Rabobank: All Hail “Our Glorious Algos”

Authored by Michael Every via Rabobank,

“Let her rip!” So said the equity-market bulls yesterday, or rather a combination of the algos that can’t catch coronavirus if they wanted to, and the young traders who have never worked a day in a market in which they haven’t had at least one central bank somewhere promising to push asset prices higher in the name of the good of mankind. And rip she did, with the Nasdaq up 2%, the S&P up 1.5%, and even Asian markets bouncing. Naturally, bonds, like protective face masks, are oh-so last season.

This was despite the fact that: total deaths are now over 490; confirmed cases are over 24,000, with 176 globally, up from single figures a few weeks ago, still rising exponentially and with no direct Wuhan link in many of these new cases, showing localised human-to-human transmission; the UK government has told all British citizens to leave China; there are 10 cases on a giant, quarantined Japanese cruise ship; American and United airlines have just suspended flights to Hong Kong due to “lack of demand”, meaning that even that key Asian financial hub is at risk of de facto quarantine; Europe is considering a US-style flight ban from China; and the epidemiologist who led the fight against SARS has stated even travel bans won’t stop the coronavirus from spreading. What he says is needed are stronger national health-care systems – which the same markets now rallying have cheer-led being gutted for decades. Yes, the WHO says we have a window of opportunity to deal with this virus globally. So do the IMF when talking about global economic imbalances. So do the WEF when talking about inequality. So do the UN when talking about climate change. How are we doing so far?

We also have the US proceeding with new tariff measures against anyone engaging in currency manipulation, which deserves more space than I can spare here, but basically means a secular trend of a stronger USD, then higher tariffs, and then a yet stronger USD until something breaks; and we have Larry Kudlow saying coronavirus means China likely won’t be rushing to buy US agri goods (colour us unsurprised there); and we have Bloomberg reporting that there are still discussions taking place in the White House about limiting US portfolio inflows into Chinese capital markets on top of the current physical restrictions on access to China. Perhaps that has something to do with the 8% drop in Chinese stocks on Monday(?), but it certainly underlines the threat that a Chinese economy being hit hard by this virus–for example, the massive April Canton fair just got cancelled–might not see the USD inflows it will need to provide a counterweight to the flood of new CNY liquidity it will have to produce at home to try to re-float its economy. Consider that as you consider where USD/CNY might be heading, taking other crosses with it.

Regardless, it seems our glorious algos would be buying diamonds all day long as they trudged through a baking-hot desert – especially with central banks crying “free liquidity!” without the actual ability to make it rain.

Also being ripped up is political convention. In this case, hopes for an orderly US Democratic Party convention. The results of the Iowa caucus are finally dribbling in a day late, and with 71% of the total released, Mayor Pete Buttigieg seems to be ahead. That’s the same Mayor Pete whose campaign backers produced the voting app that has both singularly failed to work in Iowa, and which has put the relative unknown at the top of the caucus pack ahead of better-known politicians drawing far larger crowds. All very new normal. The populist outsider Bernie Sanders may still pip him to the post, however; and very much worth noting is that Democrat establishment’s (grand)father figure of Joe Biden has come out very poorly from Iowa.

Meanwhile, US President Trump gave a State of the Union address that was part campaign rally and part reality TV show. This is an election year, after all I suppose. The Democrat’s Speaker Nancy Pelosi then responded to this political theatre with the statesmanlike action of physically ripping up the speech on the podium. At least nobody burned down the Reichstag – yet. However, one has to say that the 2020 electoral season is not doing anything to relieve fears that populism is here to stay and getting worse, in the US of A.

Data-wise, today already saw Japan’s services PMI dip to 51.0 and China’s Caixin to 51.8, and we heard RBA Governor Lowe make the case for a policy rethink in terms of the embrace of monetary-fiscal policy coordination as an economic stabilizer (meaning permanent tool), suggesting that the runway is indeed being foamed for AUS-QE ahead. Just two rate cuts to go, and then it’s fiscal spending and the RBA bond-buying as far as the eye can see. And, as we see elsewhere, with no way back home afterwards. Can the AUD really hold up in the face of that kind of radical policy? Is it a USD in disguise? We shall soon find out. But with AUD at 0.6736 again today, the market is simply shrugging it all off. For a change. Free-money, money-on-trees, total-upending-of-how-everything-we-used-to-think-works-really-works. *Yawn* Buy stocks. *Yawn*

Indeed, not to worry – ever: as our Rates Strategy team put it so well yesterday, we live in a post-Minsky world. There are no consequences to our precarious debt levels; there are no consequences to our investment actions; and, for politicians, for most of their actions full-stop. Ask the Soviets how that worked out for them. Or just let nature continue to explain how things actually work.

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Nothing actually matters to markets anymore, so I am not sure why I am bothering to list what to look ahead to this week, but I guess I am my own auto-algo in that regard.