Authored by Michael Every of Rabobank
Light at the end of the tunnel
Yesterday had its fair share of positive developments. Foremost was news that the Oxford Covid-19 vaccine appears to show good potential in human trials. Yes, it might need two doses to work, which markets didn’t like so much, but frankly it was always going to be a slow, laborious, and hugely expensive challenge to develop, and then physically produce, and then practically roll out an effective vaccine to most of mankind. “Here’s a genie in a magic lamp – but you have to rub it twice to release it.” “Oh, that’s rather inefficient! Haven’t you got another one?” Markets showing their innate ‘Oscar Wilde’ price vs. value genius once again. We also had an update on last week’s news from Israel that progress also continues to be made on a Covid treatment using common hyperlipidaemia drugs, which scientists claim could potentially downgrade the virus from a killer to just a cold. In short, a good day for science. Perhaps it’s not such a bad thing after all.
Europe found a way out of its multi-day mega-summit, which must have come as a physical relief to the leaders involved and the journalists having to sit there and cover it. The outcome is EUR390bn in virus recovery grants and USD360bn of low-interest loans. Italy in particular is to get EUR82bn in grants and EUR127bn in loans. Critics will continue to point out that this isn’t enough to really jump-start a recovery given the damage done – but it’s certainly not the cold hard nothing that was on the cards at one point.
In the UK, Chancellor Rishi (Rich) Sunak continues to defy traditional Conservative stereotypes, and has announced almost 900,000 public sector workers are due to get a pay rise of up to 3.1%. That doesn’t mean that the private sector won’t look at an atomised workforce where unemployment is surging and try to slash salaries or benefits, but at least the state won’t be the first into such a damaging downwards spiral.
Stocks continue to act as if we have already beaten Covid-19 - and every potential health-risk known to man. The Nasdaq in particular was up 3% on the day. Bonds still don’t buy that enthusiasm, acting in either a more hypochondriac (or realist) manner: US 10-year yields were at 0.61% at time of writing. The USD is still relatively on its heels, with bellwethers like AUD managing to hold over the psychological 0.70 level for example, and EUR at 1.1440.
However, lights at the end of the tunnel can be either an exit or trains coming towards us; and some might want to consider that in some key cases it could still prove to be either.
First, the White House and Congressional leaders are to sit down today and start to consider what stimulus comes next. Democrats are pushing for a USD3 trillion package while the White House only wants USD1 trillion, and focused on a payroll tax cut rather than an extension to the USD600 weekly extension to unemployment benefits. The clock is ticking given we are days away from income supplements drying up at a time when millions are jobless and one in three Americans is not making a full rent or mortgage payment. Political speed is of the essence.
The US Treasury is of course sitting on a cash balance of USD1.8 trillion at this point. I don’t recall any taxes being paid to raise that sum – almost as if MMT were already a thing. (On which note, please see this report.) One wonders when this massive fiscal firepower is going to be unleashed; because surely no president wants to leave USD1.8 trillion to a successor?
While it makes sense to argue it’s better to incentivise working (a payroll tax cut) than not working (unemployment benefits) this presumes everyone is able to go back to work. If many can’t physically get back to work and also have their benefits cut, it will risk an express train hitting the US economy.
So back to the USD. Bloomberg breathlessly reports today about the USD200bn IPO of a certain large Chinese financial company in Hong Kong and Shanghai. What a bright light that is, apparently. So much so it is flagged in one editorial as signalling the start of China’s de-dollarization. Really? The fact we are talking about a USD200bn IPO when it won’t actually be in dollars, or in the US, doesn’t say anything about which currency still rules? Or that one of the popular services under the umbrella of this firm is selling FX to buy USD at attractive rates and commission free.
Certainly there won’t be many CNH takers in Australia at present given the rapid shift in government opinion there. In Aussie markets we also saw the RBA make clear it won’t be making any rapid shifts on rates either: they are going to stay low for a long, long time – but going negative remains “extraordinarily unlikely”. The RBA did also reaffirm “the importance of the longstanding principle of separating monetary policy from the financing of government” – so no MMT here, please! Which sits rather awkwardly with unlimited bond buying to keep the short end of the yield curve where they want it to be (albeit with little actual buying needed so far), and separate pleas from the RBA for the government to spend more to get the economy moving. The RBA are not exactly renowned for seeing trains coming, however, any more than they are for providing funding to build them in the first place.
Meanwhile, there are many potential trains ahead of us: there’s US-China relations, where Secretary of State Pompeo is due to make another speech on Thursday that might sour relations even further. Yet we also have the following headlines on Bloomberg opinion:
- UK Living Standards Post Biggest Drop Since 1970s Oil Crisis (Whisper it, dear readers, but not everyone has had a good crisis. **The stock market is not the real world!** )
- China Is Getting Closer to Its Lehman Moment (Oh, what party poopers they are to write this given that Chinese financial IPO: and why remind people the PBOC is forcing already struggling banks to give up most of their profits ‘for the team’?)
- We’re One Gaffe Away From Another Taper Tantrum (So we can’t stop if we wanted to?)
- Financial Repression Will Be a Liberator for Gold (Which says what about returns on other assets? And FX volatility?)
So to summarize: we are still deep in crisis despite huge fiscal stimulus in the UK; we heading for a crisis if we keep going the way we are in China; if we take a step back anywhere we are heading for another kind of crisis; and if we go all-in then we face a different kind of structural crisis. Not that any of that will stop current financial exuberance.
“Let there be light.”