Rabobank: Several Things Cratered Yesterday

Submitted by Michael Every of Rabobank

Several things cratered yesterday.

The first was global stocks. The S&P dropped 3.4%, which once upon a time was just a normal bad day in the office, but in our new normal of central banks tacitly and US presidents openly targeting stock prices as the key driver of the global ‘economy’, that kind of decline in plutocratic wealth is both rare and a nasty shock. Regardless, more and more companies are now reporting that either earnings or supply chains are going to be impacted by this crisis – as we had feared would be inevitable. Asia this morning has seen follow-on equity selling, with the Japanese Nikkei -3.3% at time of writing and even China, where all is now close to being closer to normal again (or so we are told) -1.6%. However, US futures are rising as I type. It is, after all, cheaper to buy, and our underlying asset-pumping infrastructure is still intact, even if global supply chains and the real economy aren’t. But who cares about them anyway? Indeed, “Please hold the panic” says the Wall Street Journal, and US Treasury Secretary Mnuchin yesterday happily overstepped his boundaries to tell us that central banks will of course cut rates if the virus impact grows.

The second to crater was global bond yields. In this case, 10-year US Treasuries hit a low of under 1.36%, although we are back up to 1.39% along with US equity futures, with the 2-year at 1.28%. The market is now expecting the Fed to cut again later this year, which should be no real surprise to anyone except the Fed. (Not so much over the risk to life, perhaps, or to growth – just to equities.) In the meantime, we got ‘just’ around USD40bn in new Fed repo madness to tide us over for a few days…or perhaps hours. Who knows?

The third to crater was arguably the credibility of China’s virus-collection statistics. The foreign press have published several stories during this crisis that have questioned the accuracy of the data being presented: now the Chinese press has too. Caixin newspaper is alleging that COVID-19 deaths being hugely under-reported at old people’s and nursing homes, with this being a key demographic hit by the virus. The sample is very small, just one home, but in it 19 deaths have occurred recently, of which just one was recorded as being due to COVID-19, which seems highly irregular. If true, this could mean that the virus’s fatality rate is significantly higher than being reported, even as deaths rose ‘just’ 71 yesterday in China. That higher mortality rate, especially for the elderly, would also be more in line with the shock of 50 deaths that Iran reported yesterday (though there is confusion over that number too) and most all of the recorded deaths seen in Italy so far.

The fourth to crater must surely have been the WHO’s reputation. The same institution that has been lavishing praise on China’s virus lockdown while simultaneously arguing that similar measures internationally were totally unnecessary is still refusing to call this a “pandemic”,--despite South Korea, and Iran, and Italy--a designation that would legally force the hand of governments world-wide. We are right on the edge of that definition, apparently, but not there yet. “Using the word pandemic now does not fit the facts, but it may certainly cause fear…what we see are epidemics in different parts of the world affecting different countries in different ways,” said the WHO boss, who added that in China the situation now appears under control, which again means it can’t be a pandemic. (Note that the WHO has form in terms of when it does and doesn’t cry “pandemic”, which appears to be a moveable feast and not a gold standard. The question is who moves it and why.)

Of course, this makes the WHO look like that other international guardian, the IMF, which has suggested that the crisis so far could knock all of 0.1 percentage point off 2020 global GDP growth--oh the horror!--but which is preparing for an ‘even worse’ scenario: perhaps 0.2 percentage points? The IMF will, of course, never call a recession until one is already in one; it always sees risks instead. And it is never, ever political in its decisions or statements. Ever. Honest.

And consider this. The deaths recorded in Iran and Italy, worrying as they are, matter more than we think. Italy has already seen China-style quarantine imposed yet the EU, like China, insists on a ‘WHO’ message that international controls on free movement are not needed. However, generally people don’t catch COVID-19 and *suddenly* die. The evidence is that it takes several weeks, often symptomless, before it claims a life, during which time the infected individual has been able to spread it to all around them in various ways. In short, if there are already deaths, it suggests that there are likely to be many other as-yet unrecognised clusters of cases within Europe, the Middle East, and elsewhere. Consider how many ‘targeted’ travel bans might have to be introduced if that comes to pass, just like the one that Hong Kong, itself on some travel bans, is now imposing on South Korea - against WHO advice, of course. Consider if COVID-19 gets into the Syrian refugee population; and consider where the Syrian refugee population may then try to get to in response.

Even the “What, me worry?” White House has just requested Congress for USD2.5bn to combat COVID-19. Try adding several decimal places to that, if one looks at China’s experience.

Meanwhile, in the rest of the world it appears that 16 more Turkish soldiers have died in Syria at the hands of Syrian-Russian forces, which in more normal times would be considered a major event; US President Trump is having a hug-in with Indian Prime Minister Modi in India, which also has enormous geopolitical (and ultimately market) implications; and the White House is both insisting that China stick to the terms of the US-China phase one trade deal (remember that?) and is allegedly close to expelling Chinese journalists from the US in retaliation for the expulsion of three Wall Street Journalist journalists from China in response for an Op-Ed using a widely-used cliché to describe the Chinese economy which has been used in China itself by Chinese writers in the recent past; oh, and even Bernie Sanders has been talking about US support for Taiwan. In short, the global liberal order is also still cratering. Not that the market has really paid any kind of attention to that either.