Can The Trillions Keep Ahead Of The Millions?

Submitted by Michael Every of Rabobank

10 million. That’s now the global total of virus infections. Less than a week ago it was 9 million. Deaths are over 500,000. In the US, Texas and Arizona have banned bar drinking as Covid surges in the sunbelt, and 5.3% of NBA players tested are coming back positive as a worrying benchmark; in the UK, Leicester faces a new local lockdown, and one of the government’s scientific advisors says things nationally are on a “knife edge” with a spike in new infections expected by July; Germany has reportedly put in place internal quarantine for domestic travellers in Bavaria; Australia has seen a breakout in Victoria that might mean a new lockdown there; Brazil just had its worst week yet with 259,105 new cases; the New Delhi healthcare system is reported as on the brink of collapse; and as schools get ready to reopen in Europe after the summer, note that Israel --which liked to think it had beaten the virus-- is officially now at the start of a second Covid wave (and soon, it sees, lockdown) being blamed on the hasty reopening of schools, which appear to have acted as a major transmission mechanism.

There are people out there still saying that this is not serious, especially in economies that desperately want to open up, or which still refuse to lock own. They point to lower hospitalisation rates and death rates with this second spike than with the first. That is true, but let’s wait a few weeks and see if they follow with a lag once hospitals are overloaded. Moreover, scientists increasingly report that even moderate Covid cases can mean permanent damage to lungs, nerves, the heart, and the pancreas, potentially causing diabetes. So “Happy Monday”…and that’s before we consider other news.

US-China decoupling continues apace. Late last week we saw suggestions from China that US interference via sanctions, especially over Hong Kong, would be a red line that might see Beijing walk away from the US-China trade deal. Tomorrow we will see the national security law for Hong Kong passed in Beijing, and it appears it will include life imprisonment for breaking it. Indeed, the sole pro-Beijing Hong Kong representative working on the bill has openly lobbied for the law to have more than the proposed ten-year penalty --which appears to have been successful-- and for it to be retroactive. It is hard to see the current China hawks in the US Congress remaining silent if such a red line is crossed on Tuesday.

It is not like we are short of other US-China decoupling stories anyway: they are spreading like the virus. Even China considering allowing its giant commercial banks to develop into US-style investment banks can be seen as bad news when one wonders exactly what future market share Beijing can then dangle to the Wall Street firms it uses as political counterweights to China hawks.

In other geopolitics the picture is also messy. The India-China border stand-off is far from over, with both sides building up their forces and the Global Times tweeting: “If #India wants to take advantage of US support in border dispute with #China, it is terribly mistaken, as the Chinese PLA is fully prepared & capable of defending on multiple fronts including China-India border, South China Sea and Taiwan Straits: analysts” (How is that trade deal looking again?) In the Middle East we have a major explosion in Iran and potentially explosive Israeli actions from as soon as 1 July, while Egypt is serious about intervention in Libya that would see it facing off against Turkey. In Europe, the US continues to press ahead with plans to move troops from Germany to Poland, which will inflame Germans, Russians, and much of the US establishment alike.

Which is already inflamed by allegations US President Trump has allowed Russia to pay a bonus to those who kill US troops in Afghanistan. Trump claims he had not been presented with this information, and that it is not credible. Is Vladimir Putin deliberately trying to weaken a president whom the New York Times, which published this story, likes to repeatedly claim is a close friend of Moscow? The allegations are literally explosive. The lack of market reaction is partly due to a generalised liquidity anaesthesia, and partly due to little expectation that the US will act on it (other than by say moving troops to Poland in violation of long-held understandings with Moscow); and perhaps partly because the story can be seen as a replay of #Russiagate (i.e., domestic US politics)?

In domestic politics the picture is equally messy. The US is still wracked with protests; French President Macron’s party was handily defeated in mayoral elections in Paris and other major cities by the Green Party, and in the south the far-right National Rally did well; Poland’s incumbent President Duda won the first round of elections with 41.8% of votes, and the outcome of the second round on 12 July vs. the pro-EU and liberal Warsaw mayor Trzaskowski will decide whether the country continues to lean firmly towards conservatism populism or not; and in Australia, an MP is being investigated over allegations his office was infiltrated by Chinese intelligence..

On the economy, the one number so far today was Chinese industrial profits, which were up 6.0% y/y in May. How this is possible when exports are not up and neither is domestic demand, while the Chinese Beige Book says the entire economy remained in recession in Q2, is a good question. To which the answer will be “Look, China! Look, 6%!” The PBOC keeps underlining that it is there to provide ever-more credit to the economy, even as CNY will be kept simultaneously stable. That’s why 10-year Chinese bond yields are at 2.87%, over 220bp above the US.

Indeed, against this global backdrop we have US 10-year yields at 0.64%, the USD on reasonable footing for now, and equities having rare red sessions (the S&P closing -2.4% on Friday, the Nikkei -2.0% at time of writing today). Obviously the key focus will be on tomorrow’s Congressional testimony where Fed Chair Powell and Treasury Secretary Mnuchin will be able to flesh out how many USD trillion more they propose pumping into the economy ahead to try to stabilize the situation.

Can the trillions keep ahead of the millions? That’s the key dynamic.