Bad Moon Rising?

If weekend comments from Mike Pompeo and Peter Navarro are any indication, tensions between Washington and Beijing are set to flare anew.

As virus curves flatten across the developed world, the focus is shifting from containment to recrimination, leaving market participants to ponder the rather disconcerting prospect of another trade war – or worse.

“The biggest new development that could weigh on emerging markets – and it certainly weighed on markets on Friday – is the pick-up in geopolitical tensions between the US and China”, Eaton Vance’s Eric Stein remarked.

Pompeo on Sunday essentially confirmed that the White House’s official position will eventually be that COVID-19 escaped from the Wuhan Institute of Virology, not a local wet market. That would provide a justification for Trump to ratchet up economic pressure and could also prompt other western nations to adopt a similarly antagonistic stance towards Beijing.

Jitters around a new Sino-US spat were the proximate cause of Friday’s sour mood. Nomura’s Charlie McElligott called it a possible new “macro shock-down catalyst”.

When China comes back off the holiday, traders will be watching the PBoC for signs that Beijing intends to send a similar message to the warning shot fired in August, when China let the yuan slide through a 7-handle in response to provocations from the White House. The currency’s plunge precipitated a global wipeout and presaged weeks of volatility.

“USD/CNY was THE global bellwether for risk appetite, and it may very well return as such soon”, Nordea’s Andreas Steno Larsen wrote Sunday. “You should buy USD/CNY (and sell risk assets) on tariff threats”.

The offshore yuan fell the most in a month on Friday after Trump hinted at new tariffs in retaliation for Beijing’s perceived missteps in the early stages of the epidemic.

“The RMB is getting caught in a new US-China political entanglement as the White House’s China hawks, who have Trump’s ear, are seizing the moment”, Axicorp’s Stephen Innes wrote Sunday. “Given the moves in copper and CNH on Friday, it seems like the market is tentatively trying to price in the next phase of this economic calamity as the US government starts internal debate on Chinese reparations and retaliation”.

To the extent bad vibes linger in the new week, investor psychology won’t be getting any help on the data front. The April jobs report is on deck and it will, of course, be a disaster of truly epic proportions.

More than 30 million Americans have filed for unemployment benefits over the past six weeks, and consensus is looking for payrolls to plunge 21 million for April. To put that in perspective, the old record was 1.96 million, set in September of 1945.

Once again, we’re staring down a print that will forever change what we thought was possible when it comes to economic statistics.

As far as the unemployment rate goes, it’s expected to hit 16.5%. As a reminder, it was bumping along at a five-decade nadir just three months ago.

The numbers won’t come as any surprise, but they could be the proverbial “icing on the cake” if they end up capping a week characterized by shrill rhetoric aimed at China.

At the same time, there are worries in many corners that complacency around the virus is setting in stateside as local officials begin relaxing lockdown protocols at the implicit (and, in some cases, explicit) urging of the White House.

Hopefully, common sense prevails, and Americans exercise some semblance of caution as they begin to piece their daily routine back together. In states where some citizens are at odds with elected officials over the extension and/or persistence of containment measures, one can only hope things remain peaceful. Incidentally, it would help if folks like Elon Musk refrained from dropping matches on dry kindling (Musk launched into an expletive-laden tirade about stay-at-home orders during Tesla’s earnings call last month).

“We all seem to cheer on the prospects of a gradual reopening paired with bizarre amounts of central bank- and fiscal stimulus. Happy days, right?”, Nordea asked, in the note mentioned above. The bank went on to make the same point plenty of others (including myself, as late as Sunday morning) have made – namely that if forward EPS projections end up being too optimistic, current multiples are sky-high.

“Looking at it broadly, EPS may need to be revised down at least 40-50% YoY in a quarter from now, but it seems like most equity analysts [are] look[ing] for a ‘mere’ -20% EPS growth this year”, the bank went on to say, adding that if “expected earnings are slashed in the way that we find feasible, 12m expected P/E’s will either have to find bizarre new all-time-highs as 2020 is deemed an outlier, or else equities will have to give in again”.

(Nordea)

Finally, it’s at least possible that some investors will be spooked by Warren Buffett’s comments during Saturday’s farcical live-streamed annual meeting. In addition to revealing the disposal of his entire stake in US airlines, the “Oracle” struck a somewhat flat tone while discussing the rationale behind Berkshire’s decision to remain largely on the sidelines during the rout. “We have not done anything because we don’t see anything that attractive to do”, he said.

For what it’s worth (which is nothing), TSA data shows a marginal rebound in total traveler throughput over the past week or so, but Buffett’s concerns about the future of the industry are certainly warranted. Passengers are still down 93% YoY.

Buffett also took a page out of every other billionaire investors’ playbook recently, by essentially blaming the Fed for robbing him of an opportunity to capitalize on corporate desperation.”There was a period right before the Fed acted, we were starting to get calls”, he remarked. “They weren’t attractive calls, but we were getting calls. And the companies we were getting calls from, after the Fed acted, a number of them were able to get money in the public market frankly at terms we wouldn’t have given”.

What a shame. Had Buffett been able to swoop in and strong-arm a couple of hat-in-hand CEOs into forking over billions worth of preferred, he might have been well on his way to recouping Berkshire’s $50 billion Q1 loss.

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