Month: February 2020

Update (0950ET): Sources on both sides have confirmed that the spat won’t have any impact on the US-UK trade agreement that Trump and Johnson have touted.

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When Prime Minister Boris Johnson decided to defy the Pentagon’s warnings and approve Huawei’s bid to build “non-core” components of the UK’s 5G network, the White House quickly made its dissatisfaction known, as we reported at the time.

Johnson was walking a fine line between appeasing the US and China. But as one observer remarked at the time, “you can’t be half pregnant.” A report published Friday in the FT seems to have confirmed this sentiment by revealing that President Trump lashed out at Johnson, a leader whom he had one lavished with praise, in a phone call held shortly after the announcement.

During a phone call held last week shortly after Johnson’s decision was publicized, an aide said Trump was “apoplectic” with rage, and laid into Johnson using language that left many on the call completely dumbfounded.

A second official confirmed that the Trump-Johnson call was “very difficult.” British officials with knowledge of the exchange said they were taken aback by the force of the president’s language towards Mr Johnson. Mike Pence, US vice-president, said after the Huawei decision that the Trump administration had made its disappointment at the UK decision “very clear to them.” But the extent of Mr Trump’s anger was unknown until now. Downing Street, the US state department, the US National Security Council and the White House declined to comment on the call.

After the call, the White House released only a brief readout: “Today, President Donald J Trump spoke with Prime Minister Boris Johnson of the United Kingdom. The two leaders discussed critical regional and bilateral issues, including telecommunications security.”

Downing Street’s readout hinted at the tensions: “The prime minister underlined the importance of like-minded countries working together to diversify the market and break the dominance of a small number of companies.”

Privately, the British chafed at the US’s demands, particularly since the US didn’t have a superior product to offer to replace Huawei.

Sensing this, AG William Barr went so far as to suggest that the US buy stakes in Ericsson and Nokia, the two Scandinavia telecoms components giants, to allow the US to have something to offer its allies instead of just asking them to go without Huawei’s cutting-edge telecoms equipment for their 5G rollouts.

Mr Barr said America and its allies should be “actively considering” proposals for “American ownership of a controlling stake” in the European companies, “either directly or through a consortium of private American and allied companies”. He added “it’s all very well to tell our friends and allies they shouldn’t install Huawei’s, but whose infrastructure are they going to install?”

The two sides left reporters with distinctly different impressions about the condition of their relationship. The US reportedly insisted that the White House spent considerable time and resources trying to convince Johnson to abandon Huawei. However, Downing Street said President Trump’s strident views on Huawei were barely known to the administration before the phone call. Though Washington approved some sales to Huawei last year, Trump apparently still believes the company is “very dangerous.”

As one academic who spoke with the FT for its story about the rift pointed out, the UK’s decision to buy some equipment from Huawei could compromise the ‘Five Eyes’ intelligence alliance between the US, UK, Canada, Australia and New Zealand. Though Secretary of State Mike Pompeo has apparently made some progress in repairing the relationship during a recent visit to the UK – “friends don’t always agree on everything” – he also insisted that the US would take steps to ensure the security of the alliance.

Has China succeeded in driving a wedge between President Trump and one of his most natural allies? It’s starting to look that way.

Submitted by Michael Every of Rabobank

As has been the case since Monday’s sell-off, there is an attempt to try to look on the bright side of the virus headlines. Chinese officials are spreading the word globally that things are under control and that other countries should not be closing their borders to China, in line with the WHO recommendations that says that free-flows of people during a potential epidemic is completely fine. Of course, at home China is still under draconian lockdown, with tens of millions of people not allowed to leave their homes, and hundreds of millions more voluntarily following the same advice. Moreover, as a former Mexican ambassador to China publicly notes, when Mexico briefly suffered from H1N1 bird ‘flu back in 2009 China’s response was to ignore the WHO’s recommendations and: place all Mexican nationals in China under quarantine; cancel all direct flights to Mexico; stop issuing visas to Mexicans; and closed all its consulates in Mexico.    

After having extended its Lunar New Year break, and yet with more cities and firms still shutting down than doing any re-opening, Beijing is starting to become cognizant of just how deep and serious the economic damage is going to be if this goes on much longer. We are, after all, talking about 80% of the economy, and 90% of exporters, simply not functioning. This is already seeing supply-chain knock-on effects for a swathe of global firms and this, very much like the virus itself, will snowball as time passes if nothing changes. For a country that was already seeing foreign firms talk about shifting production to other locations this is a problem. Thus, perhaps, some of the urgency in trying to stress that everything is returning to normal soon, and that the WHO advice is worth following – this time.

S&P, for example, are suggesting the virus might knock 0.8ppts off of 2020 GDP growth in China. That sounds a lot, doesn’t it? Until we realise that 80% of China’s GDP is probably shrinking by 10-20% y/y right now, a slump that makes the peak of 2008-09 look like a picnic by comparison and which frankly defies traditional economic statistical analysis of the S&P variety, where outliers like this get “winsorized” away and the underlying equilibrium GDP model kicks in and drags us back to a trend rate of growth again by magic. (Very much like an apparatchik, as I was saying yesterday.)

During The Great Recession did *everybody* stay at home and almost all business shut down? I don’t recall that being the case. If this virus *is* all over in days then one can make the case that Q2, Q3, and Q4 will see a huge bounce in GDP into double digits as everyone restarts work and eats out more, etc. Yet if this drags on through Q1 and into Q2–and I have not seen any serious virologists, merely not-at-all-serious economists, suggest such a rapid return to normal is possible–then the negative effects in the first third of the year are going to be so bad that the rest of the year is never realistically going to get us back close to 6% y/y GDP growth again, or 5.2%, regardless of empty new skyscrapers and shiny subways and high-speed trains. Surely the whole year will be flat at best? Obviously, 2021 GDP will then be gangbusters in Q1 and Q2 (“so buy stocks!”) – but there will also be lasting damage if this drags on as SMEs shut down and don’t reopen, and as already capital-constrained banks are forced to bail everyone out, and as the PBOC is then forced to bail banks out. Market calm that does not make for.    

Yes, are we seeing a slowdown in new virus cases reported this morning. We now have 31,481, which does show a day-to-day decline away from an exponential rate of growth *if accurate*. Yet for those market participants merrily saying this is “just a flu” (there are some) we also have 4,824, 15% of the total, in critical condition, and 638 deaths. Further, one arguably cannot measure the death-rate of any virus against the number of *currently* sick people: you surely measure it against those who eventually recover vs. those who don’t. Given we have 1,563 who have recovered vs. 638 dead (and 4,824 critical) that is a worrying ratio of 29% dead as an end-outcome, which is right up there with the MERS virus from a few years ago – although, yes, there is real reason for us all to hope that number will decline sharply as milder cases will be fully curable. But a simple flu this is not.

The quandary for China between releasing the quarantine straitjacket in days to stop its economy from getting truly sick, and allowing a virus like this to spread further as people start to mingle again is truly awful. There are no good options. For a world with a serious lack of final end-demand, and which has been relying on China, along with increasingly “Chinese” central banks, this is going to be a nasty shock either way that Mr Market is treating like he is Mr Magoo. (Oh, and Donald Trump was apparently “apoplectic” with PM Boris Johnson over his recent Huawei decision in a recent call, with suggestions that the UK might now be trying to backtrack; the US is allegedly also floating the idea of buying shares in firms like Nokia and Ericsson to help build a Western 5G alterative. Something else for China to be worrying about, of course.)

For example, Bloomberg is this morning trying to sell the fact that Chinese government bond yields are dropping (-33bp this year) as a good news story. It isn’t, even if that single trade is one I have long supported if one simply has to be in Chinese markets. If China is seeing its yields plummet, what does that say about global growth prospects? What does that say about global reflation? It’s a long bonds story – full stop. Of course, lower yields mathematically means higher P/E ratios for equities too (“so buy stocks!”). Until yields have gone as low as they ever can, real activity has ground to a halt, and we have a world where bonds can’t go any higher, equities can’t go any higher, central banks and governments can’t afford to let either collapse, and only FX markets have any pricing function.

Talking of pricing functions, the RBA have hilariously used their Statement on Monetary Policy this morning to make clear that rates are on hold right now, and that further rate cuts could do more harm than good with only two left in the can before QE has to start. I always guessed these guys spent all day on the Domain.com property website, but the timing is pure black comedy, as is their call that the unemployment rate will be going down and not up just as Chinese tourism collapses. On which note, today has already seen Japanese household spending collapse -4.8% y/y in December before anyone even sneezed and real labour earnings -0.9% y/y. Gambatte, ne?

Also talking of pricing functions, this time political, and of black comedy the US Iowa Democratic caucus moved into even more surreal areas yesterday, with a press report that up to 30% of the votes might have been tabulated wrong due to bad math skills; then a very slow final count; then populist Bernie Sanders taking the lead and publicly claiming victory; and at the same instant the Democratic National Congress chairman Tom Perez saying an “immediate recanvas” was needed instead. In the UK they called that a “People’s Vote” – perhaps he could use that terminology? Meanwhile, previous Iowa ‘winner’ Mayor Pete is busy appointing ex-Goldman Sachs staff to his campaign team. Hope and Change, people.

Just days after Ford reported a $1.7 billion operating loss during the fourth quarter, released 2020 guidance that failed to impress, and prompted a nearly double-digit drop in its shares in after-hours trade, the Detroit carmaker has announced a major executive shakeup on Friday.

WSJ reports that Ford President Joe Hinrichs is retiring, an ouster likely tied to the company’s poor performance, now that its shares are trading at less than $9 while Tesla trades at an almost unbelievable multiple.

Joe Hinrichs

Strategy Chief Jim Farley will take his place.

• FORD PRESIDENT OF AUTOMOTIVE JOE HINRICHS TO RETIRE: DJ
• FORD TO NAME STRATEGY CHIEF JIM FARLEY COO: DJ

Last year, Ford angered president Trump by laying off thousands of manufacturing employees as it ended production for all of its sedans in North America as it pivots to focusing on the trucks and SUVs that comprise its most popular models.

Ford shares ticked higher on the news, though the reaction was relatively muted.

Maybe he can get a job at Tesla?

For once the ADP private payrolls report was not that far off.

With Wall Street expecting a 165K print in this morning payrolls report, and with ADP coming in at almost 300K, the whisper number was obviously well above the official consensus, and the BLS did not disappoint, because just as Trump hinted a few days ago with his “jobs, jobs, jobs” tweet, in January the US created a whopping 225K jobs, smashing expectations, and well above last month’s upward revised 142K print.

The unemployment rate nudged higher by 0.1%, rising to 3.6%, above the 3.5% expected, yet still just barely above 50 year lows. Of note, the unemployment rate for both hispanics and blacks also rose to the highest since mid-2019.

Most notable, however, for markets was the rebound in hourly earnings, which rebounded from last month’s upward revised 3.0%, hitting 3.1%. Notably, after plunging in December to 3.2% from a decade high 3.8%, the average hourly earnings for production and nonsupervisory workers also staged a modest rebound, rising to 3.3% in January.

Developing

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A Royal Caribbean cruise ship that has 12 passengers quarantined over fears of coronavirus has docked in Bayonne, New Jersey, this morning with ambulances on the scene.

The “Anthem of the Seas” arrived in New Jersey just hours ago, at about 6AM, in thick dense fog, according to ABC 6. Several ambulances were on standby at the scene. 

The passengers in quarantine will all be tested by the CDC, who was also awaiting the arrival of the ship on the scene. The passengers of the ship are all Chinese nationals – many of whom started exhibiting symptoms while aboard the ship, which was coming back from the Bahamas. 

#breaking Royal Carribean cruiseship docking now in Bayonne, NJ with roughly a dozen sick Chinese nationals on board. They will be tested for coronavirus. #abc7NY pic.twitter.com/RrupnawWo1

— Derick Waller (@wallerABC7) February 7, 2020

The NY Post reported that some of the passengers “have pulmonary issues”. 

Royal Caribbean said in a statement: 

“We are closely monitoring developments regarding coronavirus and have rigorous medical protocols in place onboard our ships. We continue to work in close consultation with the CDC, the WHO, and local health authorities to align with their guidance and ensure the health and wellbeing of our guests and crew.”

Robert Isaacson, whose 75 year old mother is on the ship, said that crew members have not alerted passengers to the sick people on board. 

“We have been chatting throughout the cruise and she has not brought any mentions of the crew alerting the passengers of a potential situation involving sick passengers,” he said, referring to conversations with his mother.

This news follows last night’s news “Nightmare at Sea” news that 42 additional cases of coronavirus, including an infected passenger who got on the ship in Japan, had been discovered on the Diamond Princess cruise ship which is anchored in Yokohama, Japan.

【速報】横浜に停泊中のクルーズ船内に新たに４１人の新型コロナ感染者　厚労省 #指定感染症 #感染症 #新型コロナウイルス pic.twitter.com/nnFZAnSQnb

— TBS NEWS (@tbs_news) February 7, 2020

Japan says 273 people on the cruise ship were tested and 61 were found positive, and the 41 new patients have been sent to hospitals in 5 separate prefectures.

Japanese PM Shinzo Abe said no foreigners on board the MS Westerdam, run by Holland America Liner, would be allowed to disembark in Japan. The ship is capable of carrying 3,000, but it’s unclear how many are on board. Passengers on the Westerdam say the ship has already been refused entry to the Philippines and Taiwan over the virus fears.

Stephen Hansen, one tourist onboard the ship, has express concerns that the ship could be quarantined for two weeks.

Hey, Stephen, maybe New Jersey will let you in. 

Authored by Richard Breslow via Bloomberg,

• The S&P 500 has, so far at least, been up every day this week. And achieved a new all-time high.

• The Shanghai Composite, after Monday’s plunge, rose each day to finish out the week at levels seen only as far back as early December — when it began its big run.

During these moves, we have spent a lot of time trying to come up with suitable explanations for the strength, let alone resiliency, of these markets in the face of really disturbing news.

Obviously investors must be bullish. And are so despite some pretty eminent and respected economists warning that this is getting way out of control. And valuations making no sense given the forecast outlook. It’s making me think back to last Friday, when the stock market got whacked. What a buy-the-dip opportunity that turned out to be. A 3%-plus snip over the course of a single week is a home run on any occasion. Caveat: we still have to get through today.

The main reason we had that Jan. 31 sell-off (which seems like a long time ago, doesn’t it?) was uncertainty over where Chinese markets would open after their long hiatus. How orderly things would function. But also, and this is the point, what if there was more bad news while exchanges were closed for the weekend?

Bad news was assumed to be just that. We weren’t trying to explain it away with unsupportable arguments about this all being temporary and obviously contained. (Subtext: Over there.) This week the market has clearly reverted to the old “bad news is good news” playbook. I want to see which of these two assumptions holds true through this session. It will inform trading going forward.

There is, of course, the matter of non-farm payrolls to cloud the matter. But it still should be possible to get a sense of where we stand on this question, which is an important one. This afternoon will matter. Central banks will do what they have to when push comes to shove, but most of them don’t want to. Fed speakers are doing their best to stick to the on-hold mantra, which given U.S. numbers is appropriate. Chairman Jerome Powell’s congressional testimony next week is well-timed given how markets are trading.

ECB President Christine Lagarde isn’t a clone of Mario Draghi. Her comments this week about having few monetary stimulus options left after the years of fighting the financial crisis Europe is still struggling from are true. And, given the industrial production numbers we saw this morning, made all the more worrisome. But I couldn’t help thinking they were also meant to be a reminder to those buying the “undervalued” Stoxx 600, which itself is up 3% this week. The U.S. had its Iowa debacle. Germany had a scarier one in Thuringia.

In a very real sense, traders are trying to call their central bankers’ bluffs. And are building in rate cuts to prove their points. It’s worked before and as any Bayesian believes, it’s worth thinking it can work again. So the old adage of, “if you liked it up there, you’ll love it down here” remains the operative practice. And, that is what keeps those who might be tasked with cleaning up any major stumble up at night.

Ten-year Treasuries have failed miserably trying to get back above 1.70%. The technical resistance right in front of it proved too difficult to surmount. Remember how it traded there should we revisit that level at some point. It’s shaping up to be big. On the downside, 1.50% is equally huge support. Maybe even more powerful. And until either side breaks we will have a clear, and tradable, range.

Guangzhou, the capital of China’s southwestern Guangdong Province and the country’s fifth largest city with nearly 15 million residents, has just joined the ranks of cities imposing a mandatory lockdown on all citizens, effectively trapping residents inside their homes, with only limited permission to venture into the outside world to buy essential supplies.

The decision means 3 provinces, 60 cities and 400 million people are now facing China’s most-strict level of lockdown as Beijing struggles to contain the coronavirus outbreak as the virus has already spread to more than 2 dozen countries.

That’s more than 400 million people forcibly locked inside their homes for 638 deaths? Just think about that: If there was ever a reason to believe that Beijing is lying about the numbers (and not just because Tencent accidentally leaked the real data), this is it.

Breaking: Guangzhou City (population: 14 M) locked down. All residential blocks be isolated from each other. So far around 400 million people locked down in #China to contain #coronavirus. #coronavirusOutbreak Original Chinese official report:https://t.co/emfLIaOLut pic.twitter.com/RmX82iDOEH

— 曾錚 Jennifer Zeng (@jenniferatntd) February 7, 2020

Meanwhile, in the US, the Trump Administration has directed researchers to investigate the ‘true origins’ of the virus, as ‘conspiracy theories’ and misinformation spreads online. We can’t help but wonder: What if the scientists discover something that the regime in Beijing doesn’t want them to see?

白宮要求美國科學家和醫學研究者調查 #新型冠狀病毒 的起源。#武汉肺炎 https://t.co/mZPAYz0K1N

— 曾錚 Jennifer Zeng (@jenniferatntd) February 7, 2020

Elsewhere, Singapore raised its national disease response level to Orange, the second-highest level and the same level from the SARS epidemic, according to the city-state’s health ministry. It also confirmed three new coronavirus cases. While investigations are ongoing, none of the three appear to have a history of recent travel to China, suggesting they picked up the virus in Singapore.

‘Orange’ means the outbreak “is severe and spreads easily from person to person” but “has not spread widely in Singapore and is being contained,” according to the Disease Outbreak Response System Condition color-coded framework. Singapore has never invoked its highest level, red, per BBG.

Foreigners are complaining that the new hospitals in Wuhan are merely ‘quarantine centers’ without any medical resources.

Dear Gov’t of Uganda,

The famous makeshift “hospitalsh the Chinese Gov’t is bragging about are not hospitals, they are quarantine areas where patients are not receiving any treatment at all. Is this the place you’re saying is safer for us ? #EvacuateUgandansInWuhan pic.twitter.com/sLzdUHA24P

— Thomas (@owishemwe) February 7, 2020

Yesterday, Beijing argued that the virus outbreak had ‘peaked’ as they cited a drop in the rate of new infections. However, others have suggested that the rate of new confirmed cases has more to do with Beijing’s limited resources.

It’s been said by others but I’ll say it too:

The way China is reporting almost an identical number of new coronavirus cases each day (approximately 3000) MUST be a reflection of its diagnosis capacity rather than the true caseload, which is likely much worse.

— Mark B. Spiegel (@markbspiegel) February 7, 2020

The WHO said during a press conference on Thursday that it’s too early to claim that the outbreak has peaked, even as the outlook for the global economy falls off a cliff.