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Rabobank: “There Will Be Attempts To Go Back To Normal After This Crisis, But It Will Be Impossible”
Rabobank: “There Will Be Attempts To Go Back To Normal After This Crisis, But It Will Be Impossible”
The Grand National-ists
The weekend’s world-famous UK horse race, the Grand National, was won by Potters Corner, trained in Wales and ridden by Jack Tudor, at 18-1. That’s a little unusual – but not as much as the fact that this was all a virtual race run on a computer because the actual Grand National was cancelled for the first time since WW2 due to COVID-19.
I mention this because there is a lot of Grand National-ism about at the moment due to this virus. After all, Germany accused (then apparently retracted, to far less attention) claims of ”piracy” as 200,000 face masks in Bangkok destined for it ended up in the US instead: this is normally called “gazumping” in the UK, and in healthier times is seen as perfectly natural – which says something about how we used to operate. The US is also refusing to send medical gear to Canada. Germany itself had of course previously refused to send ventilators and masks to Italy when asked, and France requisitioned private-sector stocks weeks ago. Meanwhile, China has placed strict controls on the export of personal protective equipment (PPE), masks, and virus test kits – which is a problem given it is still the world’s bulk producer – though the Czechs, Dutch, Spanish, and Turkish have all reportedly returned such gear for being faulty, and one news report alleges Pakistan received a shipment of masks clearly made of women’s underwear.
In terms of medicine, there is also a struggle to access virus testing chemical reagents – Israel has had to scale back its testing as Germany has nationalised one of the chemical producers and South Korea has been forced to close one of its plants due to the virus itself.
…click on the above link to read the rest of the article…
Rabobank: Over 100 Million Could Be In Lockdown In India
Rabobank: Over 100 Million Could Be In Lockdown In India
Police State
The headlines continue to shock.
Firstly, the number of coronavirus cases surged past 300,000 on Sunday with more than 13,000 deaths now reported worldwide.
Secondly, predictions about the fall out on the global economic outlook have rapidly gone from bad to worse over the past few days.
- In the US over 80 million people are now in a lockdown,
- over 100 million could be in similar circumstances in India.
- In Italy, controls on movement have been stepped up with all internal travel now banned and in numerous other countries social gatherings have been forbidden and businesses have been closed in an attempt to prevent the spread of the virus.
In just over a fortnight or so, the debate among economists has shifted from whether the US will suffer recession to how big the downturn is likely to be. Our baseline base case now is a global pandemic as outlined by our colleagues here.
Central banks and governments around the world have moved quickly to staunch the wounds, but more policy support will likely be forthcoming.
On Friday, the UK Chancellor jacked-up the size of the fiscal relief offered to the UK economy aggressively – just over a week since he delivered his budget. The new measures include a pledge by the state to pay 80% of the wages of workers, up to GBP2,500 per month. Germany has announced it will raise EUR150 bln in new debt to bolster the economy, which is an abrupt departure from its culture of fiscal discipline. By contrast the US’s Republican’s Coronavirus Rescue Package failed to pass through the Senate yesterday. Shortly after the vote DJIA futures were again limit down. Democrats argued that the package overly favoured corporations and didn’t go far enough to support individuals facing joblessness and a loss of income.
…click on the above link to read the rest of the article…
Rabobank: What Level Of Interest Rates Will Incentivize You To Risk The Death Of Yourself And Your Family
Rabobank: What Level Of Interest Rates Will Incentivize You To Risk The Death Of Yourself And Your Family
“Tonight the super trouper lights are gonna find me
Shining like the sun (sup-p-per troup-p-per)
Smiling, having fun (sup-p-per troup-p-per)
Feeling like a number one…”
So sang markets yesterday in excitement as we enter what I am dubbing “Super Trouper Tuesday”. Indeed, the Dow Jones went up a whole baseball cap-and-a-bit to close at 26,703 even as the 10-year US remain at an unprecedented 1.12%. Not because the Fed mumbled something on Friday, but didn’t act, and not because the BOJ pumped all of USD4.6bn into markets yesterday, and not because the RBA cut rates 25bp to a new low of 0.50% earlier today, meaning that they now have one more cut left to go before it’s “Oz-QE, Oz-QE, Oz-QE” (Oi!Oi!Oi!) time. (Good timing not only due to Covid-19, as building approvals tumbled -15.3% m/m in January anyway.)
It’s also not due to more signs the virus spread is in “uncharted territory” according to the WHO (which means “pandemic” but is contractually obliged not to ever say it, it seems), with more deaths, and as UK police and army draw up lockdown plans and supermarkets plot their own contingency plans, for just one real-life example.
Rather it’s a reflection of the fact that the not-so-magnificent G-7, and G-7 central banks, have pledged that they will meet today to act jointly on the virus, and the IMF and World Bank are also prepared to help if needed; Covid-19, it seems, is a threat that requires immediate action in a way that the potential risk of the end of life on earth (if you are Green), or increasingly Victorian/Gilded Age levels of wealth inequality (if you are Piketty) are not. Then again we have to recall that stocks had just fallen by over 10% in a week, and that house prices risk following: Come on you cynical people, priorities, please!
…click on the above link to read the rest of the article…
Rabobank: Markets Need To Start Pricing For One Of Two Things – One Bad, The Other Terrible
Rabobank: Markets Need To Start Pricing For One Of Two Things – One Bad, The Other Terrible
It is that rarest of occasions. Not a global pandemic, because: 1) we still aren’t in one yet, officially; and 2) we have had that pandemic declaration made in the relatively recent past (2009-10). Rather, we are being told by well-known voices on Wall Street NOT to buy this particular dip in stocks, which closed down once again in the US (S&P -0.4%) to make it three losing sessions in three. The Nikkei is also down another 2.1% this morning in Asia. Furthermore, those “Kud-LOW” bond yields are also now Kud-LOWER, with the 10-year US Treasury at 1.30%, a new record that I suspect will not hold for long. Aussie 10s also hit a new record low of 0.84%, as once the virus hits housing prices in Sydney and Melbourne, the RBA will of course be forced to act.
Is that equity slump and yield-move justified though? Certainly, when the WHO notes that the spread of COVID-19 is now faster and wider outside China than within it. (Albeit with a further press report alleging that China’s numbers are far higher than being officially recognised). At time of writing we now have the first cases in new locations like Georgia, Greece, Finland, Macedonia, Norway, and Romania, to say nothing of suspicions of what may be happening unrecorded in Africa, as well as what looks like the first case in the US unrelated directly to China, and with 91 reported as under precautionary quarantine in the States too. This virus is indeed now threatening to spread at the pace previously seen in China in many other locations.
…click on the above link to read the rest of the article…
Rabobank: Several Things Cratered Yesterday
Rabobank: Several Things Cratered Yesterday
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?
…click on the above link to read the rest of the article…
Rabobank: Our Coronavirus Base Case Is Rapidly Shifting From “Bad” To “Ugly”
Rabobank: Our Coronavirus Base Case Is Rapidly Shifting From “Bad” To “Ugly”
Regular readers will know that our four projected COVID-19 scenarios were “Bad, Worse, Ugly, and Unthinkable”. Current news today suggests risks that the base case is rapidly shifting from “Bad”, meaning only China is impacted, to “Ugly”, where both emerging Asia and developed economies see soaring infection rates and deaths.
After all, following Vietnam, Iran now has eight deaths and an uncertain number of cases, prompting schools and universities to closed and the borders with Afghanistan and Pakistan to be sealed from the other side. For an economy already being crushed by sanctions, this is all that it needed. More worrying for markets, South Korea (with a GDP of over USD1 trillion) has also been swamped by hundreds of new cases, a 20-fold leap in just five days, and, as in China, is seeing the highest-level emergency declared, cities on lock-down, gatherings and travel bans in place, and the national assembly additionally suspended. Samsung has had to shutter at least one factory, in the city of Gumi. The Asian economy, already reeling, it about to suffer another major kick.
Worse, in Europe there also are over 160 cases in a cluster in northern Italy, with three deaths so far, and the regions of Lombardy and Veneto, the industrial and financial heartlands, in both panic and lockdown. Venice’s Carnival has been cancelled, and so was a recent fashion show. Italy is 11% of Eurozone GDP, and those two regions are 30% of Italy’s GDP. For a Eurozone already close to recession, that shock could well be more than enough to generate a downturn.
…click on the above link to read the rest of the article…
The Four Coronavirus Scenarios: The Bad; The Worse; The Ugly; And The Unthinkable
The Four Coronavirus Scenarios: The Bad; The Worse; The Ugly; And The Unthinkable
Summary
- The Covid-19 coronavirus could be more disruptive than markets are currently pricing in. Not in the least because the ‘true’ number of infected people remains uncertain, as the recent surge in cases exemplifies
- We outline four scenarios in which the virus increasingly becomes severe: The Bad; The Worse; The Ugly; and The Unthinkable
- We provide rough estimates for China’s growth trajectory in these scenarios although we stress that these are not our official forecasts since we are still working out the details
- The three main channels through which Covid-19 will affect the global economy are tourism, net exports, and intermediate goods
- In the ‘Bad’ scenario the virus outbreak does not last far beyond Q1. China’s GDP growth for 2020 could drop to below 5%, with production taking the biggest hit and a catch up in Q3 and Q4. This is our base case scenario, although with the recent surge in mind, the second scenario is becoming increasingly likely
- In the ‘Worse’ scenario, the virus outbreak lasts beyond Q1. In that case China’s GDP growth could end up below 4% in 2020
- In this scenario, next to China, Asia will bear the brunt of the prolonged outbreak due to its dependence on Chinas as an export market and intermediate imports as well as for tourism
- In China itself, defaults of non-financial corporates in China could start to rise rapidly
- This will lead to a decline in China’s long-term growth potential as private companies will suffer most, while less efficient SOEs will likely be bailed out. As a result, debt levels will balloon further, leaving China more vulnerable in the future
- There will also be downwards pressure on the Chinese currency as extra CNY liquidity is made available
…click on the above link to read the rest of the article…
Rabobank: The Dilemma Facing China Is Truly Awful
Rabobank: The Dilemma Facing China Is Truly Awful
As has been the case since Monday’s sell-off, there is an attempt to try to look on the bright side of the virus headlines. Chinese officials are spreading the word globally that things are under control and that other countries should not be closing their borders to China, in line with the WHO recommendations that says that free-flows of people during a potential epidemic is completely fine.Of course, at home China is still under draconian lockdown, with tens of millions of people not allowed to leave their homes, and hundreds of millions more voluntarily following the same advice. Moreover, as a former Mexican ambassador to China publicly notes, when Mexico briefly suffered from H1N1 bird ‘flu back in 2009 China’s response was to ignore the WHO’s recommendations and: place all Mexican nationals in China under quarantine; cancel all direct flights to Mexico; stop issuing visas to Mexicans; and closed all its consulates in Mexico.
After having extended its Lunar New Year break, and yet with more cities and firms still shutting down than doing any re-opening, Beijing is starting to become cognizant of just how deep and serious the economic damage is going to be if this goes on much longer. We are, after all, talking about 80% of the economy, and 90% of exporters, simply not functioning. This is already seeing supply-chain knock-on effects for a swathe of global firms and this, very much like the virus itself, will snowball as time passes if nothing changes. For a country that was already seeing foreign firms talk about shifting production to other locations this is a problem. Thus, perhaps, some of the urgency in trying to stress that everything is returning to normal soon, and that the WHO advice is worth following – this time.
…click on the above link to read the rest of the article…
Rabobank: “What If We Are On The Brink Of An Exponential Increase In Coronavirus Cases?”
Rabobank: “What If We Are On The Brink Of An Exponential Increase In Coronavirus Cases?”
The beginning of 2020 starts to look alarmingly similar to 2018. Back then the US stocks extended their impressive 2017 gains in the first few weeks of trading only to plunge at the end of January and sustain heavy losses in the first half of February. In that period the S&P 500 Index plunged almost 12% from the peak to trough on the back of rising concerns that inflation may rise much faster than initially anticipated forcing the Fed to accelerate the pace of monetary policy tightening. It was just a taste of what was to come as 2018 proved to be a tumultuous year for the US equities which set record highs in September only to end the year deep in the red.
Back to 2020, global stocks are in a risk off mode amid escalating concerns about the coronavirus. The S&P 500 Index plunged 1.57% on Monday trimming its year-to-date gains to just 0.40%. One could argue that this is just a correction from seriously stretched levels that will ultimately prove as an opportunity to buy stocks on the back of an assumption that the Chinese officials will, eventually, get on top of the coronavirus.
However, it is extremely difficult to estimate the negative impact on the Chinese economy at a time when the death toll is rising sharply (106 so far) and the number of confirmed cases is soaring (4,515 as of today). More than 50 million people in China are now in a lockdown.
t is also worth considering the following: what if we are on the brink of an exponential increase in the number of people affected by the deadly virus? One could argue that we have already reached this stage given that confirmed cases reportedly increased by 65% over the past few days.
…click on the above link to read the rest of the article…
Rabobank: “Imagine London In Full Lockdown”
Rabobank: “Imagine London In Full Lockdown”
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.
…click on the above link to read the rest of the article…
Rabobank: “World War 3? The US Has Crossed A Red Line… But It’s Not The One They Think”
Rabobank: “World War 3? The US Has Crossed A Red Line… But It’s Not The One They Think”
“World War Three!” is trending on social media the day I return to work after two weeks off deliberately not reading any news for once: ironic given my reputation for being bearish about geopolitics. Markets, of course, have failed to react much: Middle-East bourses closed down 2-4% on Sunday, which is not exactly end of the world stuff; WTI futures are up around 3%, again not a real panic; while US 10-year yields were down from 1.94% intraday Thursday to 1.79% as of the Friday close – but the weak US ISM survey (47.2 headline; 46.8 new orders; 45.1 employment) could be to blame for that alone.
You know what? For once the markets are arguably right, albeit for all the wrong reasons. Markets think nothing that happens in the Middle East matters because central banks will have their backs regardless. That is patent nonsense, even if Ben Bernanke is muttering about not ruling out negative rates and further purchases of “private securities” during the next down-turn. If Iran launched a devastating missile attack on Saudi and UAE oil facilities, and means it this time; or on Tel Aviv and the nuclear reactor at Dimona; if it unleashed a wave of global terrorist attacks and assassinations from sleeper agents – none of those things are made better by a lower cost of borrowing. They aren’t even helped by (not) helicopter money, as Bernanke alludes to. Central banks can and would be funding a lot more defence spending immediately on a helicopter money basis in those scenarios, but much of the world economy would take a hit regardless – most so if the oil complex is hit. Sorry Central banks, but in those kind of scenarios–as Ayatollah Khamenei tweeted to US President Trump right before he then killed Iranian Revolutionary Guards Council head Qassem Suleimani–“You can’t do anything.”
…click on the above link to read the rest of the article…
Rabobank: “The Global Institutional Architecture Is Collapsing”
Rabobank: “The Global Institutional Architecture Is Collapsing”
It’s December, and the start of the season of good will to all and peace on earth. Not much of that about, of course.
In the UK, the election has been interrupted by the terrorist attack at London Bridge, which both sides are naturally playing politics with in different ways (The Left is soft on terrorists vs. police underfunding and foreign policy, etc.); the latest opinion polls suggest Labour continues to make up some ground but remains well behind, but London Bridge may perhaps see that impetus stalled. Let’s see if the imminent arrival of US President Trump tips the scales, as President Obama did on Brexit, or if he can hold off on commenting as protocol dictates.
In Germany, Angela Merkel’s coalition partners the SPD have just elected new leadership, and they have veered to the left, hardly a surprise against this global backdrop, but likely accelerating the eventual collapse of the current government and opening up questions about what any new one could look like. Instability, or at least uncertainty, at the heart of the Eurozone is certainly not going to be welcome to investors – yet could it herald an imminent fiscal shift?
Tomorrow and Wednesday will also see the 2019 NATO summit, again in London, where the world’s largest military alliance will get together and try to decide what it is for and if it still has a purpose. Trump continues to put pressure on all members to spend the pledged 2% of GDP to keep it a fighting force vs. Russia, and perhaps China(?): relatively few do or show they even want to (e.g., Germany). He’s is also going to bring up Huawei and 5G to discuss. President Macron of France has called NATO “Brain dead” due to the absence of US leadership–I thought it was leading?
…click on the above link to read the rest of the article…
Rabobank: “Global Central-Bankery Continues To Go Where No-One Has Gone Before”
Rabobank: “Global Central-Bankery Continues To Go Where No-One Has Gone Before”
Stocks at new recorder record highs; bonds up (yields down); CNY up; broad USD DXY up; China issuing USD6bn of sovereign debt at a narrow spread over USTs….it’s all up, up, and away. And why not? Trump tells us the US is “in the final throes” of a phase one trade deal with China. Usually that language is used to imply something is dying, but hey ho, decimate is used to mean annihilation rather than killing one in ten of the enemy, and quantum leap is used to imply something big when it actually means something amazingly small. Suffice to say markets loved it. So much so in fact that it is a song we should keep singing over and over, like another ‘final’- “The Final Countdown”.
Three decades after Europe’s pop-metal kitsch classic first hit the charts, they are still out there playing it, and whenever anyone hears the keyboard intro “Deedle deedle….deedle dee”, everyone knows the song and joins in enthusiastically: how can you not? As such, I suggest that from now on, every time the White House talks about the impending phase one trade deal coming soon, to save time they just play the track for the press. Or just the keyboard intro. And rallying markets can continue to trade off the deep wisdom of the lyrics:
“We’re leaving together; But still it’s farewell; And maybe we’ll come back; To earth, who can tell?
I guess there is no one to blame; We’re leaving ground (leaving ground); Will things ever be the same again?
It’s the final countdown; The final countdown”
…click on the above link to read the rest of the article…
We Now Have Mass Public Unrest In France, Spain, Algeria, Iraq, Lebanon, Egypt, Hong Kong, Venezuela, Chile, Ecuador And Bolivia
We Now Have Mass Public Unrest In France, Spain, Algeria, Iraq, Lebanon, Egypt, Hong Kong, Venezuela, Chile, Ecuador And Bolivia
Ages and Ages of Rage
Monday morning and we here we go again for another “dramatic week”. There are going to be monthly PMIs to look at in particular: will we see any further deterioration, or will growth start to pick up as an early Christmas present? And there are of course rate meetings for the Fed, and the BOJ, and the BOC: the former will cut, with the real issue being if they will signal more soon or not given they are already deep in Repo Madness; and will the giant BOJ wake up from slumber like a giant Kaiju and start throwing markets into turmoil again?
Plus there is the Brexit circus. Will the EU grant the UK an extension until end-January 2020, or a more flexible date, or will France veto that and insist on a very short extension? Almost certainly they will insist that the newly reopened Withdrawal Agreement is this time firmly shut – so if the British Parliament then decides to merrily reopen it from its end and unilaterally start ramming amendments into it, it will not be doing so with EU approval. As such, and just as pertinently, will PM BoJo get his December election or not? The greater likelihood is not, as Labour appears to be desperate for an election – just not now – although the Lib Dems may be prepared to allow one given they see this as a way to prevent any further movement towards Brexit in the short term. (Though what do they think the election campaign will be about? The price of cheese?) Note that the latest opinion poll for the Observer has the Tories on 40% (+3 on the week), Labour unchanged on 24%, and the Lib Dems on 15% (-1), with the Brexit Party on 10% (-2).
…click on the above link to read the rest of the article…
Focus Is Increasingly On How Similar Conditions Are To The Lead Up To WW2: Rabobank
Focus Is Increasingly On How Similar Conditions Are To The Lead Up To WW2: Rabobank
Back with a bang
As mentioned on Friday, welcome to both La Grande rentrée and weltschmerz: and combining the two, this week we are ‘back with a bang’. That seems appropriate given yesterday marked 80 years since the start of WW2, which one would have thought would have received far more media coverage than it did: instead, far more focus was on how similar some conditions are to the lead up to WW2.
For just one market example, yesterday saw new US and Chinese tariffs kick in, taking a further step down the trade war path – if that is what one still insists on calling it. I underline that more holistic view of the US-China standoff as the Wall Street Journal reports that “SEC Revives Fight Over Inability to Inspect Chinese Auditors of Alibaba, Baidu”. The SEC could yet “impose more oversight on US-listed companies that rely upon those [Chinese] auditors. The measures could include forcing the firms to disclose more about their business or accounting and restricting their ability to sell new shares.” Given the Chinese firms are unlikely to comply, that is a potential step towards an eventual US delisting; and don’t forget there is also a push in the US Congress to stop US capital flows into China via bill S. 1731, which will get a further bipartisan tailwind when Congress returns on 4 September. In short, this is a whole other new front in the US-China struggle (capital flows, following tech limits and tariffs), not a ‘trade war’.
Markets May Focus on Dissenters in FOMC Minutes: Rabobank’s Foley
Let’s see just how weak CNY fixing, and CNY itself, are today. Indeed, after the Chinese manufacturing PMI stayed well below 50 over the weekend, will we take out the low of 7.1926 on the back of this news-flow? If not today, then soon, surely. And then where?
…click on the above link to read the rest of the article…
