Submitted by Michael Every of Rabobank
All good, healthy stuff
Yesterday saw a strong equity market rally (S&P +3.1%), a sell-off in bonds (10-year US Treasuries rising above 70bp but back to that level at time of writing), oil up significantly (Brent now at USD34.67, so around 8% higher since the end of last week), and the USD down on the broadest measure (DXY dropping from a high of 100.5 to 99.6).
In a data-free day this was nothing to do with what we saw unfold at the World Health Organisation pow-wow, being held virtually. There, China’s Xi Jinping gave the same kind of speech that he did at Davos a few years ago, extoling the virtues of globalisation and co-operation and promising Chinese leadership – as well as a virus vaccine for all just as soon as they find one. With Davos in mind, this was on the same day that China confirmed it is slapping a market-closing 80% tariff on Australian barley.
Meanwhile, Taiwan’s bid for some kind of WHO status was dropped (sparking an angry official response from the US State Department), but the body agreed to launch an independent probe into how it managed the initial virus response – though this will not go as far as the actual origins of the virus itself, which is where the US and China continue to trade recriminations. Indeed, US President Trump has also just announced that he may once again cut funding to the WHO, after having only just partially reinstated it, because it is a “puppet of China”, giving it 30 days to make “major, substantive improvements”. He also admitted he has been taking hydroxychloroquine and zinc as a precautionary measure. (There was no mention of any bleach being ingested.)
The market rally was instead all because US firm Moderna announced that its phase one virus trial, on eight healthy young people, had been a success. Each of them had developed antibodies the same as those of people who had been exposed to Covid-19 and so their experimental vaccine “has potential to prevent Covid-19.”
That is unadulterated good news. However, consider some of the small print. All companies searching for a vaccine like to say they are doing well: it’s very much in their interest. This was a sample of less than ten when phase two, starting in months, will be on many thousands. Even if that hurdle is passed with flying colours we will still not see a vaccine on the US market, let alone in emerging markets, until early 2021. That is still a vast economic problem for the rest of this year at the very least and, as we are already seeing flagged with airline routes, will mean infection-free pockets opening up to each other and excluding others – exactly as we flagged would happen.
Moreover, that is the best-case scenario. The vaccine is not certain to work. For example, the promising Oxford vaccine trial which is now undergoing human trials and reportedly offers “some” immunity against the virus has apparently still failed to stop the six monkeys on which it was first tested from contracting Covid-19.
Meanwhile, markets in Europe were cheered by another dose of promising medicine. With serious questions being asked about the Eurozone’s institutional structure, we may just have a breakthrough of sorts: France and Germany has jointly proposed a new borrowing scheme of EUR500bn which will be led by the European Commission and operate within the framework of the EU budget, from which they would be repaid.
The details of this new proposal are unclear and it is still possible that it could be vetoed by one of the block’s ‘hairshirt’ members. It’s also immediately evident that it is in no way adequate. Italy alone could probably use EUR500bn when one looks at the scale of what the US economy is spending. Nonetheless, it would appear that a political and economic Rubicon has been crossed – and one that also appears to be able to circumvent the apparent obstacle of recently presented by the German Constitutional Court. Yet like all medicines there will be a risk of side effects. If this mechanism works, it will surely grow from EUR500bn. That’s what all bureaucracies do, and European ones in particular. And that will leave an ever-larger pool of funds being decided above the national level. The politics of this should be obvious.
Yet despite some genuine reasons for optimism now sitting on top of the usual market-ramping that is our institutional attempt to disconnect market-pricing from reality, we see some bitter pills which remind us that we were already sick long before Covid-19 hit us.
The Bank of England are sending even more signals that they are interested in negative rates. One member seems to believe that within the EU negative rates “have had a positive effect in the sense of having a fairly powerful transmission to real activity.” And there were cynics noting Europe’s descent into zombification, Japanification, and lack of real activity. GBP obviously is not enjoying that prospect much. If only the UK had an export-based economy, and any export markets still open at the moment (or in the future at the rate Brexit talks are going), it would be rubbing its hands.
The RBA left rates on hold at 0.25% today, as expected, noted that wage freezes and wage cuts are to become more common, and worried that this would logically flow through to the holy of holies, the housing market. (As Aussie TV news recently interviewed someone deep in the residential property market who said many agents are not telling vendors how bad the market actually is right now to try to paper over the cracks.) Rates are on hold in Oz until full employment and inflation goal are met. Welcome to Japan once again. But this time a Japan without a hefty current-account surplus to support its currency – should anything ever happen to Chinese iron-ore demand.
Meanwhile, the US Nasdaq has just announced that it is to tighten its listing rules for IPOs to restrict Chinese firms. China is not being named directly, but the measures target a lack of accounting transparency – which is a synonym for the same thing. The Nasdaq is now going to audit the small US firms who audit Chinese IPO wannabes, for a start. Moreover, a minimum size of USD25m is being put on IPOs, which would have stopped 40 of the 155 Chinese firms that have listed on the Nasdaq since 2000, according to Refinitiv data. Trade > tech > capital. I keep repeating that mantra because the symptoms keep repeating in US-China relations. And yet they are just symptoms, not the actual disease. That runs far deeper.