Dour Chinese PMIs and a significant deterioration in the news flow around the coronavirus epidemic found markets playing defense to start the new week. The New York Times on Sunday evening confirmed New York State’s first case of the virus, saying a woman was infected while in Iran. She is now isolated in her home.
Bond yields in Australia plunged to record lows, as traders bet on central bank action to inoculate economies from the impact of the disease. The BoJ stepped up to the plate early with a promise to promote stability through operations and asset purchases, and subsequently said it offered to buy 500 billion yen in government bond repurchase for future delivery. Goldman now sees a 50bps rate cut from the Fed this month. 2-year US yields plunged below 0.80%.
A 25bps cut from the RBA is fully priced, and a 50bps reduction is seen as possible. JPMorgan (among others) is calling for the bank to cut this week as the balance of risks is now clearly skewed to the downside. 3-year Aussie yields plunged an incredible 17bps (the most on a closing basis since summer 2016) to 0.33%, while 10-year yields fell 15bps to a record low below 0.70%. The 3-year yield is now well below the RBA’s policy rate.
Australia reported its first death from COVID-19 over the weekend. The Aussie plunged out of the gate before paring losses.
For those who missed it on Friday evening (or Saturday morning, depending on where you happen to be based), this is what China reported in terms of PMIs for February:
Some worry even those record-low prints are overstated, and concerns over doctored data are popping up again. Consider the following short excerpts from a Bloomberg piece out Sunday:
At least three cities [in Zhejiang province, an industrial hub on the east coast] have given local factories targets to hit for power consumption because they’re using the data to show a resurgence in production, according to people familiar with the matter. That’s prompted some businesses to run machinery even as their plants remain empty, the people said.
On Saturday, a newspaper in one of Zhejiang’s cities appeared to take aim at the practice. The Taizhou Daily published a front-page commentary criticizing local officials for narrowly focusing on power usage, arguing that hitting the targets won’t ensure economic growth. By Sunday, a link to the article on the paper’s website was no longer working.
That kind of thing isn’t going to inspire much confidence, but it does show that Beijing has a limited tolerance for reporting bad news. Past a certain point, they will simply make it up, and it will be left to the market to decide whether to trade on possibly-fabricated data or not.
In any event, shares in New Zealand dove more than 3% in what, if the losses held, would be one of the worst days in years.
COVID-19 cases in Italy soared 50% to nearly 1,700, while Spain’s total jumped sharply as well. South Korea reported an additional 586 infections. France added 30. Iran has a genuine crisis on its hands, with serious ramifications for the government, as documented extensively here early Sunday.
In the US, Washington State declared an emergency, as two additional cases were discovered in the Seattle area, a day after state officials confirmed the first death.
S&P futures sank to start the new week, as did oil. Both trimmed losses aggressively after the BoJ news. You can expect things to be choppy.
“The epic moves in asset markets last week shattered the complacency in financial markets that is typical in the late-stage of cycles”, SocGen’s Jason Daw wrote, in a Sunday note. He went on to suggest that this week could be “a defining moment”.
“Whether the market rout last week develops into a full-blown crisis is an open question, but the tail risk event everyone was worried about is possibly here in the form of large negative growth shock and it’s time to be prepared and dust off the crisis playbook”, Daw went on to advise.
Among other things, that playbook involves coming to terms with the fact that “markets can move farther and faster than seemed possible before [the] crisis starts”, “past relationships break down and risk-off correlations strengthen”, “liquidity can become scarce” and, of course, “significant policy stimulus is usually required to stabilize sentiment”.
That latter bit is what markets are now pinning their hopes on although, as discussed here on Friday evening in “Getting Involved“, there are legitimate questions as to what, exactly, rate cuts can do in the face of a biological threat.
“If authorities manage to contain the situation, then risk appetite will return – possibly with a vengeance – within a short couple of weeks, but for now the situation remains too fluid to make that call”, Nordea said Sunday, on the way to cautioning that “it’s possible the negative economic effects from containment efforts will prompt a new recession, which might arguably prompt much more downside to risk appetite than what we have seen already”.
The bank’s Martin Enlund called that chart from his colleague Andreas Steno Larsen “a wee bit too doom-mongering”, but you get the idea. Folks are concerned about the fallout from the world’s second-largest economy grinding to a halt.
If nothing else, this will be an interesting, and exciting week.
CNBC is ready, that’s for sure:
— Dan Colarusso (@Colarusso42) March 1, 2020
As America’s fearless leader would say: “We’ll see what happens”.