Submitted by Michael Every of Rabobank
Monday was one of those days that will live long in market infamy. The scale and breadth of moves seen was up there with the very blackest, or should one say reddest, after the Saudis released a second oil Black Swan on top of the one China already released with Covid-19 – though the official line from China is now that nobody knows where the virus started.
These are extraordinary times. We saw the S&P close -7.6% and the Dow -7.8%: we are now down six whole baseball caps in the latter since the end of February. As I type we see the US 10-year Treasury yield is at 0.67%, which if you had just returned from Mars would be a jaw-dropping figure – until you realise that we were at 0.31% at one point intra-day yesterday. As I said, the scale of moves is just amazing.
After Panic Monday we are currently seeing what looks like a dad bat bounce. US stock futures are up around 3%, Asian bourses have generally staged small rallies, USD/JPY is up to 104.7, and EURUSD is back to 1.1359, while even Brent crude is up 7.3% (to just USD36.88, of course). The reason for this optimism is purely technical, and lies not in what we see unfolding in front of us.
Not in the Middle East, where we can now talk of Low-Rents of Arabia and Wadi Rum Deal. Not in Europe, where Italy has 463 deaths and has just placed the whole country of 60m people on virus lockdown, with everyone told to stay at home and all public gatherings banned: even sporting events are cancelled, so no more Serie A matches. Not in Ireland, where St Patrick’s Day celebrations have been cancelled across the country.
And, one would argue, not in the US, where even as Italy was suspending soccer/football, and Ireland it’s biggest national celebration, I yesterday saw a YouTube video of a US sporting event where the crowd were enthusiastically building a giant beer snake out of used beer cups, through which said liquid was then being chugged. Impressive – and not exactly the best way to prevent a virus spread by human contact and saliva from propagating.
Of course, US President Trump, who is truly worried about those Dow baseball caps, doubly so as the prediction markets concurrently see his odds of retaining the presidency decline, has floated “very substantial measures” via an economic stimulus package: one that includes a payroll-tax cut, to either save or spend on toilet roll; support for hourly wage earners that will allow people to take paid time off if they get sick (presuming they have insurance to cover medical bills); as well as some kind of fiscal support for small businesses, who are about to see demand evaporate anyway.
This is all welcome but is just a plaster on a deep wound unless we see some serious efforts to concurrently fight the virus, not the bear market – and as the “Chug! Chug! Chug!” dynamic at the US sporting event yesterday underline, this is still not being seen on the ground. We would need the same energy applied as to the beer snake. Where are the lockdowns? Where is the provision of health services like free testing (or any serious, large-scale testing)? The examples from China and Korea and Taiwan are that acting like this can get it under control. We have no examples of the virus under control when this is not done. Zero.
The same criticism applies to Australia, where the virus is going to spread rapidly – and where the collective imaginations of the Morrison government have come up with the idea of an economic stimulus package of up to ADU10bn that could include wage subsidies for SMEs and business tax incentives, including asset write-offs - which is appropriate because the Chinese experience shows many SMEs are write-offs under this virus. There is even talk of simply transferring cash to households again, an idea which was seen as a wash when used in the GFC because everybody bought a wide-screen TV, which were all imported of course, and then carried on as usual. Against this virus, a package like that will arguably prove as effective as a tax cut would be to fight bushfires.
There is, of course, also the usual market clamour for the Federal Reserve, that guardian of free-market capitalism, to ensure that there is only upside to buying stocks, not downside. Another huge rate cut ahead this month is a done deal, obviously. Which won’t work – and the what? Dead bats can bounce for a while on the hope for something even more dramatic than zero rates and unlimited Repo Madness.
Meanwhile, other central banks are also flagging they need to do more. The RBNZ says they can cut rates from 1%, with the next meeting on 25 March. Governor Orr also explained how the Bank will either then use negative rates, forward guidance, intervening in interest-rate swaps, QE (into government and RMBS), and term loans to banks, with negative rates the first step. He also flagged the possible purchase of FX or assets to help push down the NZD exchange rate – which is really moving into new territory: let’s see how other central banks feel about outright FX wars on top of oil-price wars and trade wars and a war on a virus. Naturally, there was also an appeal for the government to do more too.
For those reading down in New Zealand (and Australia), do you recall in late 2017 I was travelling with a presentation called ‘Heaven or Hell-icopters’? It argued if the global recovery staggered on the RBNZ and RBA, and the government, would carry on like Anglican vicars, politely offering watery cucumber sandwiches and tea; but that as soon as we headed for structural, deep recession the whole political-economy policy space would be transformed into something that looked more like a Hieronymus Bosch painting, leading to ‘The End of Central Banking As We Know It’. Throw in the Dante’s Inferno of this virus, and here we are, perhaps. And not just in New Zealand.
Of course, we need to focus on what are now going to be a flood of fiscal and monetary policy responses. But to differentiate between a bat that can fly and a dead bat bounce, we need to look and see what is being done on the ground to fight the virus. Only when that corner is turned can we start to argue for a return to market normality – and we are a long way from that corner being turned globally.
For example, even if South Korea and China stay virus free (which remains to be seen), won’t they have to seal themselves off until everyone else has achieved the same status? If they don’t it will re-enter the country and spread again, necessitating fresh panic and lockdowns. Either we all sort this out, even in places nobody is even looking at, like Africa; or we all seal ourselves in. Neither option suggests the bottom is in for markets yet, even if today gives us some room to breathe (behind a mask, I hope).
What can I add in terms of data? Well today saw Chinese PPI and CPI, where the former was -0.4% y/y, so deflationary, and the latter unchanged at 5.2%, so inflationary. Neither reflects real facts on the ground at the moment.