Friday, February 21, 2020

Weekly Commentary: Pandemic Risk Rising

Coronavirus cases in China surpassed 76,000. Deaths have reached 2,345. The number of new cases has slowed markedly, perhaps owing to repeated changes in the methodology of counting infections. Developments elsewhere are less encouraging. Plans have been drawn to add 19 temporary hospitals in Wuhan. There are reported cases of Chinese being re-infected after hospital discharge. This week saw a surge in coronavirus cases in Beijing to 396. Two hospitals in Beijing were quarantined, as concerns of a rapid escalation mount. Infections are now spreading in multiple Chinese prisons. Twelve cases have been reported at a single Wuhan nursing home.

A Friday evening New York Times headline: “With 4 Deaths in Iran and More Cases on 3 Continents, Fears of Coronavirus Pandemic Rise.” Alarmingly, new South Korea coronavirus cases spiked to 142 on Friday. Cases quadrupled in two days and surged ten-fold in four (from Monday’s 30 infections). At 346, South Korea is now second only to China (excluding the Diamond Princess). A troubling Wednesday Bloomberg headline: “As Cases Mount, Japan Rapidly Becomes a Coronavirus Hotbed.” Cases tripled over the past week in Japan to 92.

Reported cases in Iran went from zero to 18 in three days. With four deaths, the number of infections could already number in the hundreds. Most are in Qom, but there has been an infection reported in Tehran. A member of the Iranian Health Ministry was quoted by the New York Times: “A coronavirus epidemic has started in the country. It’s possible that it exists in all cities in Iran.” The United Arab Emirates now has 11 cases. Israel and Lebanon both recorded their first infections Friday. The World Health Organization is particularly worried about outbreaks unfolding in areas with inferior healthcare systems. Cases tripled to nine Friday in Italy, with the first death reported.

Friday from the New York Times (Vivian Wang, Donald G. McNeil Jr., Farnaz Fassihi and Steven Lee Myers): “Further bolstering the idea that the virus is spreading widely, an epidemiological modeling team from Imperial College in London estimated Friday that two-thirds of the people infected with coronavirus who left mainland China before restrictions were imposed had traveled throughout the world without being detected.”

The infection count from the Diamond Princess cruise ship now exceeds 600. It appears 28 infected American passengers have been brought back to the U.S. Forty seven infected Canadian passengers are being treated in Japan, while 129 Canadians, having not yet tested positive, flew back to Canada on Friday. Four Australians rescued from the Diamond Princess have tested positive, bringing the total Australians infected on the ship to 46.

Friday evening from the Washington Post (Gerry Shih, Michael Brice-Saddler, Lateshia Beachum and Miriam Berger): “There are outbreaks. There are epidemics. And there are pandemics, where epidemics become rampant in multiple countries and continents simultaneously. The novel coronavirus that causes the disease named covid-19 appears to be on the verge of that third, globe-shaking stage. Amid an alarming surge in cases with no clear link to China, infectious disease experts think the flu-like illness may soon be impossible to contain. The World Health Organization has not declared covid-19 a pandemic, and the most devastating effects… are still in China. But the language coming from the organization's Geneva headquarters has turned more ominous in recent days as the challenge of containment grows more daunting. ‘The window of opportunity is still there, but the window of opportunity is narrowing,’ WHO Director General Tedros Adhanom Ghebreyesus said Friday. ‘We need to act quickly before it closes completely.’”

February 19 – Financial Times (Robin Harding and Alice Woodhouse): “The hundreds of passengers being released by Japan from the Diamond Princess posed an ‘ongoing risk’ of spreading the coronavirus, the US Centers for Disease Control warned as about 500 people began disembarking from the stricken cruise ship. The leading American public health institute said that attempts to quarantine the 3,700 passengers who were on board the vessel moored off Yokohama had been ineffective, after several hundred people on board contracted the infection. The warning from the CDC, which said it was imposing immediate travel restrictions on the ship’s passengers and crew, came as Japan… released some of the remaining passengers…”

As the trading week came to an end, cracks appeared to emerge in the irrepressible global market boom. Notably, initial indications of de-risking/deleveraging were apparent at the emerging markets “Periphery.” With coronavirus cases spiking, the South Korean Kospi equities index sank 3.6%. While Chinese stocks rallied this week, equities dropped 2.0% in Thailand, 1.5% in Vietnam, 1.1% in Taiwan and almost 1% in Malaysia. Stocks were down 2.8% in Turkey and 2.7% in Chile. Local currency bond yields jumped 83 bps in Turkey and 15 bps in Brazil and Chile.

The more intriguing moves were in the currencies. Curiously, the yen sank a quick two percent in two sessions to trade to the low versus the U.S. dollar since April. The South Korean won dropped 2.15%, the Thai baht 1.55%, the Malaysian ringgit 1.28% and the Taiwanese dollar 1.21%. But it wasn’t just Asian currencies under pressure. The Brazilian real declined 2.21%, the Mexican peso 1.87%, the Chilean peso 1.41% and the Russian ruble 0.79%. Notable moves in “developed” currencies included losses of 1.38% in the New Zealand dollar and 1.30% in the Australian dollar.

I view heightened currency market instability as a harbinger of “risk off” de-risking/deleveraging. Increasingly volatile and unpredictable currency swings engender a risk-mitigating reduction in speculative leverage. This, on the margin, reduces marketplace liquidity while weighing on market prices. Such dynamics typically unfold at the “Periphery.” And it is the “Periphery” that happens to be increasingly exposed to Global Pandemic Risk.

The safe havens enjoyed a big week. Gold surged $59 to a seven-year high $1,643. Playing some catch-up, Silver jumped 5.0% to $18.613. Ten-year Treasury yields sank 12 bps to 1.47%, nearing the lowest yields since 2016. Swiss 10-year yields fell five bps to negative 0.76%, with bund yields down three bps to negative 0.43%.

While the moves were not dramatic, it is worth noting late-week reversals throughout the Credit default swaps (CDS) universe. After closing last week near lows going back to 2007, investment-grade corporate CDS rose three bps to 46.6 bps. High-yield CDS jumped 10 bps to an almost three-week high 295 bps. EM CDS rose seven bps to 196 bps, the high since January 31st. Some of the bigger moves were in European high-yield. CDS for the big global banks also reversed higher. It’s also worth noting Japanese banks dropped 1.9% this week, with European banks down 2.3%.

Chinese January Credit data were out this week – and the numbers were gargantuan! Chinese lending surged in what is typically the strongest Credit expansion of the year. Aggregate Social Financing (a measure of total system Credit) surged a record $720 billion – for the month (history’s greatest monthly Credit expansion?). This was more than double December growth and 25% above estimates. Credit growth was 8% ahead of the previous monthly record from January 2019. This pushed one-year growth to almost $3.70 TN, or 10.7%.

New Bank Loans surged a record $475 billion, up from December’s $162 billion. Bank Loan growth exceeded the previous record – January 2019’s $459 billion - by about 3%. This put one-year growth at $2.408 TN, or 12.1%. Bank Loans expanded 27% in two years and 87% in five.

January’s Credit boom was driven largely by a surge in corporate lending – that, considering the backdrop, could be viewed ominously. Government lending was strong. Even “shadow banking” showed a pulse, reversing course for a marginal expansion during the month. Curiously, Consumer (chiefly mortgage) Loans increased only $90 billion during January, the weakest growth since October. Monthly Consumer Loan growth was down 36% from January 2019. Still, two-year growth was at 35%, three-year at 64% and five-year growth of 137%.

February 16 – Reuters (Yawen Chen and Se Young Lee): “New home prices in China grew at their weakest pace in nearly two years in January as the economy slowed and a fast-spreading coronavirus outbreak brought the country’s property market to a standstill. Worryingly, analysts say the worst is yet to come for the property market, noting that with stepped-up measures to contain the spread of the epidemic, aggressive price-cutting by developers and widespread business disruption will be fully reflected only in coming months. Average new home prices in China’s 70 major cities rose 0.2% in January from the previous month…”

We’ll wait about a month for February Credit data.  Yet it would appear China’s housing markets had already begun a meaningful slowdown prior to the coronavirus outbreak. With apartment sales slowing dramatically, February Consumer lending volumes will be dismal. How quickly apartment sales bounce back is a critical issue for Chinese finance as well as China’s economy. Increasingly, however, it appears that great uncertainty surrounds economic prospects for Japan, South Korea, greater Asia and the emerging markets, Europe and globally. The bullish hypothesis that the coronavirus would be largely limited to China and soon contained is increasingly suspect.

February 21 – Bloomberg: “China car sales plunged 92% during the first two weeks of February as the coronavirus outbreak kept buyers away from showrooms. It was even worse in the first week, when nationwide sales tumbled 96% to a daily average of only 811 units, the China Passenger Car Association said in a report released earlier this week. Deliveries this month may slide by about 70%, resulting in a roughly 40% drop in the first two months of 2020, the association said.”

And Wednesday from CNN (Yoko Wakatsuki and Junko Ogura), one of the week's more alarming reports: “More people from the quarantined Diamond Princess cruise ship tested positive for the novel coronavirus Wednesday, according to the Japanese Health Ministry. The ministry said 79 new cases were confirmed, adding that 68 of the people were said to be asymptomatic.”

For the Week:

The S&P500 fell 1.3% (up 3.3% y-t-d), and the Dow lost 1.4% (up 1.6%). The Utilities were little changed (up 9.0%). The Banks fell 1.1% (down 4.7%), while the Broker/Dealers were about unchanged (up 4.1%). The Transports gained 0.4% (up 0.1%). The S&P 400 Midcaps dipped 0.6% (up 1.0%), and the small cap Russell 2000 declined 0.5% (up 0.6%). The Nasdaq100 dropped 1.8% (up 8.2%). The Semiconductors sank 3.3% (up 2.2%). The Biotechs rose 0.9% (up 4.6%). With bullion jumping $59, the HUI gold index surged 10.8% (up 3.2%).

Three-month Treasury bill rates ended the week at 1.515%. Two-year government yields declined seven bps to 1.36% (down 21bps y-t-d). Five-year T-note yields dropped nine bps to 1.32% (down 37bps). Ten-year Treasury yields sank 12 bps to 1.47% (down 45bps). Long bond yields dropped 12 bps to 1.915% (down 47bps). Benchmark Fannie Mae MBS yields fell seven bps to 2.38% (down 33bps).

Greek 10-year yields increased two bps to 0.95% (down 49bps y-t-d). Ten-year Portuguese yields fell five bps to 0.24% (down 21bps). Italian 10-year yields slipped a basis point to 0.91% (down 50bps). Spain's 10-year yields dropped seven bps to 0.23% (down 24bps). German bund yields declined three bps to negative 0.43% (down 25bps). French yields dropped five bps to negative 0.20% (down 32bps). The French to German 10-year bond spread narrowed two to 23 bps. U.K. 10-year gilt yields fell six bps to 0.57% (down 25bps). U.K.'s FTSE equities index was little changed (down 1.8%).

Japan's Nikkei Equities Index declined 1.3% (down 1.1% y-t-d). Japanese 10-year "JGB" yields declined three bps to negative 0.06% (down 5bps y-t-d). France's CAC40 declined 0.7% (up 0.9%). The German DAX equities index fell 1.2% (up 2.5%). Spain's IBEX 35 equities index dipped 0.7% (up 3.5%). Italy's FTSE MIB index slipped 0.4% (up 5.4%). EM equities were mostly lower. Brazil's Bovespa index declined 0.6% (down 1.7%), and Mexico's Bolsa slipped 0.4% (up 2.9%). South Korea's Kospi index sank 3.6% (down 1.6%). India's Sensex equities index dipped 0.2% (down 0.2%). China's Shanghai Exchange rallied 4.2% (down 0.3%). Turkey's Borsa Istanbul National 100 index sank 2.8% (up 2.1%). Russia's MICEX equities index added 0.3% (up 2.0%).

Investment-grade bond funds saw inflows of $5.141 billion, while junk bond funds posted outflows of $40 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added two bps to 3.49% (down 86bps y-o-y). Fifteen-year rates gained two bps to 2.99% (down 79bps). Five-year hybrid ARM rates declined three bps to 3.25% (down 59bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 13 bps to 3.74% (down 64bps).

Federal Reserve Credit last week gained $9.8bn to $4.145 TN, with a 23-week gain of $418 billion. Over the past year, Fed Credit expanded $193bn, or 4.9%. Fed Credit inflated $1.334 Trillion, or 47%, over the past 380 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $4.1 billion last week to $3.463 TN. "Custody holdings" were up $30.6bn, or 0.9%, y-o-y.

M2 (narrow) "money" supply rose $18.9bn last week to a record $15.509 TN. "Narrow money" surged $1.040 TN, or 7.2%, over the past year. For the week, Currency dipped $0.4bn. Total Checkable Deposits dropped $60.1bn, while Savings Deposits surged $79.2bn. Small Time Deposits declined $1.3bn. Retail Money Funds added $1.6bn.

Total money market fund assets gained $8.3bn to $3.633 TN, with institutional money fund assets declining $7.9bn to $2.260 TN. Total money funds jumped $561bn y-o-y, or 18.3%.

Total Commercial Paper rose $10.3bn to $1.123 TN. CP was up $63bn, or 5.9% year-over-year.

Currency Watch:

For the week, the U.S. dollar index was little changed at 99.262 (up 2.9% y-t-d). For the week on the upside, the Swiss franc increased 0.4%, the Canadian dollar 0.2%, the euro 0.2% and the Swedish krona 0.1%. For the week on the downside, the Brazilian real declined 2.2%, the South Korean won 2.2%, the Mexican peso 1.9%, the Japanese yen 1.6%, the New Zealand dollar 1.4%, the Australian dollar 1.3%, the British pound 0.6%, the South African rand 0.6%, the Singapore dollar 0.4%, and the Norwegian krone 0.3%. The Chinese renminbi declined 0.58% versus the dollar this week (down 0.92% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index rallied 1.1% (down 5.7% y-t-d). Spot Gold jumped 3.7% to $1,643 (up 8.2%). Silver surged 5.0% to $18.613 (up 3.9%). WTI crude recovered $1.41 to $53.46 (down 12%). Gasoline rallied 4.3% (down 2%), and Natural Gas jumped 3.7% (down 13%). Copper increased 0.3% (down 7%). Wheat gained 1.9% (down 1%). Corn dipped 0.3% (down 2%).

Market Instability Watch:

February 16 – Bloomberg (Liz McCormick and Ruth Carson): “Investors overseeing trillions of dollars are plowing money into U.S. government debt like never before, in a wave that’s only gaining strength as the spreading coronavirus casts doubt on the global growth outlook. Evidence of the insatiable demand can be found across the fixed-income universe. Pensions, which have been ramping up bond allocations for more than a decade after a change in regulations, now hold a record amount of longer-dated Treasuries. Bond mutual funds saw a historic inflow of money last year, with no sign of a slowdown. Even hedge funds have piled in.”

February 18 – Reuters (Gertrude Chavez-Dreyfuss): “Foreign buying of Treasuries in 2019 hit their largest level in seven years…, as Japanese and euro zone investors sought higher-yielding U.S. government debt in a world of negative interest rates. Overall foreign inflows into U.S. Treasuries hit $6.696 trillion in December, up about $425 billion from a year earlier. That was the largest foreign inflow since 2012… Japanese investors bought $115 billion in U.S. Treasuries in 2019, while euro zone investors were net buyers of more than $100 billion, accounting for half of foreign buying last year.”

February 18 – Financial Times (Joe Rennison): “The cost of insuring against the default of some of the world’s biggest corporate borrowers has dropped to its lowest levels since 2007, as investors bet that continued strong support from central banks will keep credit markets ticking over. The CDX North American Investment Grade index, which reflects the cost of default protection on bonds issued by 125 US companies, fell to 43.81 bps last week, implying a premium of $4.38 to insure a $1,000 portfolio of bonds. That was its lowest level since July 2007… An equivalent index tracking a group of European credit default swaps dropped to 41.26bp on Monday, also its lowest level since November 2007… One credit derivatives trader said the CDX index’s recent move lower had been driven in part by the strong investor appetite for corporate bonds. ‘The CDS indices are used as place-holders,’ said the trader. ‘If there aren’t enough individual corporate bonds to buy then people sell CDX. There are a tonne of people that want to buy corporate credit and it is driving the index lower.’”

February 18 – Bloomberg (Joanna Ossinger): “Trading in U.S. stock options has by at least one metric reached a level of bullishness not seen since the height of the dot-com boom. Investors bought to open almost 24 million call options last week, more than ever before, Sundial Capital’s Jason Goepfert wrote… At the same time, selling of calls to close dropped nearly 30% from its level a couple of weeks ago… That puts the difference between the two at a record high. ‘We’re seeing a level of leveraged speculation right now’ that ‘only has the early 2000s as a precedent,’ Goepfert wrote… In the past 20 years, any time calls bought to open minus calls sold to close hit 10 million, stocks struggled in the months that followed, he said.”

February 18 – Financial Times (Jennifer Alban): “While the S&P 500, Dow and Nasdaq have surged to record highs in recent weeks, another rally has taken hold. The US options market has been experiencing a huge jump in trading — led by large-capitalisation companies including Tesla, Amazon, Apple, Google, Microsoft and Disney, according to analysts at Goldman Sachs. Vishal Vivek, equity derivatives strategist…, noted that trading volumes in US options were now almost as high as volumes on the underlying stocks, at 91%. That is the highest level in at least the past 14 years, and about three times the equivalent percentage in 2016. The purchase of ‘call’ options… has been a particularly popular trade. If the stock increases in price over that period, the holder of the call option gains.”

February 19 – Wall Street Journal (Jon Sindreu): “The stock market’s coronavirus wobbles may be overdone given the robustness of the U.S. economy, so it is tempting to say that ‘the only thing to fear is fear itself.’ What should be concerning, though, is that there is little of it. On Tuesday, February’s survey of global fund managers conducted between Feb. 6 and 11 by Bank of America Merrill Lynch showed that cash now makes up only 4% of portfolios, the lowest since March 2013. Little ‘cash on the sidelines’ is often a sign of investor confidence.”

February 19 – Financial Times (Mamta Badkar): “US and European stocks are at record levels, but analysts at Goldman Sachs have cautioned the risk of a correction in equity markets is ‘high’ as the impact of the coronavirus on earnings is being underestimated by investors. ‘We believe the greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices, suggesting that the risks of a correction are high,’ said Peter Oppenheimer, analyst at Goldman Sachs…”

February 20 – Reuters (Stanley White and Tom Westbrook): “The yen’s status as a safe haven is coming under pressure as unease grows about the rising number of coronavirus cases in Japan, against the backdrop of a stuttering domestic economy. Japan’s currency tumbled to a nine-month low against the dollar and faced a barrage of selling against other currencies on Wednesday, in what traders and analysts say points to a flight of large portfolio investors from yen markets. That runs counter to the long-standing assumption that Japanese funds would repatriate their money during a true global crisis, pushing the yen higher.”

February 20 – Wall Street Journal (Avantika Chilkoti): “Emerging-market companies sold a record amount of foreign-currency debt this year, taking advantage of low rates and investors’ appetite for better returns despite warnings about the growing risks of a global borrowing binge. About $66.4 billion of bonds denominated in U.S. dollars, euros and other currencies have been sold this year by nonfinancial businesses in countries such as China, Mexico and Chile, according to Dealogic... That is almost double the $34.2 billion raised in the first seven weeks of last year and the highest ever for the period… The growing debt pile leaves the companies vulnerable to any stark appreciation in the foreign currencies, which would drive up the cost of interest payments. Businesses that rely on domestic operations, such as real-estate firms, are particularly susceptible.”

February 19 – Bloomberg (Lu Wang): “Making money in U.S. markets has become scarily easy. Consider: Since the start of the year, the S&P 500 is up 5%, compared with a loss of 0.7% for an MSCI equity measure of the rest of the world. The dollar has rallied 3.4% against a basket of major currencies. Ten-year Treasury bonds have returned more than 2%. It’s happening with a minimum of risk. The three asset classes are sporting an average year-to-date Sharpe ratio, which adjusts returns for volatility, of 4.23 on an annualized basis…That’s in the 98th percentile since 1982.”

February 19 – Reuters (Marc Jones): “Lebanon dollar-denominated bonds fell to record lows on Wednesday with some dropping as far as 29 cents on the dollar, after the country’s parliament speaker was said to see a debt restructuring as an ‘ideal solution’. As heavily-indebted Lebanon battles its worst ever financial crisis, the government is under growing pressure to decide what to do about its repayments, including a $1.2 billion Eurobond due on March 9.”

China Watch:

February 19 – Reuters (Josh Horwitz and Chayut Setboonsarng): “Blocked highways. Stranded workers. Dwindling supplies. Shipping and air freight companies also hamstrung. The Chinese manufacturing engine that powers much of the world economy is struggling to restart after an extended Lunar New Year break, hindered by travel and quarantine restrictions imposed to curb the coronavirus epidemic and still in place in many parts of the country. Case in point: in the southern China manufacturing hub of Dongguan, a factory that makes vaporizers and other products had just half of its workforce of 40 last week and was struggling to function without key personnel. ‘The quality inspectors, they’re all out,’ said Renaud Anjoran, who runs the factory. ‘One is stuck in Hubei, the other is in an area with no transportation open.’”

February 19 – Bloomberg: “The outbreak of the coronavirus and China’s efforts to stop the spread mean the economy will grow slower this quarter than first thought, with the median forecast now for growth to be the slowest in 30 years. China’s gross domestic product will grow 4% in the first quarter, according to the median of 18 forecasts… That’s down from 5.9% in the last survey on Jan. 22 and the lowest level since 1990. Full-year economic growth is forecast to be about 5.5%, also down from 5.9% last month… The lowest forecast is from Standard Chartered Plc. who expect the economy to grow 2.8% this quarter from a year ago, and to contract 1.5% from the fourth quarter.”

February 17 – Wall Street Journal (Nathaniel Taplin): “Things were just starting to look up for China’s small businesses in late 2019. Now, two new threats have emerged: A dangerous new coronavirus is spreading through the nation and Chinese officials have shut down much of the country to try to curb infections. The unprecedented quarantine measures probably have helped slow the spread, but at an enormous cost… If China doesn’t get back to work soon, the damage to small businesses and to employment may prove irreparable. Just how bad things could get was highlighted by a joint study from China’s top two universities in early February. Researchers from Tsinghua and Peking universities found that of 1,435 small businesses they surveyed, more than one-third had a month’s worth or less of cash on hand. Two-thirds had less than three months’ worth.”

February 19 – Reuters (Winni Zhou and Stanley White): “China cut the benchmark lending rate on Thursday, as widely expected, as the authorities move to lower financing costs for businesses and support an economy jolted by a severe coronavirus outbreak… The one-year loan prime rate (LPR), the new benchmark lending gauge introduced in August, was lowered by 10 bps to 4.05% from 4.15% at the previous monthly fixing.”

February 14 – Bloomberg: “The coronavirus outbreak in China is putting pressure on price stability because production has been delayed but it will not lead to large-scale inflationary pressures, according to China’s central bank. The People’s Bank of China’s stance is unchanged and it will maintain prudent monetary policy, Deputy Governor Fan Yifei said…The central bank is confident the effects of the outbreak can be dealt with and that the economy can be kept stable, and it urged investors to avoid irrational sentiments in financial markets…”

February 19 – Bloomberg: “China is considering measures such as direct cash infusions and mergers to bail out an airline industry crippled by the coronavirus outbreak, according to people familiar… One proposal involves allowing some of the nation’s biggest carriers -- which are controlled by the state -- to absorb smaller ones suffering the most from the collapse of travel, the people said, asking not to be identified because the information hasn’t been discussed publicly. Another option being explored is for the government to inject billions of dollars to bail out the industry…”

February 20 – Bloomberg: “China plans to take over indebted conglomerate HNA Group Co. and sell off its airline assets, the most dramatic step to date by the state to contain the deepening economic damage from the deadly coronavirus outbreak… The government of Hainan, the southern island province where HNA is based, is in talks to seize control of the group after the contagion hurt its ability to meet financial obligations, according to people familiar with the plans. The once little-known airline operator shot to prominence between 2016 and 2017 after a debt-fueled acquisition spree saw it become the leading shareholder of iconic companies such as Hilton Worldwide Holdings Inc. and Deutsche Bank AG, while paying top dollar for properties from Manhattan to Hong Kong.”

February 18 – Financial Times (Sun Yu): “Companies across China are taking advantage of the coronavirus outbreak to shore up their balance sheets, as Beijing urges them to issue cheap bonds to support the world’s second-biggest economy. More than 25 Chinese businesses, ranging from airlines to drug distributors, have raised Rmb24bn ($3.4bn) by selling ‘virus control’ bonds since the start of February, according to Huatai Securities… Regulators have encouraged the sales of virus-linked bonds by cutting the approval process from weeks to days while urging state-backed banks to buy them. To qualify for the programme, companies must commit to spending at least 10% of the proceeds on measures to combat the epidemic…”

February 17 – Reuters (Stella Qiu, Hallie Gu, Dominique Patton, Tom Daly, Min Zhang, Yawen Chen and Lusha Zhang): “China will grant exemptions on retaliatory duties imposed against 696 U.S. goods, the most substantial tariff relief to be offered so far, as Beijing seeks to fulfill commitments made in its interim trade deal with the United States.”

February 16 – Bloomberg: “China’s provinces are facing the economic fallout from the coronavirus with depleted ammunition, given they were already bracing for a deterioration in public finances before the outbreak hit. More than half of mainland provinces expect slower expansion of revenue in 2020 than last year’s average local income growth, according to their budgets published before the disease outbreak became widespread in January. Hubei, the epicenter, was already expecting income to fall.”

February 16 – Reuters (Yawen Chen and Clare Jim): “China Evergrande Group , the third-largest developer by sales in the country, said… it will offer 25% discount for all properties on sales from Feb 18 to Feb 29. The incentives come as property firms fear that the coronavirus outbreak would hit the market… ‘It’s hard for properties to be sold online...Even if property demand is expected to rebound after the coronavirus outbreak, sales would still have a huge impact in the short term,’ said Sheng Songcheng, a government advisor… Sheng expects that the value of lost property sales could reach 1.44 trillion yuan ($206.13bn) in the first quarter and property investment could drop by as much as 37.5% on year due to outbreak of the flu-like virus.”

February 16 – Bloomberg: “Most U.S. factories in China’s manufacturing hub around Shanghai will be back at work this week, but the ‘severe’ shortage of workers due to the coronavirus will hit production and global supply chains, according to the American Chamber of Commerce in Shanghai. While about 90% of the 109 U.S. manufacturers in the Yangtze River delta expect to resume production this week, 78% of them said they don’t have sufficient staff to run at full speed, according to a survey by AmCham.”

February 17 – Financial Times (Sue-Lin Wong, Yuan Yang and Christian Shepherd): “China has clamped down on civil society activists and access to information on the coronavirus outbreak after President Xi Jinping told authorities to strengthen control over online media as public outrage erupted over Beijing’s handling of the health emergency. Prominent legal rights activist Xu Zhiyong, who had criticised China’s political system and its response to the coronavirus outbreak in a series of scathing essays, went missing at the weekend…”

February 16 – Bloomberg: “China is considering delaying its most high-profile annual political meeting for the first time in decades, as the government attempts to contain an outbreak of a deadly new strain of coronavirus.”

Global Bubble Watch:

February 14 – Bloomberg (Alex Longley): “February 2020 will come to be remembered as a period of historic disruption to physical supply chains the world over, as the coronavirus wrecks trade. Dozens of export sailings to ship China-made goods to consumers from the U.S. to Europe -- think handbags, flat-screen TVs, and plastic toys -- have been canned since the coronavirus crisis escalated last month. Those non-shipments are part of a much bigger picture in which every aspect of global shipping -- from oil and gas through to dry-bulk commodities -- has been upended. The unprecedented gyrations caused by the virus matter because 90% of all trade moves by sea and China has grown into the maritime industry’s main source of cargoes.”

February 17 – Bloomberg: “The biggest question for the global economy right now is how quickly China can get back to anything like normal operations while it’s battling the coronavirus outbreak that has killed more than 2,000 people and sickened tens of thousands. Government controls and people’s fear of going outside have decimated spending for businesses from local noodle joints and Starbucks stores to Alibaba delivery men. Meantime, many factories are still not working due to a lack of staff, with workers trapped in their hometowns or spending two weeks in quarantine. China’s economy was likely running at just 40%-50% capacity last week, according to a Bloomberg…”

Trump Administration Watch:

February 17 – Wall Street Journal (Asa Fitch and Bob Davis): “The Trump administration is weighing new trade restrictions on China that would limit the use of American chip-making equipment, as it seeks to cut off Chinese access to key semiconductor technology, according to people familiar with the plan. The Commerce Department is drafting changes to the so-called foreign direct product rule, which restricts foreign companies’ use of U.S. technology for military or national-security products. The changes could allow the agency to require chip factories world-wide to get licenses if they intend to use American equipment to produce chips for Huawei… Chinese companies are bound to see the action as a threat to them too, which is a goal of the proposed rule… The move is aimed at slowing China’s technological advancement but could risk disrupting the global supply chain for semiconductors…”

February 15 – Wall Street Journal (Courtney McBride, Nancy A. Youssef and Laurence Norman): “Defense Secretary Mark Esper told European allies in a speech Saturday the U.S. considers China a pre-eminent threat in its pursuit of an ‘advantage by any means and at any cost.’ His comments at the Munich Security Conference followed earlier remarks by Secretary of State Mike Pompeo that ‘the West is winning’ against authoritarian regimes. Mr. Esper’s comments were among his most extensive about China since taking office in July. He warned that by 2035, China aims to ‘complete its military modernization.’ And by 2049, he said, China wants to ‘dominate Asia as the pre-eminent global military power.’”

February 18 – Reuters (Jonathan Landay): “The Trump administration said… it will begin treating five major Chinese state-run media entities with U.S. operations the same as foreign embassies, requiring them to register their employees and U.S. properties with the State Department. Two senior state department officials said the decision was made because China has been tightening state control over its media and President Xi Jinping has made more aggressive use of them to spread pro-Beijing propaganda. ‘The control over both the content and editorial control have only strengthened over the course of Xi Jinping’s term in power,’ said one official. ‘These guys are in fact arms of the CCP’s (Chinese Community Party’s) propaganda apparatus.’”

Federal Reserve Watch:

February 20 – CNBC (Jeff Cox): “Federal Reserve Vice Chairman Richard Clarida doused talk of a rate cut, saying… he doesn’t think most market participants really expect one or that it is noted. ‘Market pricing for rate cuts is a little tricky, because there’s market expectations for rates, there also can be term and liquidity premiums,’ the central bank official told CNBC’s Steve Liesman… Futures contracts are pointing to a rate reduction as soon as June or July and no later than September, according to various indicators. However, Clarida said economists surveyed by Bloomberg largely do not see the Fed easing this year, a view that he gives strong weight.”

U.S. Bubble Watch:

February 19 – Reuters (Lucia Mutikani): “U.S. homebuilding fell less than expected in January while permits surged to a near 13-year high, pointing to sustained housing market strength amid lower mortgage rates. Housing starts dropped 3.6% to a seasonally adjusted annual rate of 1.567 million units last month… That followed three straight monthly increases. Data for December was revised up to show homebuilding rising to a pace of 1.626 million units, the highest level since December 2006, instead of surging to a rate of 1.608 million units as previously reported.”

February 18 – Bloomberg (Prashant Gopal): “U.S. homebuilders are off to a hot start in 2020. In January, the average number of new home orders per community surged 34% to the highest level for the month since the housing recovery began in 2012, according to a survey by John Burns Real Estate Consulting. The January surge comes after sales ticked up in the second half of 2019… The credit goes to job growth, consumer confidence, a strong stock market and, most importantly, a plunge in mortgage rates, according to Rick Palacios Jr., the firm’s director of research.”

February 18 – Bloomberg (Max Reyes): “U.S. homebuilder sentiment in February remained near the highest level since 1999 as lower borrowing costs kept construction firms upbeat about sales prospects. The National Association of Home Builders/Wells Fargo Housing Market Index in February edged down 1 point to 74… Readings above 50 indicate more builders view conditions as good than poor…”

February 21 – Reuters: “U.S. home sales fell in January, but the constraint from tight supply could ease as building permits and the number of homes under construction sit at levels last seen nearly 13 years ago. The National Association of Realtors said on Friday existing home sales declined 1.3% to a seasonally adjusted annual rate of 5.46 million units last month. December’s sales pace was revised down to 5.53 million units from the previously reported 5.54 million units.”

February 21 – Reuters (Dan Burns): “U.S. business activity in both the manufacturing and services sectors stalled in February as companies have grown increasingly concerned about the coronavirus, a survey of purchasing managers showed… The IHS Markit flash services sector Purchasing Managers’ Index dropped to 49.4 this month, the lowest since October 2013 and signaling that a sector accounting for roughly two-thirds of the U.S. economy was in contraction for the first time since 2016.”

February 19 – Reuters (Lucia Mutikani): “U.S. producer prices increased by the most in more than a year in January, boosted by rises in the costs of services such as healthcare and hotel accommodation. The… producer price index for final demand jumped 0.5% last month, the largest gain since October 2018, after climbing 0.2% in December. In the 12 months through January, the PPI advanced 2.1%, the biggest increase since May…”

February 18 – CNBC (Jeff Cox): “The gap between open jobs and unemployed workers is about as wide as the one between the kinds of available positions and the qualifications that the workforce collectively has to fill them. A recent survey from the Manpower Group… exemplifies the chasm: Nearly 7 in 10 employers reported talent shortages in 2019, the worst level ever and a jump of 17 percentage points from just a year ago. It’s also more than three times higher than a decade ago. The data comes as the Labor Department reports that there are still about 670,000 more job vacancies than there are unemployed potential workers.”

February 18 – Reuters (Noel Randewich): “As Wall Street approaches the 20th anniversary of the piercing of the dot-com bubble, today’s decade-old rally led by a few small players shows some similarities that cautious investors are keeping an eye on. March 11, 2000 marked the beginning of a crash of overly-inflated stocks that would last over two years, lead to the failure of investor favorites including Worldcom and and take over 13 years for Wall Street to recover from. That bust ended a 1,000% decade-long Nasdaq rally that had been fueled by low interest rates and a rush to invest in the emerging World Wide Web, often at any cost.”

February 19 – Financial Times (Derek Brower): “Bankruptcy risks in the US shale sector are rising, with weak oil prices and tightening access to credit worsening the outlook for some producers just as a ‘staggering’ $86bn in debt maturities start to come due. Speculative-grade, or subinvestment, debt makes up more than 60% of the total to be repaid between now and 2024, ‘implying a higher degree of default risk for the industry’, said Moody’s… Speculative-grade maturities will peak in 2022, dwarfing investment-grade maturities by almost two to one that year, Moody’s said.”

February 19 – Wall Street Journal (Julia-Ambra Verlaine): “U.S. oil-and-gas companies need cash, but it won’t come at a cheap price. Explorers and producers have more than $85 billion of debt maturing over the next four years. Those with junk-rated debt will likely have a hard time tapping capital markets in 2020, increasing the odds for wave of defaults, according to a new report by Moody’s… ‘Despite our expectation of a generally low interest rate environment globally, such companies face greater risk because of continuing overproduction, depressed natural gas prices and widespread investor risk aversion toward the exploration and production sector,’ said Moody’s analyst Sajjad Alam.”

February 18 – CNBC (Arjun Kharpal): “Apple shares were down 1.8% Tuesday, a day after the iPhone maker warned that it does not expect to meet its own guidance for the March quarter because of the impact from the coronavirus…. Apple said… there was ‘a slower return to normal conditions than we had anticipated’ pointing to issues around its supply and demand. The U.S. technology giant has large exposure to China, with around 15% of revenue coming from the region and most of its products, including the lucrative iPhone, being made there.”

February 18 – Wall Street Journal (Konrad Putzier): “More New York City hotel owners are defaulting on their mortgages, succumbing to a crush of new supply and rising expenses. The surge in new development has pressured room rates, while short-term rental-listing websites such as Airbnb Inc. have also gained market share. New York’s average daily room rate fell to $255.16 last year, according to research firm STR. That is down from $271.15 in 2014 and the lowest figure since at least 2013. A continued construction boom could push these numbers down further: 22,117 new hotel rooms were under construction or in planning as of January, according to STR.”

Fixed-Income Bubble Watch:

February 20 – Bloomberg (Molly Smith, Claire Boston and John Ainger): “It’s rarely been a better time for borrowers with good credit to tap into the bond market. In fact, the same is true for borrowers with dodgy credit. It’s not just U.S. Treasuries that are seeing near-historic low yields. Once-radioactive sovereign markets like Greece, high-tax U.S. states like New York and California, and corporate borrowers from investment grade to junk are being rewarded with yields that are barely above benchmarks. With the record-long U.S. economic expansion on course to enter a 12th year, a swollen supply of investor capital flooding into markets is shrinking or eliminating risk premiums throughout the fixed-income landscape. It’s not that investors are oblivious to the eye-popping valuations. In fact, ‘bond bubble pops’ was the second-most-cited risk in Bank of America’s latest survey of fund managers. Regardless, many investors ask, what choice do they have but to keep on buying?”

February 19 – Bloomberg (Olivia Raimonde): “U.S. blue-chip companies are borrowing for longer and longer periods in the corporate bond market, locking in record-low borrowing costs for years as money managers accept greater risks in exchange for higher yield. The duration of U.S. investment-grade corporate bonds outstanding, a measure of how exposed the total market is to the risk of rising interest rates, has risen above eight years. That’s the highest level since the late 1970s. Rising overall duration has been driven in part by companies selling longer-dated notes in recent months.”

February 19 – Bloomberg (Paula Seligson): “Junk bonds are starting to look a little like leveraged loans in a new sign of investor fever for higher-yielding debt. Private-equity owned companies Zayo Group Holdings Inc. and LifePoint Health Inc. have torn up the rule book when it comes to a high-yield bond structure known as the non-call period, which makes it harder for borrowers to redeem debt early without paying a penalty to investors. Zayo’s planned offering trims the period to just a year, bringing it closer in line to the structure in leveraged loans. Some analysts have sounded the alarm that the deals could set a new precedent in a market that’s seen years of eroding investor protections. Yet demand has stayed strong with orders for Zayo’s $1 billion secured bond swelling to twice that amount before marketing even began on Tuesday, as investors clamor for deals…”

February 17 – Wall Street Journal (Sam Goldfarb): “Investors’ renewed demand for speculative-grade corporate loans is proving to be a boon for businesses, allowing them to slash billions of dollars in borrowing costs in one of the biggest refinancing waves on record. So far this year, businesses ranging from retailer BJ’s Wholesale Club Holdings Inc. to power generator Calpine Corp. have lowered the interest rates on some $117 billion of loans. That includes $95 billion in January, the second-largest monthly total in records going back to 2002, according to LCD, a unit of S&P Global Market Intelligence.”

Central Bank Watch:

February 16 – Financial Times (Dario Perkins): “The idea that central banks can address any problem that emerges in markets is surely one of the most dangerous in finance. Since the outbreak of the coronavirus in China, it is reaching the point of parody. Without doubt, the prospect of monetary stimulus has buoyed investor confidence over the past year, supporting a powerful rally in equities and a big easing in financial conditions. But central bank officials are contributing to the fantasy that they can solve other ills, by continually talking about risks outside their mandates.”

February 19 – Financial Times (Laura Pitel): “Turkey’s central bank has cut its benchmark rate for a sixth time in a row, despite growing currency volatility and geopolitical risks. The bank’s monetary policy committee lowered its one-week repo rate by 50 bps to 10.75% on Wednesday, bringing the bank closer to achieving President Recep Tayyip Erdogan’s long-stated aim of having single-digit rates in a bid to revive the country’s previous credit-fueled, fast-paced growth.”

Asia Watch:

February 20 – UK Guardian: “The South Korean city of Daegu was facing an ‘unprecedented crisis’ after coronavirus infections that centered on a controversial ‘cult’ church surged to 38 cases, accounting for nearly half of the country’s total. The city of 2.5 million people, which is two hours south of the capital Seoul, was turned into a ghost town after health officials said the bulk of country’s 31 new cases announced on Thursday were linked to a branch of the Shincheonji Church of Jesus. ‘We are in an unprecedented crisis,’ Daegu’s mayor, Kwon Young-jin, told reporters.”

February 17 – Financial Times (Song Jung-a and Stefania Palma): “South Korea’s president warned that ‘emergency steps’ were needed to prevent a growing crisis in the country’s China-reliant economy, as the fallout from the deadly coronavirus outbreak reverberated across the globe. President Moon Jae-in called for ‘all possible measures’ to support the South Korean economy, as Singapore also unveiled a S$6.4bn ($4.6bn) stimulus package to offset the impact of the virus. This came a day after analysts said Japan faced a recession as the virus disrupted regional supply chains and exports.”

February 16 – Reuters (John Geddie and Aradhana Aravindan): “Singapore… cut its 2020 growth and exports forecasts due to an expected economic blow from the new coronavirus outbreak, flagging the chance of a recession this year.”

Japan Watch:

February 19 – Bloomberg (Gearoid Reidy): “Japan is emerging as one of the riskiest places for the spread of the coronavirus, prompting criticism that Prime Minister Shinzo Abe’s government has misfired on its policies to block the outbreak. The number of infections in Japan has more than doubled in the past week to 84, tying Singapore as the country outside mainland China with the most cases. The government is being faulted for being too slow to bar visitors from China and too lax in its quarantine of the Diamond Princess cruise ship, where infections surged during two weeks docked in Yokohama.”

February 16 – Reuters (Leika Kihara and Daniel Leussink): “Japan’s economy shrank at the fastest pace in almost six years in the December quarter as a sales tax hike hit consumer and business spending, raising the risk of a recession as China’s coronavirus outbreak chills global activity… Japan’s gross domestic product (GDP) shrank an annualized 6.3% in the October-December period…, much faster than a median market forecast for a 3.7% drop and the first decline in five quarters.”

February 18 – Reuters (Tetsushi Kajimoto): “Japan’s machinery orders tumbled at their fastest pace since 2018 while exports posted a 14th straight month of decline as the world’s third-largest economy grappled with the widening impact of the coronavirus outbreak and a recent sales tax hike. …Exports fell 2.6% year-on-year in January, smaller than a 6.9% decrease expected by economists and dragged by U.S-bound shipments of cars and construction and mining machinery. It followed a 6.3% fall in December. Separate data… showed core machinery orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, fell 12.5% month-on-month in December…”

Europe Watch:

February 18 – Bloomberg (Carolynn Look): “Investors have been plunged back into a gloomy mood over the German economy on concern the coronavirus outbreak in China will disrupt global trade. Expectations for the next six months fell below even the most pessimistic estimate in a Bloomberg survey, suggesting confidence is fading that Europe’s largest economy can stem a manufacturing recession that has lasted more than a year.”

Leveraged Speculation Watch:

February 20 – Bloomberg (Srinivasan Sivabalan and Adrian Krajewski): “It’s too early to call an end to the euro’s rout, even after its worst start to a year since 2015. Money managers from Aberdeen Asset Management to Pinebridge Investments expect more weakness in the common currency. That’s because the factors that pushed the euro to a 34-month low against the dollar, such as carry trades, are still intact.”

Geopolitical Watch:

February 17 – Reuters (Maria Tsvetkova): “Russia said… plans by the United States to deploy weapons in space would deal an irreversible blow to the current security balance in space, the RIA news agency cited the foreign ministry as saying.”