Submitted by Michael Every of Rabobank
Chinese stocks are up; the Chinese currency is up, slightly (though still weaker than 7); global stocks are up; and US Treasury yields are slightly higher.
Yet at the same time we have the first reported death of a 39-year old resident in Hong Kong, where medical workers are on strike over the refusal to totally close the border with China; China reporting 425 deaths and over 20,000 cases despite massive quarantine efforts; China’s Global Times reporting that the virus can be transmitted via the digestive system and contact with surfaces such as doorknobs or mobile phone screens, computer keyboards, etc. (which is also the case with many other coronaviruses); Xi Jinping publicly stating the virus “directly affects” China’s economic and social stability and has again cracked the whip against the bureaucracy to act better and faster; and the US Centre for Disease Control (CDC) stating it is planning as if this will become a global pandemic. The WHO remains relatively upbeat, however, stating the virus’s progression will remain “minimal and slow” if it is fought at the source and countries cooperate – which does not include closing their borders, apparently.
Who aside, something doesn’t seem to fit in that market reaction, perhaps? The missing link here is that the PBOC injected CNY400bn (USD57bn) in market liquidity this morning, the equivalent of one month’s QE in the US in recent times past. (Ah, the good old days!) Lots more is to follow apparently. Naturally, this relieves some immediate liquidity pressures. It also allows the PBOC to scoop up all the assets that nobody else wants to hold right now via reverse repo – which the Fed knows a thing or two about. What I fail to see is how this is in any way positive for CNY. Only the USD can operate on such a profligate basis without risk of collapse due to its global role: who is stockpiling CNY right now?
Hypothetically, if this virus were to follow the dreadful path mapped out by the CDC, even just within China, would more central bank money really ease our pain? It’s almost as if all of the believers in Adam Smith’s free markets also have no idea what he wrote (following Plato and others) about the relative value of water and diamonds in different circumstances, an intellectual argument that ended up with Marxism via the labour theory of value - and here we come full circle back to China and the PBOC.
The underlying market hope is clear: central banks will save us, not just from the business cycle, and not just from climate change, but now from global pandemic too. The same people who can’t generate 2% y/y CPI sustainably will ensure we all stay at 36.5 – 37.5 degrees centigrade body temperature range. As Bloomberg helpfully summarises today, “Coronavirus Won’t Restrain Global Stocks For Long”. This is because, as the detail and irony of the article become clear, “It’s a bullish sign for global stocks that facts have taken a back seat in much of the market ‘analysis’ of how to react to the coronavirus.” How true that is. Nonetheless, in such an uncertain dynamic, I would still wager that if one wants to be brave enough to dive in to these markets aggressively, one should also be brave enough to stand next to someone who has recently been in Asia coughing without wearing a mask: if you won’t do the latter, are you really sure about the former?
In other news that might induce a fit of coughing, the RBA left rates on hold today despite bushfires, the coronavirus, and a global slowdown centred on China. Why, one might ask? Perhaps because CoreLogic house prices and building approvals are both up again: what else matters to the RBA and their unofficial Sydney and Melbourne house-price target? ;-) Regardless, we still expect them to keep cutting and move to join the NOT-QE reverse repo liquidity party soon. (They will want to be buying mortgage bonds , one would wager.)
I would also have liked to include the results of the key Iowa Democratic Party caucus, and whether Bernie Sanders beat Joe Biden or vice-versa. However, inexplicably the result has been delayed by voting issues and “inconsistencies” and instead we have total chaos, with many candidates claiming some form of victory: mayor Pete Buttigeig is saying he won, and even Amy Klobuchar is saying she is doing well vis-à-vis Biden. President Trump tweeted this was “The sloppiest train wreck in history,” and it takes one to know one; but what a harbinger this is for the upcoming 2020 election at a time of rising lack of faith in the democratic process.
Central banks to the rescue again, then? Perhaps. But, as we have long argued, only under seriously new management if so. And markets really won’t like that when the grasp the full implications. Then again, the same markets can’t grasp what a virus is or isn’t, so let’s not hold our breathe – at least not for that reason.