Buy The Viral-Apocalypse-Dip (Bern Victims)

It was evident on Tuesday that at least some market participants (both carbon-based and otherwise) decided it was better to buy the viral-apocalypse-dip than not.

On the off chance the world doesn’t end this month or next, risk assets will probably fade the Wuhan panic.

Of course, any bullish lean from still-elevated levels on US benchmarks implicitly assumes America’s tech titans don’t let everyone down when they report this week. The market is also trusting Jerome Powell not to fumble another press conference or say anything to inadvertently rattle investors’ confidence in the Fed’s unspoken desire to perpetuate a liquidity-driven rally.

Although Tuesday brought more evidence that business spending in the US remains weak, other economic data came in solid, as both consumer confidence and the Richmond Fed beat expectations.

That helped reverse the recent bull flattening pressure on the curve, as 10-year yields were 4bps cheaper into the US afternoon, steepening the 2s10s by ~2bps. Treasury futures volumes remain elevated.

Analysts continue to weigh in on the likely economic and market ramifications of the virus outbreak, even as the schizophrenic character of modern markets has a pernicious tendency to render even the most timely analysis obsolete within minutes.

SocGen’s Kit Juckes noted Tuesday that “the belief that low rates can and will smooth over the deepest potholes in the road ahead for financial markets, is deeply-ingrained”. Remember, we’re coming off a year that saw the largest net easing impulse in recent memory.

But, as we’ve been stubbornly keen to emphasize over the past couple of sessions, the economic fallout from this unfortunate global health scare will be perceptible, even if it (hopefully) proves fleeting, something Juckes underscores.

“There will be an economic impact from the virus outbreak in China, even if we don’t yet know how long it will last and therefore how big the economic hit will be”, he went on to say. “Whatever else happens, there will be more pressure for easier policy in China, and further reasons for other central bankers to remain dovish”.

Here’s a quick snapshot of key economic indicators on the mainland during the SARS epidemic (shaded in grey):

(SocGen)

Meanwhile, Nordea’s Andreas Steno Larsen writes that until the severity of the Wuhan virus is known, about the only thing anyone can do is have a look at past outbreaks and graph the market reaction.

“Equities temporarily sold off post SARS [with] Europe hit the worst (20-25% drawdown), while MSCI World drawdown was less than 10%”, Larsen notes, adding that in rates, “long bonds [were] up [and] more cuts priced but [with] only a marginally flatter curve”. Bunds rose sharply in the wake of the SARS outbreak.

(Nordea)

“The Coronavirus is of course the main short-term driver of markets but as we’ve discussed of late, we think markets have been priced for perfection whereas the reality is that positioning and valuations are stretched and the data still has a lot to prove”, Deutsche Bank’s Jim Reid said. He then delivered the following brief summary of the situation along with some possibly useful historical context:

Without downplaying the very tragic human effects, a confirmed death toll of 106 so far (vs. 80 yesterday) is but a fraction of the hundreds of thousands of people who die each year globally from seasonal flu. On the other hand of course, this is a new virus that’s seen the number of confirmed cases double every 2 days (nearly doubled overnight) and at this rate is on the brink of passing the number of recorded cases of SARS back in 2003 in China and HK which eventually killed 774 people globally. Many experts suggest that by far the biggest issue in this episode is the long contagious period where there are no symptoms which makes the virus much harder to isolate and different from SARS. SARS had a higher mortality rate of 9.6% though against c.2.8% for Coronavirus so far. For reference the famous 1918 flu outbreak had a fatality rate of 2.5% with normal flu often no more than 0.1%. China’s reaction has been a lot more rapid than for SARS so a different template and this makes analysing it hard. In doing the research the thing that stood out for me was how many people die of flu globally in normal years even if the fatality rate is low. Anyway as a minimum Chinese data is going to take a notable hit for many weeks and getting a true read of underlying momentum is going to be hard.

Some readers (and many among the Twitterati) seem convinced that Bernie Sanders’s poll numbers have something to do with the risk-off mood across assets over the past few sessions.

We wouldn’t disagree, but we would note that those kinds of worries tend to manifest in hedging activity around key dates associated with the nomination process and, ultimately, the general election, not so much in the en masse selling of cash equities coming off a weekend. And, indeed, you are seeing some of that hedging.

“Mind you that also in the background of this recent risk asset discomfort has been the trajectory of Bernie Sanders in the Iowa and New Hampshire Democratic primaries, which too has corresponded with large tail-buying in VIX calls expiring in those primary time horizons as well”, Nomura’s Charlie McElligott said Tuesday, noting that there are “still kinks there as well in S&P downside ‘crash’ too”.

But it seems doubtful that the price action on Friday or Monday was materially affected by anyone “feeling the Bern”, so to speak.

That’s not say it didn’t have an effect at the margins, but clearly, Wuhan > Bernie – at least until the virus abates and there’s some concrete reason to believe that Biden’s odds of getting the nod to take on Trump are truly fading.

Still, Bernie gets a mention from the above-mentioned Reid, too. “The market risk of a Bernie Sanders Presidential victory has been completely underplayed”, he says, adding this:

Going into the caucuses, the national race seems to be settling around the two polling frontrunners of Joe Biden and Bernie Sanders, and right now Sanders has actually edged ahead of Biden on both Betfair and PredictIt. However, when we asked who was most likely to be the Democratic nominee in our EMR survey a couple of weeks ago, Biden was the most popular choice, with 49% of respondents, while Sanders was selected by just 10%, which suggests that many market participants (or at least the ones who answered our survey) could be completely underestimating the chances that Sanders might be selected as the nominee especially as 90% said his Presidential victory would be a negative for markets.

It’s the socialist scare – again. We heard the same thing late in the third quarter (and early in the fourth) when Elizabeth Warren was making her move and CNBC was busy perpetuating a thinly-veiled smear campaign.

Obviously, a Bernie win would not be a positive development for equities in the near-term, but we’re so far away from realizing that scenario that it hardly bears mentioning – or at least not when there’s a clear and present danger in the virus outbreak.