bonds Markets stocks

State Of Emergency.

Who's excited for mainland Chinese markets to reopen?

Some folks didn’t fancy being long into a weekend that will feature more headlines documenting new cases of the coronavirus and, in all likelihood, more deaths.

Looming large on the horizon is the reopening of mainland markets in China, where shares are almost sure to plunge, especially after Friday’s rout on Wall Street.

On Friday afternoon, the US declared a public health emergency mandating quarantines for anyone traveling from the epicenter of the outbreak in China. Trump suspended entry into the US for foreign nationals who have recently been in China, other than immediate family of US citizens. Flights from China to the US will be funneled through seven airports from Sunday (JFK, O’Hare, SFO, Seattle, Atlanta, Honolulu, and LAX).

Treasurys rallied to close out what some would suggest was an improbable month for bonds.

Q4’s reflation narrative is now in serious jeopardy, with 30-year yields falling below the Fed’s inflation target on Friday. 2-year yields plunged an incredible 9bps to the lowest since September 2017. So far in 2020, 2-year yields have fallen every day but five.

“US rates will remain beholden to the path of the coronavirus and, to a greater or lesser extent, the assessment of the World Health Organization”, BMOs Ian Lyngen, Jon Hill and Benjamin Jeffery said in a note. “The actual impact to US growth doesn’t appear to be very significant, but clearly the risk-off tone that has taken place has already spurred quite a significant repricing in Fed expectations” even before Friday, Credit Suisse’s Jonathan Cohn told Bloomberg, in a phone interview.

10-year yields were lower by 17bps on the week. That looks like the largest weekly drop in five months. The 21-day Z-score is nearly -3.

Given the above, you can probably surmise that it was another monumental month for the long-bond ETF. In fact, there have only been six better months than January for TLT since 2008.

It is now overbought – again.

For emerging markets, this was a dark, dark stretch. This will go down as one of the worst weeks for the EM equity ETF since the crisis.

Previously bulletproof US shares finally got hit, despite decent earnings where it counted. The S&P dropped more than 2% on the week.

Indeed, this was the worst week for US equities since the PBoC let the yuan slide through 7.00 early in August. It was the second weekly loss in a row for US shares.

The offshore yuan is trading well weaker than the last onshore print, making guidance from the PBoC coming off the holiday especially interesting.

The S&P 500 Info Tech index had its sixth worst day since the December 2018 rout on Friday.

Now that is a “real” state of emergency.

We jest. But, again, it is worth noting that this came during a week when Apple and Amazon both beat and Jerome Powell, although characteristically hapless, didn’t say anything overtly untoward during his post-meeting presser.

Gold is up nearly 5% already in 2020, coming off 2019’s 18% gain.

“It’s not a stretch to imagine heavy selling interest for risk assets” in Asia when markets reopen next week, BMO’s Lyngen and Hill cautioned. “The first trading day in the Year of the Rat will also likely mark the start of a correction, with downside risk at least in line with the declines observed on the Hong Kong market (Hang Seng Index -9.0% since 17 Jan) and Taiwan (-5.5% on opening day/30 Jan)”, SocGen warned Friday.

Get ready for fireworks.


3 comments on “State Of Emergency.

  1. Me, me, me!

    Seriously, if Chinese markets take a header, the valuation gaps between Chinese and US stocks will be extreme, and China has husbanded more stimulus ammo than the US has, so …

    Yes, nCov will whack economic growth – mightyly, I’d think – but not permanently.

  2. PaulMiller

    I’m with jyl above.

    Because the death rate (yes, suspect, I know) is only growing linearly, I’m becoming less alarmed, and now somewhat optimistic that China will (a) have the outbreak under control and/or (b) the disease won’t be as devastating as originally feared. I had suspected Thailand to experience an exponential infection rate, and a serious death rate, but as of now (Friday evening) it seems that even they have things under control. So far, it’s a blessing.

  3. HKU’s statistical model (re-released today in the lancet), now estimates 75K cases in Wuhan compared with 3200 confirmed cases in latest update. So a factor of 20+ for statistical estimate of “now” vs. data-based, where data-based (suspected and confirmed) is limited by test resources and/or hospital access, admittance, and enumeration. Wuhan is of course leading the rest of the major metros and it’s not known how effective the combination of lockdowns and self-imposed mobility restrictions will be in preventing a similar disconnect of measured vs. reality in other metros. Given the recent confirmation of asymptomatic transmission, I doubt this epidemic is linear anywhere (we’re just near 0 on the x-axis of that exponential graph in most countries) and will ultimately be limited only by vaccination.

    If the various mobility restrictions really do cause this to die out (would be nice), we should see evidence in China fairly soon I suppose. But if China really is only measuring <10% of the actual cases in the populace, I would be initially skeptical of using confirmed cases to judge any apparent inflection point.

    One could assume the statistical model is crap, I suppose, but I think believing the official numbers are close to reality is likely the worse assumption.

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