make your own considerations; The federal debt is projected to hit a record 174% of GDP by 2049, 30% higher than what is forecast for today. Also consider that debt held by the public is projected to be 81% of GDP in 2020 and reach a staggering 98% by 2030.

Update on Gold as we have seen huge inflows and the build of new longs but the price is not really reacting to the negative market newsflow anymore. We would suggest to start decreasing the gold exposure as it has already performed well and unfortunately it is now a consensus long position with a potential risk of a sharp reversal if there is any good news. On gold futures, over the last 30 days, there were 17bn$ worth of new net longs established, which is a substantial 15% of total open interest. Worldwide gold holdings in ETFs rose to 2,561.2 tons , the highest level since January 2013.

Gold ETF holdings

As far as Macro is concerned, mixed data in US yesterday. US Q4 GDP came at 2.1% vs 2% consensus, growth came slightly above but the details were weaker, with personal spending missing expectations, growing at the slowest pace in three quarters, and business investment weakening again, registering a third straight drop for the longest slump since 2009. The headline GDP figure was aided by the housing market, residential construction spending increased at the strongest rate in two years. Q4 Personal consumption 1.8% vs 2% consensus, Q4 core PCE (inflation) at 1.3% vs consensus 1.6%, well-below Fed’s target.

Confidence among Americans climbed to a 20-year high amid record optimism about personal finances and the buying climate. The latest Bloomberg Consumer comfort jumped to 67.3 vs 66 consensus, the highest since the peak of the DotCom bubble in 2000. It’s not a coincidence the strong positive correlation between consumer confidence and S&P500 index as this indicator is backward looking.

Consumer confidence (red) vs S&P500 (blue)

In Europe, Euro-area confidence increased more than forecast, Industrial confidence at -7 vs -8.8 consensus, Economic confidence 102.8 vs 101.8 consensus. The rise in confidence was particularly strong in Germany and France and led by manufacturing and construction.

January Chinese PMI out this morning, pretty in line (ex-Virus), with manufacturing PMI at 50 and Non-Manufacturing at 54.1 vs 53 consensus. We strongly believe these data might be much different from the current evolving situation after taking the Virus in account.

Also, mixed data in Japan with a beat for December Industrial production 1.3% vs 0.7% consensus, while still struggling December Retail sales 0.2% vs 1% consensus and December CPI (inflation) at 0.6% vs 0.7% consensus.

Today’s Macro

  • Q4 GDP Italy, Euro-area
  • December US, Personal Income/Spending, Chicago PMI, Uni. of Michigan