Rabobank: "Imagine London In Full Lockdown"

Submitted by Michael Every of Rabobank

Imagine London in full lockdown. Hard? Well, Chinese authorities just decided to issue a Wuhan travel ban, locking down a city with more inhabitants than London. Stopping the spread of the new SARS-like corona virus is the aim, as more and more cases of contagion have been reported, for which the majority are pointing at Wuhan being the place of origination. The WHO delayed its decision on whether to brand the situation as an a public health emergency of international concern and is expected to report on its deliberations today. Meanwhile, China reported 8 new deaths from the Corona virus, bringing the worldwide tally to 17.

Whilst broader risk-off sentiment in financial markets seemed slightly less intense than on Tuesday, Asian stocks took a significant beating overnight, with the Chinese CSI index dropping more than 3% as losses mounted during the trading session. Concerns that travel bans will be rolled out more widely are giving investors jitters, even though these bans are intended to prevent the situation from spiralling out of control.

Meanwhile, the stepping-down of Five Star movement leader Luigi di Maio, on which the market had been speculating already earlier this week, had relatively little impact on European bonds, with Italy’s spread volatile but even tightening slightly after the widening move yesterday. Italian minister Robert Gualtieri said di Maio’s resignation as leader would not affect his position as foreign affairs minister and would not affect the stability of the government. Apparently this was sufficient for market participants, who perhaps see this as an opportunity for the PD’s coalition partner to seek a new leader who can take on the potential threats from the rising popularity of Matteo Salvini’s League, who are expected to do well in the regional elections on Sunday.

Although ‘climate’ remains the key area of attention, with respect to the global trade tensions there were both soothing words as well as warnings from Davos. On the positive side it was ‘confirmed’ by French Finance Minister Le Maire that the US and France had reached an agreement on the digital tax, which essentially boils down to France delaying the collection of the tax until the end of this year and the US refraining from imposing tariffs on certain French import goods. Well that sounds like a great deal! Instead the two countries agreed to work towards a “shared global framework”. Which sounds like another great deal, bearing in mind that the US has played a key role in delaying digital tax talks at the OECD level.

Fortunately, for the pessimists there was still sufficient material. And the main reason for that may well be the ‘optimism’ and ‘deal-making’ mood that has engulfed the Swiss ski town. For UK chancellor of the exchequer said that “[the UK’s]  first priority is getting an agreement with the EU”. That sounds like a realistic approach if you take into account that the UK is leaving the EU is less than two weeks and no agreement on the future relationship between the EU and the UK before year-end would still imply a crashing out of the EU. But Mr. Trump wants to secure a trade deal between the US and the UK before the November elections, by which time he also wants a trade deal between the EU and the US. Being mindful of the fact that the US president has repeated his warnings that the US may slap tariffs on European cars and that the EU is “more difficult to do business with than China”, even more remarkable were the comments by Ursula Von der Leyen, the new European Commission President, who said that she was “expecting in a few weeks to have an agreement that we can sign together.”

So are we seeing the contours here of a triad of bilateral trade agreements (US – EU – UK) to be signed before November? Well, never rule out a miracle of course, but let’s just see how these good intentions roll down the snowy hills of Davos as reality sinks in next week.