Rabobank: "The Quants Who Were Merrily Looking At The Decline In New Virus Cases Woke Up To A Shock"

Submitted by Michael Every of Rabobank

Outbreak Data Break Out

Yesterday we warned “Curb your enthusiasm”, and all week we have been warning that the markets were totally out of line with the fat tail risks that this Covid-19 virus was presenting. Especially so when all of us are relying on data from China to try to accurately track this outbreak. Those market quants who have been merrily looking at the recent decline in the day-to-day new virus cases woke to a shock this morning. Hubei province has revised its definition of a virus infection and the total is a stunning leap: we now have 15,408 new cases in one day, dwarfing what we have seen so far in a week. Presumably some of that is a catch-up, but even so it takes us back to an exponential upwards trend in total cases just due to Hubei. Yet the virus classification in the rest of China remains unclear, as asymptomatic patients were apparently to be officially excluded since a few days ago. Indeed, full transparency is something we do not have at all. What we do have is *officially* 60,329 sick people. Moreover we had 235 deaths in just one day, taking us up to 1,369 vs. 6,017 recovered. That’s an 18.5% fatality rate if one looks at that ratio, and a ‘Spanish Flu’ 2.2% if one looks at total cases, if they are now accurate. This is, of course, presuming that the *deaths* data are also accurate and not being attributed to other causes, as some have alleged.

The firing of the health chiefs and the top Communist party boss in Hubei in the last 24 hours certainly show Beijing’s unhappiness, and all have been replaced by figures close to Party Chairman Xi Jinping. (The Hong Kong and Macau representative was also just fired, so changes all round it seems.) Presumably the new local bosses have the remit to blame the mess on their predecessors and try to bring the awful new cases number straight back down again to try to calm citizens (and markets). The virus may have its own dynamic, but some kinds of politics—and market stupidity—are universal.

Indeed, for those in markets who were telling themselves that a return to business as usual in China was imminent, and there were lots of them, we have one unconfirmed report (on Twitter, which is not the most reliable, of course!) of a firm in Suzhou that: reopened; 200 employees turned up as requested; one was found to have Covid-19; and all 200 employees were then quarantined in the building for 14 days. As I said, unconfirmed - but so were suggestions that the virus numbers were far higher than being reported until today. Importantly, this anecdote, not data-point, does also underline the risks involved in rushing back to work to try to double GDP by 2021 when the virus is happily doubling its footprint much faster than that.

The mood in the West also seems to be shifting, with UK media in particular now talking on the front page of virus risks, and when, not if, we will see a further spread of the virus there. Not something BoJo’s Bouncy Brexit Britain wants to have to experience. I very much doubt there will be any hospitals being built in six days given the “high-speed” rail isn’t arriving until nearer to mid-century.

Naturally, we are finally seeing a risk-off mood in markets this morning, with Asian stocks coming off, US 10-yer yields down around 4bp to 1.60%, and JPY moving higher again (although USD will remain in demand too vs. both EM FX and EUR, it seems). Let’s see how long this lasts before ‘all is well’ again for some reason.

Meanwhile, talking of accurate reporting of events, I notice that nowhere immediately evident do we have Bloomberg news reporting that friendly neighbourhood billionaire and Democratic Party presidential nominee Mike Bloomberg was heckled at his campaign rally yesterday: one woman at the front cried out “Bloomberg is trying to buy this election! That is not democracy! That is plutocracy!” That is also not news, apparently. Sadly, it is certainly not dog-bites-man stuff either - or even virus-infects-man.