Rabobank: Forever "Looking Up?" - Reflections On A Blinkered (Or Schizophrenic) Market

Authored by Michael Every via Rabobank,

Looking up? 

That’s certainly how equity markets are trading the virus – again. No surprises there, really.

At present, one could have a headline screaming “Killer asteroid to hit earth!” on Monday morning, and by lunch-time the equity market would be saying “Think of all the rebuilding!” 

Bond markets are not much more gloomy than they already were, however, which is still pretty damn gloomy. Indeed, it’s FX markets, with a strong/risk-off USD, where we have been seeing most of the virus impact so far, with USD/CNY in particular only holding around 7 due to what I am sure is frenetic intervention on the part of state banks to save the PBOC the effort of doing it itself.

But are things really looking up? This morning there are: officially 43,101 confirmed casesup 2,546 (or one new hospital’s worth) day-to-day, so again not the feared exponential, but also no real trend decline in what is a noisy series - unless it is being massaged, as some critics allege; this also measures how many tests are being done, as much as anything else, of course; and the accuracy of those tests, which is not 100%; more concretely, we have at least 1,108 deaths, which is past both the SARS total and the kind of psychological round number one would think an algo would notice; and of the 5,601 cases with an outcome, we have 4,043 recovered vs. that 1,108 deaths, so we are now down to a 20% mortality rate, which is good if accurate--and there are again some question-marks there--but still a level that does not suggest either public calm or supply-chain normality are anywhere close. China’s Xi Jinping was also seen yesterday in a facemask, talking about a “grim” struggle. “Think of all the rebuilding!”

Looking ‘Chinese’? That’s certainly what the market should be worrying about, of course. Indeed, just as Singapore apparently sees cases in its own central business district, and is linked to a cluster of virus cases in the UK and France, Hong Kong CEO Carrie Lam has asked the public to stay at home as much as possible after a virus outbreak in a densely-populated area: once again, the public was there long before her, but the official concern is notable. Neither development is going to be good for either economy, it should go without saying. Regardless, as Bloomberg says this morning “Asian Stocks Rise as Virus Fears Linger.”

Also looking ‘Chinese’ is the UK. Not only does it have a currency off its recent lows but way off its previous highs, and where politics drives sentiment, but we have: a push for a US trade deal that Huawei might get in the way of; a role for Huawei in the 5G network (for now….expect a pushback there); a government now legally able to quarantine people as virus preparation measures are stepped up; a Prime Minister publicly called contemptuous of the free press by a very pro-Tory newspaper; preparations for real customs and border checks with the EU in 2021; possible new taxes on the wealthy; and now a splurge on public infrastructure projects to “level up” society. Yes, not only is the HS2 high-speed rail to proceed (even if not at any kind of high speed in any kind of sense, either in construction timetable or final operating velocity), but there is a look being taken at building a 20-mile bridge from Scotland to Northern Ireland through treacherous waters and massive marine munitions dumps…“because it will save the Union.” Politics first, productivity of investment later: well, it’s worked so well for China for decades, I suppose. “Think of all the rebuilding!”

Also looking increasingly ‘Chinese’ is the Australian economy, in this particular instance it’s the at-root-it’s-all-a-leveraged-property-play parallel. One can see why the RBA is so relaxed on rates all of a sudden when its (im)moral-hazardry of spruiking the property market has worked so well. Today we saw home loans rise 4.4% m/m vs. 1.6% expected and investor loans up 2.8% vs. 2.2% in December, as everyone once again gets the message that working or running a business are not the route to comfortable retirement, but speculating on property officially is. “Think of all the buildings!”

Yet don’t think the ‘US and A’ is not also looking more and more ‘Chinese’ too. Today we get to listen to a technocrat describe how well everything is going while trying to decipher the hidden and not so hidden hints in his speech to ensure that one correctly front-runs where the state is about to pour enormous buckets of liquidity. That’s right: it’s the first day of Fed Chair Powell’s semi-annual testimony. The key issue: does the current virus give him extra momentum towards easing? If so, is it just going to be more Repo Madness? Or will the virus threat be a convenient pivot-point towards lower rates? We have, after all, seen policy easing in most of ASEAN and China already. Is that going to prove contagious?

Meanwhile, sticking with the today’s theme, we will then also have the New Hampshire Democratic Party primary - and the first question on the market’s mind is “Will it be a real vote or not?” The second question will be if we are to get a self-declared socialist winning, or if instead we get a newly-parachuted-in billionaire who made his money in the financial sector talking about the need to heal society’s ills.

Need I stress which the market would prefer? So far the 2020 campaign has out “Veep”-ed Veep, and it’s only February.