Category: zerohedge

Nasdaq is nearing its record highs as coronavirus cases and deaths explode exponentially, global supply chains collapse, and the world’s second biggest economy is basically shutdown…

BTFD!

But Bonds ain’t buying it…

Nor is crude…

Or copper…

Or Yuan…

Sometimes you have to laugh.

 

 

Update: confirming that liquidity is indeed quite scarce to start the month of February, moments ago the Fed also conducted its overnight repo which saw a whopping $64.45BN in liquidity injected…

… and which together with the massively oversubscribed $30BN term repo discussed below, means the Fed has injected $94.45BN in liquidity for today’s market needs.

* * *

After several relatively uneventful reverse-repos to close off the month of January, which saw a gradual decline in submission, February has started off with a bang.

Even ahead of the results of today’s reverse repo, some traders were already closely watching to see how it would play out for one main reason: as we reported on Jan 14, this was the first “tapered” reverse repo, whose aggregate operation limit was shrunk modestly from $35BN to $35BN.

There were also some questions why the repo would be tapered by only $5BN when the Fed repeatedly said the liquidity injection via repo were just a temporary operation (one which ostensibly should have ended soon after the September repocalypse), and yet which to this day continues to be an integral part of the Fed’s balance sheet rebuild.

We got the answer moments ago, when the Fed announced that while the operation went off without a glitch, the demand for Fed liquidity was simply unprecedented, with $59.05BN in securities submitted ($41.75BN in TSYs, $17.3BN in MBS) for the downsized $30BN term repo maturing on Feb 18. As such, the nearly 2.0x submitted-to-accepted ratio made today’s repo the most oversubscribed since the first term repo issued at the depth of the September repo crisis (and not by much), which saw $62BN in submissions for $30BN in liquidity.

Ominously, the massive demand for term repo today means that the liquidity crisis that continues to percolate just below the surface of the market and has clogged up the critical plumbing within the US financial system, is getting worse, not better, and today’s massive oversubscription indicates that one or more entities continues to face a dire shortage of reserves, i.e., cash. As for what they are doing with that cash, one look at Tesla this morning may provide an answer.

Summary:

• Confirmed deaths: 427
• Confirmed cases: 20,676
• Aimerican Airlines, Cathay Pacific and Jetstar close routes to China
• Taiwan tightens travel restrictions
• WHO infectious hazard chief says outbreak ‘not a pandemic’
• Japan says no coronavirus cases confirmed on cruise ship “Diamond Princess”

* * *

No new coronavirus-related deaths were announced overnight, leaving the global fatality toll at 427, with all but two of those deaths occurring in China, according to the South China Morning Post. The total number of confirmed cases is closing in on 21,000, as nearly 200,000 are ‘under observation’ in China.

 

Yesterday, President Xi convened a second meeting of the Politburo Standing Committee, China’s highest governing body. The public meeting marked Xi’s second appearance before the Chinese people since the coronavirus outbreak. According to reports in Chinee state media, Xi declared the outbreak “a major test of China’s system and capacity for governance and we must sum up the experience and draw a lesson from it,” while declaring the outbreak a threat to societal stability. As we reported yesterday, Xi also warned local officials that they would be punished if they failed to suppress the virus, or if they slowed down the government’s efforts to fight the virus for the sake of “formalities” and “bureaucratism,” according to the New York Times.

Already, more than 400 local officials have already officially punished for dereliction of duty, despite complaints from some (including the Mayor of Wuhan) that Beijing tied their hands.

China’s financial ‘support’ of the WHO continued to pay off on Tuesday as the head of WHO’s Global Infectious Hazard Preparedness division said that the nCoV outbreak doesn’t yet constitute a global “pandemic” – directly contradicting the organization’s declaration.

VIDEO: The head of WHO’s Global Infectious Hazard Preparedness division says that the outbreak of the deadly novel #coronavirus, which has spread from China to two dozen countries, does not yet constitute a “pandemic” pic.twitter.com/YKuEh5IEbN

— AFP news agency (@AFP) February 4, 2020

As the world grows increasingly skeptical of the numbers and information coming out of China, Beijing’s NHC said Tuesday that the coronavirus mortality rate would drop further as soon as “suitable treatments” are implemented in Wuhan. What kind of treatments are they talking about? Well, as we’ve repeatedly pointed out, nCoV responds to a cocktail of AIDS drugs (sometimes augmented with typical flu treatments). Some scientists have highlighted certain similarities between HIV and nCoV.

NHC Deputy Director Jiao Yahui said the national fatality rate was just 2.1%, with the vast majority of deaths in Hubei province. Some scientists have projected that the real death rate might be closer to 11%

Especially after Hong Kong suffered its first confirmed fatality due to the coronavirus, marking only the second death from the outbreak outside China.  The dead man traveled by train to Wuhan on Jan. 21 before returning to Hong Kong two days later.

Macau, the only place in China where casino gambling is legal, shut down its casinos for at least the first half of February.

Though some other provinces are catching up, Hubei remains by far the hardest-hit of China’s 31 provinces. The central Chinese province has lost 414 people, or 97% of the mainland death toll and the mortality rate in Wuhan, the provincial capital, has reached 4.9%, with 313 deaths so far. The mortality rate for Hubei as a whole is 3.1%, the highest of any province in the country.

Since our last check-in, airlines have suspended more routes to China. At least two more Asian airlines – Hong Kong’s Cathay Pacific and Japan’s Jetstar – suspended routes to China on Tuesday, joining dozens of other airlines, including almost all of the major American carriers, in suspending passenger travel as demand plummets. Domestic airlines, meanwhile, have been asked by the Party not to cut international flights. American Airlines suspended flights to Hong Kong from Dallas and Los Angeles through Feb. 20.

#China asks domestic airlines not to cut international flights, aviation authority says on social media. Requests when Chinese airlines cancel a portion of flights due to lower market demand they ensure they continue to operate to countries where flights are allowed. #Wuhanvirus

— Eunice Yoon (@onlyyoontv) February 4, 2020

Taiwan will ban foreigners who have visited or have been living on the mainland over the past 14 days from entering the island, effective Friday. The ban won’t apply to foreigners living in Hong Kong or Macau. On Tuesday, Taiwan’s coastguard stepped up patrols around the resort island of Penghun to stop Chinese fishing boats from “intruding” into Taiwanese territory (and possibly carrying Chinese desperate to avoid quarantine), the SCMP reports.

The decision to tighten restrictions on travelers from the mainland comes after its government condemned Beijing for blocking Taipei from joining the WHO’s anti-epidemic network, which would have allowed Taiwan to access first-hand information about the virus and any suppression efforts that are actually working.

Australia is the latest country to evacuate citizens from Wuhan. Like Japan, the US and the UK, it has forced those rescued into a two-week quarantine.

Japan has quarantined around 3,700 people aboard a cruise ship off the port city of Yokohama after a passenger who departed the cruise at an earlier date tested positive for coronavirus. So far, officials say they haven’t detected any cases of the virus aboard the ship, but tests are ongoing.

VIDEO: 🇯🇵 Japan has quarantined a cruise ship carrying 3,711 people and was testing those on board for the new #coronavirus on Tuesday after a former passenger was diagnosed with the illness in Hong Kong #DiamondPrincess pic.twitter.com/1S1s8MRKd9

— AFP news agency (@AFP) February 4, 2020

According to the Chinese press, a similar scenario is playing out at a mainland port (marking at least the third quarantine of a cruise ship since the beginning of the outbreak).

【曾搭载确诊病例的邮轮停靠高雄港 旅客被拒下船】
“世界梦号”游轮曾于1月19日从广州南沙码头载客前往越南，1月24日返回广州，船上有三人下船后确诊为武汉肺炎。这艘游轮4日停泊在高雄港，基于疫情的缘故船上的游客不能下船，邮轮在下午已经驶离高雄港。 pic.twitter.com/auKbVLnmva

— 自由亚洲电台 (@RFA_Chinese) February 4, 2020

Chinese press has also reported on cases where individuals resisted a mandatory quarantine. This is a warning to the population as much as anything.

【江苏昆山居民拒绝隔离】
【被工作人员强行带走】

网上流传片段，一批穿着“昆山市治理”防护服的人员，到一户人家劝住户准备行装接受隔离，但户主拒绝合作。工作人员于是入屋把住户逐个抬走送上救护车

男户主质疑工作人员违法并激烈反抗，期间抓破工作人员的防护服，又企图躲进车底 pic.twitter.com/ce1JbpiJkC

— 自由亚洲电台 (@RFA_Chinese) February 4, 2020

As we’ve repeatedly reported, signs are emerging that a combination therapy involving cocktails of drugs meant for different ailments may be effective in combating the coronavirus outbreak around the world, with different hospitals from Bangkok to Zhejiang reporting cases of patients recovering from the disease, according to SCMP.

On a morning when one of Tesla’s biggest bulls, New Street’s Ferragu downgrades the stock, saying:

“Limited sources of further appreciation in the next 12 months. .. We see 2020 playing out fine, but it is largely expected, and we see some risks on the stock: end of the short squeeze, 1Q20 miss on gross margins”

It is up almost 15% in the pre-market – topping $900 for the first time ever…

But Ron Baron was on CNBC earlier saying he isn’t selling a single share and sees Tesla rising to $1TN in revenue in 10 years.

Nothing to see here…

While the move is clearly a continuation of the historic squeeze that has crushed any residual shorts in the name, and may be an attempt by Musk, who has pulled his borrow, to put prominent Tesla short David Einhorn out of business, it was assisted by Ron Baron speaking on CNBC, and predicting that Tesla revenue will hit $1 trillion in ten years. In short, Tesla is the new Volkswagen… and bitcoin. Is this surge real? Well if it is was, Tesla would be selling stock here and prefund itself for the next decade. That it isn’t, tell you all you need to know.

So where does it stop?

If it’s like Bitcoin, maybe $1200?

It it’s like the VW squeeze in 2008, maybe $1600?

And it it’s the South Sea Company, it could hit $1800…

Updated for today’s price action. We can do it! pic.twitter.com/QQHvU76Q2m

— Keubiko (@Keubiko) February 3, 2020

TSLA is now 1.5% of the QQQ Nasdaq 100 ETF. For every 10% move in TSLA, Nasdaq is up ~14 points.

Trade accordingly.

It was scary for a few moments: after the PBOC expanded its massive liquidity bazooka on Tuesday with another gargantuan injection of 400 billion yuan net with reverse repos, marking the largest single-day addition since January 2019, Chinese stocks initially tumbled as much as 3%, but then the cavalry, or rather China’s “National Team” stepped in, and the Shanghai Composite bounced hard…

… halting its selloff and ultimately closing at session highs, up 1.3%, while the blue-chip CSI300 rebounded 2.6% after a near 8% slide on Monday. Hong Kong’s Hang Seng advanced 1.2% even as Hong Kong reported the second foreign Coronavirus death outside of the mainland, after a 39-year old man died.

In an effort to halt the plunge, China’s state-backed Securities Times published an op-ed on Tuesday to call on investors not to panic. That followed moves by China’s securities regulator on Monday to limit short selling and stop mutual fund managers selling shares unless they face investor redemptions.

The apparent success of China’s liquidity bazooka – even as China’s economy has suddenly ground to a halt – was enough for traders across the globe who were nervously watching if Beijing, which has so far failed to contain the coronavirus epidemic to at least contain the selloff, and algos flooded markets with buy orders, resulting in a sea of green across the world…

… and S&P futures which have not only defended the critical level of 3,254 where gamma flips negative as discussed yesterday…

… but have now almost closed the Friday plunge gap, even after disappointing earnings results from Google parent Alphabet, which missed on both on revenue and operating profit.

Commenting on the move, Nomura quant Masanari Takada said “This is just a typical reversal after a big fall. Vague concerns about (the) …virus are still weighing on U.S. stocks” although one would be hard pressed to see just where these concerns were on Tuesday morning.

MSCI’s world index rose 0.4%, led by gains in South Korea and Australia, the biggest leap in commodity-focused stocks in over three months, even as oil – which has emerged as the last unmanipulated indicator of the global economy – traded near 13 month lows.

European stocks surged by 1.4% led by the region’s heavyweight FTSE in London as it enjoyed both the mining rally and a tumble in the pound caused by renewed worries about Britain’s post-Brexit trade relations with the EU.

Yet despite the return of euphoria on Tuesday, the coronavirus outbreak continued to generate headlines with Hong Kong reporting its first coronavirus death – the second fatality outside mainland China – as the overall death toll reached 427.

“At the start to the week there was a fear that when China reopened there would be further disruption to the markets … (but) investors are tentatively going back into risk,” said Bank of Tokyo Mitsubishi strategist Lee Hardman.

“Given the extent of the shutdowns in China as well as the rapid rise in the virus that is likely to continue through March or April, a significant hit to China and regional growth is very likely,” said JPMorgan economist Joseph Lupton. “We would assume that in addition to bridging any funding stresses, fiscal policies will need to be ramped up to support growth once the contagion gets under control.”

Yet the market rebound was only a part of the story: the real highlight is the Volkswagen-like short squeeze that is taking place in Tesla, which has soared by as much as $120 overnight, hitting a ridiculous $888 (so far) pre market high, after trading in the mid-$500s less than a week ago.

While the move is clearly a continuation of the historic squeeze that has crushed any residual shorts in the name, and may be an attempt by Musk, who has pulled his borrow, to put prominent Tesla short David Einhorn out of business, it was assisted by Ron Baron speaking on CNBC, and predicting that Tesla revenue will hit $1 trillion in ten years. In short, Tesla is the new Volkswagen… and bitcoin. Is this surge real? Well if it is was, Tesla would be selling stock here and prefund itself for the next decade. That it isn’t, tell you all you need to know.

As mania returned to stock markets, safe havens were sold off, and 10Y Treasury yields jumped from yesterday’s lows, rising from 1.52% to 1.58%. The dollar firmed to 109.04 yen from an overnight low of 108.30, while the euro faded a fraction to $1.1059 but remained well within recent snug ranges.

In FX, the Bloomberg dollar index edged lower and Scandinavian currencies recovered ground in a rebound for riskier assets. The euro steadied around 1.1050 against the dollar while Treasuries extended declines, underperforming bunds, as the haven bid continues to be unwound. The pound recovered amid better-than-forecast construction data after touching its lowest since late December on pessimism about trade negotiations between Britain and the European Union; money-markets pared bets on BOE easing. The Australian dollar advanced after the central bank held rates at 0.75%, signaled economic improvement and kept virus fears in check. “In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth,” RBA said in statement. The Chinese yuan rallied and rose back above 7.00 vs the USD, as the central bank set the currency’s reference rate at 6.9779 per dollar, stronger than the currency’s official close on Monday.

In commodities, oil staged a modest rebound, one day after entering a bear market and dropping to the lowest in more than a year on worries about the impact of the coronavirus on demand. Brent crude added 0.8% to $54.90 a barrel, while WTI gained 1.1% to $50.67. A swath of commodities from copper to iron ore joined oil in the dumpster amid fears the drag on Chinese industry and travel would sharply curb demand for fuel and resources. The Dalian Commodity Exchange’s most-traded iron ore futures contract, expiring in May, slumped as much as 6.1% to 569.50 yuan a tonne, its lowest since Nov. 12. Spot gold was off at $1,572.41 per ounce, from a top of $1.591.46, as the dollar firmed and safe haven demand waned a little.

In other news, China Business Times cited analysts note “China is unlikely to urge the US to delay the execution of phase one trade deal. Though the outbreak of coronavirus will postpone China’s planned purchase of US goods in Q1” “China can scale up the purchase during the rest of the year to make up for the void”.

There was also the Iowa primary caucus debacle: as reported earlier, Democratic Iowa caucuses results were delayed due to quality checks amid inconsistencies and Iowa Democrats were said to be undecided if they will release caucus results on Monday night; results are expected to be released tonight. According to US Senator Sanders’ press release, Sanders is on track to win the Iowa Caucus with 29.66% of the votes, Buttigieg 24.59%, Warren 21.24%, Biden 12.37%, Klobuchar 11.00% [This is incomplete data and represents 40% of precincts in Iowa]

Expected data include factory and durable-goods orders. ConocoPhillips, Ferrari, Chipotle, Ford, Gilead, Snap, and Disney are reporting earnings

Market Snapshot

• S&P 500 futures up 1.2% to 3,284.50
• MXAP up 1.1% to 166.47
• MXAPJ up 1.7% to 537.87
• Nikkei up 0.5% to 23,084.59
• Topix up 0.7% to 1,684.24
• Hang Seng Index up 1.2% to 26,675.98
• Shanghai Composite up 1.3% to 2,783.29
• Sensex up 2.3% to 40,788.46
• Australia S&P/ASX 200 up 0.4% to 6,948.70
• Kospi up 1.8% to 2,157.90
• STOXX Europe 600 up 1% to 415.92
• German 10Y yield rose 3.6 bps to -0.406%
• Euro down 0.03% to $1.1057
• Italian 10Y yield rose 1.6 bps to 0.785%
• Spanish 10Y yield rose 2.9 bps to 0.271%
• Brent futures up 0.8% to $54.87/bbl
• Gold spot down 0.7% to $1,566.32
• U.S. Dollar Index little changed at 97.88

Top Overnight News from Bloomberg

• The U.K.’s beleaguered construction industry saw some relief last month as the general election paved a way to Brexit. IHS Markit’s index of building activity rose to 48.4, from 44.4 in December, although it remained below the 50 threshold that indicates expansion for a ninth month
• The Turkish central bank has kicked off its biggest government debt buybacks in over a decade, helping fill a void left by foreigners and adding momentum to the developing world’s strongest bond rally this year
• AllianceBernstein Holding LP, a powerhouse in fixed-income trading, is now allowing other investors to piggyback on its prowess. Through a new outsourcing service, the $600 billion asset manager will execute other buy-side firms’ bond trades
• The global stash of gold in exchange-traded funds has risen to a record after a long run of accumulation that’s been given added impetus in recent weeks by the fall-out from the widening coronavirus crisis
• Oil climbed to $51 a barrel in New York as officials from OPEC+ gathered on Tuesday for an urgent meeting to assess the impact of the coronavirus on global demand, and how the group should respond.

Asia-Pac equity markets traded higher after following suit to Wall St peers which were encouraged by China’s support measures and strong US data. The rebound extended into the region in which the Shanghai Comp. (+1.3%) recovered initial losses of more than 2.0% on aggressive bargain buying after having opened at its weakest in almost a year and following the 7.7% sell-off yesterday. The PBoC also continued to supply liquidity through CNY 500bln of reverse repos, while the Hang Seng (+1.2%) was lifted on the improved risk sentiment and after Q4 GDP showed a narrower than expected contraction which effectively overshadowed Hong Kong’s first coronavirus related death. ASX 200 (+0.4%) and Nikkei 225 (+0.5%) were kept afloat albeit with less conviction amid the RBA rate decision where the central bank kept rates unchanged and disappointed those anticipating a more dovish tone, while Tokyo sentiment contained by recent currency strength although firm gains were seen in Panasonic shares after it reported an increase in 9-month net and that its battery JV with Tesla turned profitable. Finally, 10yr JGBs and T-notes were subdued as the recovery in stocks sapped demand for safe havens which saw the former gap below the 153.00 level, with mixed 10yr JGB auction results also adding to the humdrum price action for JGBs.      

Top Asian News

• Thailand Says It’s Now Confirmed 25 Novel Coronavirus Cases
• Virus Puts China’s Main Economic Goals on a Collision Course
• Asia Faces Rate-Cut Pressure to Curb Fallout From Virus
• China Adds Market Support With More Cash, Strong Yuan Fix

A solid day of gains for the European equity-space thus far [Eurostoxx 50 +1.3%] following on from Mainland China’s rebound from the prior sessions near 8% losses. Sectors are mostly in the green and reflect risk appetite as cyclicals outperform defensives. The energy sector is the main gainer amid the rebound in the complex – with materials also bolstered by a rebound in copper prices; Glencore (+4.5%), Antofagasta (+3.6%) and BHP (+2.8%) are among the top FTSE 100 winners. In terms of individual movers, BP (+4.6%) extended on gains seen at the open amid favourable earnings. On the flip side, Pandora (-4.4%) and Micro Focus (-16%) plumbed the depths and remain the Stoxx 600 laggards post earnings. Elsewhere, SGS (-4.7%) shares suffer after Von Finck family sold some CHF 2.3bln worth of shares in the Co.

Top European News

• Pandora Drops After 2020 Guidance Disappoints Analysts
• U.K. Construction Slump Eases After Election Breakthrough
• Czech Government Sees GDP Growth Quickening to 2.2% in 2020
• Carlsberg Warns on Coronavirus After Posting Record Earnings
•  

In FX, a firmer start to the session for the broad Dollar and Index in a continuation of yesterday’s momentum, although with some support derived from Sterling’s slip below 1.3000 vs. the Buck. State-side, Democratic Iowa caucuses results were delayed to later today due to discrepancies, although an incomplete poll released by Sanders party (representing only 40% of Iowa precincts) show Sanders (29.66%) and Buttigieg (24.59%) leading whilst Klobuchar (11.00%) tails, followed by Biden (12.37%) . DXY remains north of its 100 DMA ~97.84 with the index eyeing 98.000 to the upside for potential resistance. In terms of the docket, Factory Orders and Durable Goods revisions are due just after the US cash open and US President Trump’s State of Union address will be closely watched overnight (0200GMT).

• Yuan – A complete reversal from yesterday’s price action and a total wipe-out of the prior session’s losses despite a firmer USD/CNY fixing by the PBoC overnight amid what seems to be a U-turn in sentiment. The CNY finished its domestic session sub-7.00 and with the session’s price action contained within its 100 and 200 DMAs at 7.0210 and 6.9889, similar trade is seen in the offshore. Some have pointed to China’s proactive measures to tackle the outbreak as a potential factor leading the turnaround.
• AUD, NZD – The Aussie leads the gains among the G10 in the aftermath of the RBA’s rate decision which proved to be less dovish than some had expected. Rates were left unchanged and the statement largely a copy-and-paste job from the prior meeting, albeit the commentary surrounding the bushfires and coronavirus seemed appeasing – with the Bank stating that effects will “temporarily weigh on growth” and its “too early” to assess the long-lasting impact. AUD/USD was bolstered above 0.6700 on the decision and thereafter hovered just off intraday highs, with the current risk-tone also underpinning the currency. Note: today sees some AUD 1.2bln in options expiring at strike 0.6765 at the NY cut. Meanwhile, Kiwi gleans some support from the risk sentiment, but gains remain capped as the AUD/NZD cross eyes 1.0400 to the upside, having tested the level in earlier trade (vs. low 1.0350)
• GBP, EUR – Sterling has seen a mild recovering following its earlier slide below the 1.3000 mark vs. the USD in a continuation of yesterday’s price action. Earlier in the session, Cable took out its overnight low (~1.2980) and the Jan low (1.2955) before printing a fresh 2020 low at 1.2942, with eyes on the Dec low (~1.2895) should the pair breach 1.2900. Cable recouped some losses and is testing 1.3000 to the upside at time of writing. Subsequently, EUR/GBP saw fleeting gains in which in the cross reached a high of 0.8537 (vs. low of 0.8495) ahead of the Jan 20th high of 0.8553. EUR/USD meanwhile remains flat in a tight intraday band of 1.1050-1.1065, with some ~EUR 1bln expiring around strike 1.1030-40.
• JPY, CHF – Safe-haven FX conformed to the overall risk appetite with the JPY and CHF the G10 underperformers. USD/JPY just about reclaimed 109.00 to the upside in early trade (vs. low of ~108.60) ahead of its potential resistance at 109.30 (Jan 29th high). The Swiss Franc meanwhile eyes 0.9700 to the upside vs. the USD having printed a low of ~0.9660.
• RBA kept the Cash Rate unchanged at 0.75% as expected. RBA reiterated it will ease policy if needed to support sustainable growth and rates are to remain low for an extended period, while it added that low rates are boosting asset prices which should lead to increased spending and that it will monitor developments in labour market. RBA added that wage growth is expected to remain at current levels for some time and the central scenario remains for the Australia economy to grow 2.75% this year, 3.00% in 2021 and underlying inflation is to be close to 2% this year and next. Furthermore, RBA noted that bushfires and coronavirus will temporarily weigh on growth although it is too early to determine how long-lasting impact from coronavirus will be.

In commodities, WTI and Brent front month futures feel some reprieve from the current overall turnaround in risk sentiment and with China’s proactive measures to stem the spread of the virus digested as a market positive. Furthermore, Russia’s Kremlin noted that Moscow is ready to cooperate with OPEC but declined to comment if Russia supports further cuts – which comes after Russian President Putin and Saudi Crown Prince MBS confirmed their readiness to continue cooperation. Regarding yesterday’s sources, which noted that Saudi might be on board for a temporary 1mln BPD cut, analysts at SGH Macro are sceptical as this may mean that the major oil producer could lose market share to the likes of Russia and the US. Moreover, analysts at ING noted that anything beyond a coordinated 500k BPD cut would be hard to achieve as “it becomes questionable who would be able to make significant cuts beyond Saudi Arabia and Russia,” while highlighting that Saudi is over-complying with their current quotas; thus further scope for the Kingdom to cut remains limited. WTI resides just below the USD 51/bbl mark having tested the level to the upside while its Brent counterpart looks at USD 55/bbl, having eclipsed the level in earlier trade. Traders will be monitoring the overall risk sentiment and OPEC jawboning (JTC will convene 4th/5th Feb ahead OPEC on 14th/15th) for any influence on prices ahead of the weekly API release later today. Elsewhere, spot gold is on the back foot due to the aforementioned risk appetite, with prices trading in close proximity to its 21 DMA around USD 1564.50/oz. Copper meanwhile staged an aggressive rebound amid the improvement in the risk tone and as Chinese markets nursed some losses, with prices catapulting to highs above USD 2.56/lb vs. a sub-2.50/lb low. That said, Dalian iron ore futures fell some 2.5% overnight amid delays of construction activities after the Chinese Lunar New Year break.

US Event Calendar

• 10am: Factory Orders, est. 1.2%, prior -0.7%; Factory Orders Ex Trans, est. 0.1%, prior 0.3%
• 10am: Durable Goods Orders, est. 2.4%, prior 2.4%; Durables Ex Transportation, est. -0.1%, prior -0.1%
• 10am: Cap Goods Orders Nondef Ex Air, est. -0.9%, prior -0.9%; Cap Goods Ship Nondef Ex Air, prior -0.4%

DB’s Jim Reid concludes the overnight wrap

Well this morning we had cleared the front page for the results of the Iowa Democratic caucus and were ready with expert opinion and interpretations. However the results have been delayed as the party have found ‘inconsistencies’ in the results. At the moment it seems blame is being put on a faulty app/technology rather than anything more sinister but at the time of writing there is no clarity on when the results will be released. Strangely all the candidates have given speeches proclaiming success in various forms without having the results to back them up. Not a great start for the Democratic primaries.

Moving onto Asia, there are now 20,438 confirmed cases of the Coronavirus (up from 17,205 yesterday) while the number of deaths stand at 425 (vs. 361). Hong Kong has also reported a death due to the virus overnight. This marks second fatality outside of mainland China. Meanwhile, the PBoC added CNY 400bn (c. $57 bn) into the banking system today, the largest single-day addition since January 2019, to stabilise the system. As we go to print Bloomberg is reporting that Macau has asked casino operators to suspend operations for half a month showing that the lockdowns are still continuing.

Asian markets are all trading in higher this morning with the Nikkei (+0.50%), Hang Seng (+0.94%), Shanghai Comp (+0.53%), CSI (+1.71%) and Kospi (+1.62%) all up. Chinese stock bourses were down c. -2% after the open but subsequently recouped all of their losses. The Chinese onshore yuan is up +0.36%. Elsewhere, futures on the S&P 500 are up +0.59% despite an overnight earnings miss from Alphabet (more below) and 10y treasury yields are up +2.4bps. Brent crude oil prices are also up +0.73% this morning erasing a small amount of yesterday’s decline.

In our DB Research-led conference call yesterday on the Coronavirus outbreak with Dr Michael Edelstein, Consultant Epidemiologist, Public Health England; he said that he believes that the most likely outcome is a disease that spreads moderately globally and continues to have a low fatality rate, with continued (but limited) trade and travel restrictions by governments. Those monitoring the situation should pay attention to what the rate of spread within other provinces of China is as well as what the spread is to other countries. There was lots more on the call. The replay details can be attained from this document (link here).

DB’s China economist put out another update yesterday (link here). His preliminary assessment, though there is considerable uncertainty, is that it’ll have a 1-1.75 percentage point impact negatively on China’s Q1 GDP growth. But assuming some modest catch-up of production and demand in the subsequent quarters of the year, the full-year impact will likely be limited to 0.2-0.3 ppts.

This morning’s Asian session followed the aftermath of Chinese markets re-opening yesterday after the extended holiday with the CSI 300 closing down -7.88% – its worst daily performance since August 2015. Other global equity markets bounced as the Chinese sell-off was orderly amidst heavy intervention. The S&P 500 (+0.73%) and the STOXX 600 (+0.25%) both advanced also supported by positive data from the PMIs/ISMs on either side of the Atlantic which showed that manufacturing data was steadily improving (more below) before the virus outbreak.

Markets closed off their highs though, seemingly helped by a story (Bloomberg) that Chinese oil demand has fallen 20% on the back of the virus. Brent crude fell -4.20% to hit a one-year low, while WTI (-3.05%) fell below $50/barrel in trading for the first time in over a year as well, and is now down more than 20% from recent highs in early January. According to OPEC officials, Saudi Arabia is likely to continue pushing for production cuts to prop up prices at a meeting of the Organization of the Petroleum Exporting Countries and its allies next Tuesday and Wednesday. Elsewhere in commodities copper fell for a 13th consecutive session as it closed down -0.46%.

Google’s parent company Alphabet reported after the US close yesterday, missing on revenues ($37.6bln vs. $38.4 exp), while still beating on EPS. The company was down over -4% in after-hours trading, after rallying +1.24% with the broader market intraday. Staying on the topic of earnings, see DB’s Binky Chadha’s Asset Allocation note (link here) for a recap of how the US Q4 earnings are progressing so far. He and his team note that while there have been some high profile beats and misses, overall the breadth and size of beats has so far been about average. Margins have surprised negatively, but remain high historically and the decline does not seem to reflect rising wage costs which is the normal culprit.

In fixed income, 10yr Treasury yields reversed much of their earlier sell-off that came after the ISM release (+c.6.5bps at the highs) before falling back to close just +1.5bps higher at 1.522%. 3m10yr continues to be inverted and 30yr yields dipped below 2% (back above in Asia). Similar to the US, European sovereign bond yields fell into the session end, with 10yr bund yields finishing flat on the day. It’s interesting that with US 30yr yields within a handful of bps of their all-time low and 10yrs within 15bps, last week the CBO announced that their forecast for US Debt/GDP by mid-century had risen from around 144% to 180%. So around an extra $13tn dollars of debt at the touch of a button. We put out a very short note out about this yesterday (link here), explaining the jump, and tied it to our view in last year’s long-term study (link here) that financial repression and central bank buying of bonds would likely be here for years and probably decades ahead.

Back to more immediate matters and recalling the data from yesterday now. The ISM manufacturing in the US rose to a 6-month high of 50.9 (vs. 48.5 expected), while the new orders index rose to 52.0 (vs. 47.7 expected), its highest level since May. Meanwhile in Europe, the Euro Area manufacturing PMI was revised up a tenth from the flash reading to 47.9, although it remained in contractionary territory for a 12th consecutive month. The French (51.1) and German (45.3) readings were also revised up a tenth each from the flash reading, while for Italy, where we didn’t have a flash reading to go off, the PMI rebounded to 48.9 (vs. 47.3 expected).

Here in post-Brexit Britain, we got a distinct sense of déjà-vu yesterday as the EU and the UK seemed at loggerheads once again over the negotiations on the future relationship set for this year. The first move came from the EU side, where chief negotiator Michel Barnier unveiled the draft negotiating directives for the negotiations with the UK. The document showed that the EU want commitments from the UK that they won’t seek to undercut the EU, saying that “the envisaged partnership must ensure open and fair competition, encompassing robust commitments to ensure a level playing field. … To that end, the envisaged agreement should uphold the common high standards in the areas of State aid, competition, state-owned enterprises, social and employment standards, environmental standards, climate change, and relevant tax matters.”

Over on the UK side however, Prime Minister Johnson made his position clear, saying in a speech yesterday that there was “no need for a free trade agreement to involve accepting EU rules on competition policy, subsidies, social protection, the environment, or anything similar”. He further said that the UK was seeking a “comprehensive free trade agreement, similar to Canada’s”, and said that if that wasn’t to succeed, then the UK would have a trading relationship with the EU like Australia’s, which has a much more limited “partnership framework” with the EU. The prospect that the UK might not agree to EU demands for a level-playing field, and hence find it harder to reach a free-trade deal this year, sent sterling tumbling yesterday, and the pound ended the day down -1.61% against the US dollar, the weakest performing G10 currency and on the biggest fall in over a year. It’s not clear why this should have been a surprise for currency traders though as yesterday’s news was very well flagged by both sides. For those wanting more on Brexit, we released a new podcast yesterday (link here) with DB’s Brexit analyst, Oliver Harvey, talking to Luke Templeman on my team about the next stage of talks during the transition period.

To the day ahead now, and it’s a lighter one for data with the UK’s construction PMI for January, Euro Area PPI for December and Italy’s preliminary CPI for January. Over in the US, there’ll also be December’s factory orders, the final December durable goods orders reading, along with non-military capital goods orders excluding aircraft. Earnings out include BP and Walt Disney, while there’ll also be President Trump’s State of the Union Address to Congress tonight.

 

President Trump just can’t stop winning.

Not only did Dems fail to win enough Republican votes to call John Bolton to testify at the president’s impeachment trial in the Senate (which so far has attracted a tiny fraction of the attention paid to the Senate trial of former President Clinton), but in one of the greatest unforced errors in American political history, they also botched the Iowa caucus, helping to restore the widespread cynicism that permeated the 2016 contest.

And since Trump isn’t the kind of politician to resist taking a victory lap, he did just that Tuesday morning in a scathing tweet reminding Americans why they shouldn’t trust the Democrats to run the country.

The Democrat Caucus is an unmitigated disaster. Nothing works, just like they ran the Country. Remember the 5 Billion Dollar Obamacare Website, that should have cost 2% of that. The only person that can claim a very big victory in Iowa last night is “Trump”.

— Donald J. Trump (@realDonaldTrump) February 4, 2020

Because the real winners of the Iowa Caucus was…the Republicans?

Big WIN for us in Iowa tonight. Thank you!

— Donald J. Trump (@realDonaldTrump) February 4, 2020

We suspect we haven’t heard the last about the Iowa caucus (which Trump won handily in 2016) from President Trump’s twitter feed. Tying the Iowa disaster to the botched rollout of the Obamacare exchanges in 2014 is exactly the political narrative that Trump and his team will need to deploy if they want to clinch a second term in November.

Macau has ordered all casinos to close for the next two weeks as coronavirus confirmed cases and deaths increase in mainland China, according to Bloomberg. The Chinese autonomous region’s new chief executive, Ho Iat-Seng, suspended all 38 casino operations on Tuesday for the next two weeks to limit the spread of the deadly virus.

Macau is the world’s largest gambling hub, has been struggling with declining annual revenue for the last several years as the regional economy stalled. The shutdown will be another blow to the industry and the longest ever period of closure. The second-longest was when a typhoon in 2018 forced a two-day shutdown.

Ho told the territory’s 600,000 residents to quarantine themselves inside their homes and only go outside for essential goods.

Macau has passed a law requiring all passengers aboard public transportation to wear face-masks from today to prevent the spread of #2019nC0V, joining Guangzhou.

Hong Kong’s government is still fighting a court appeal to impose a law banning face-masks.https://t.co/qC7BstP2Z6

— Ryan Ho Kilpatrick 何松濤 (@rhokilpatrick) February 3, 2020

Additionally, he said the city has significantly cut back transportation, and many businesses have shuttered operations after ten confirmed cases of the virus have so far been reported in the town.

Macau casino shares dropped almost 4% Tuesday on the news of a two-week closure. MGM China Holdings Ltd. and Galaxy Entertainment Group Ltd. were down the most.

Pass out phenomenon witnessed in Macau#coronavirus #coronaphobia #coronovirusoutbreak #CoronavirusOutbreak pic.twitter.com/FzntwbjzkY

— Harry Chen PhD (@IsChinar) January 27, 2020

“This is indeed an extreme measure. It is unlikely for casino operators to pass all this burden to the staff so that they may bear all the fixed costs and expenses,” said Angela Han Lee, equity analyst with China Renaissance Securities HK. “Near-term profit might fall into negative territory.”

The shutdown comes as casinos have reported the fourth straight month of revenue declines as China’s economy slows. Trade wars, Hong Kong protests, and virus outbreaks have certainly weighed down the regional economy.

Macau decided on Jan. 27 to ban all travelers from Wuhan and Hubei province unless they could provide officials with a health pass showing they were free of the virus.

The virus outbreak is expected to cut growth forecasts for China this quarter and likely into the second. A faltering China would also weigh on growth perspectives across the world. 

Authored by Ryan McMaken via The Mises Institute,

The headline was unambiguous: “Brexit Is Done: The U.K. Has Left the European Union.” As of January 31, the European Union (Withdrawal) Act of 2018 has become law and the United Kingdom has begun the withdrawal process from the European Union. The transition process will continue throughout 2020 as the UK and EU governments negotiate the nature of the future relationship between the UK and the EU.

Now that the British exit from the European Union is a legal reality, the economic situation in the UK has been surprisingly sedate.

This will be a surprise for those who believed the assurances of media pundits and economic experts that the UK’s economy would become every more crippled as Brexit edged closer.

Yet economic turmoil has been sparse. Certainly, markets and companies have moved to adapt to the new coming reality of the UK as largely outside the EU’s common market. But it is hardly clear that the country is poised on the edge of a Brexit-caused economic disaster. This is true even though Brexit has clearly been all but inevitable since December’s general election.

Predictions of Doom

It wasn’t supposed to happen this way.

Opponents of a British exit—and the economists they employed—insisted that not only would the eventual withdrawal be disastrous for the UK economy, but that even the market uncertainty associated with an eventual withdrawal would cripple the British economy.

For example, the UK Treasury released a report in May 2016 stating:

A vote to leave would cause a profound economic shock creating instability and uncertainty which would be compounded by the complex and interdependent negotiations that would follow. The central conclusion of the analysis is that the effect of this profound shock would be to push the UK into recession and lead to a sharp rise in unemployment.

According to the report, this economic disaster didn’t require a completed exit from the EU. The mere act of voting in favor of leaving, Brits were told, would trigger enormous economic problems.

Meanwhile, the Organisation for Economic Co-operation and Development (OECD) in an April 2016 report predicted that Brexit would cost Britain the equivalent of more then three thousand pounds per household and “would be a major negative shock to the UK economy, with economic fallout in the rest of the OECD.”

More nuanced analyses debated the effects of “no-deal Brexit” as opposed to a more “soft” Brexit. But in the lead-up to the election—and in the years following—the message was clear: Brexit is going to make Britain significantly poorer.

Yet investors, entrepreneurs, and consumers, appear unconvinced that the barriers to international trade raised by Brexit will be sufficient to send the UK economy into a tailspin. Investors have not abandoned UK investment opportunities, and entrepreneurs are not anticipating a crushing tariff burden. Even if the EU insists on being petulant, the UK has other important trading partners. Accordingly, by January of this year, The Telegraph reported, “The strength of the British economy is defying predictions of post-Brexit doom,” and Bloomberg reports that in spite of predictions of massive losses in the financial sector, “London has extended its lead in foreign exchange and interest rate derivatives trading since the referendum.” The Telegraph has also noted that as a finalized Brexit edges closer, hiring has increased and economic growth—as measured by economists’ usual methods, has increased.

“Transaction Costs” Include More Than Trade Barriers

The claim that Brexit would make everyone poorer was premised on an obsession with the idea that Brexit would drive up so-called “transaction costs” for British businesses in terms of tariffs and other barriers to the free movement of labor and goods. The assumption was that business with the Continent was streamlined and basically frictionless, while withdrawal from the EU would raise many new barriers.

This is a common argument among economists and politicians who favor greater streamlining of trade and migration through international agreements.

Certainly minimizing transactions costs in this way is always a good thing, all else being equal. It’s good when trade increases, and when countries—and the individuals within them—are able to take advantage of the the division of labor. It’s also good when consumers and entrepreneurs are left to choose for themselves what products they wish to buy and from where.

But the problem with economic integration of the EU sort is that it also tends to come with political integration.

Thus, economic integration comes with a host of strings attached in the form of bureaucratic management from above. That management has been extensive, and the regulatory burdens associated with it are significant.

Ralph Peters at the Hoover Institution refers to the EU as “a bureaucratic monster” that interferes absurdly with “the structures of everyday life.”

Even worse, trying to reduce this bureaucratic burden is extremely difficult for any single member of the EU. Any significant change to Europe-wide bureaucratic edicts requires an enormous amount of effort in marshaling support from other member states and pushing through reforms. The weight imposed on smaller businesses and entrepreneurs is especially damaging. As Peter Chapman noted at Politico, “the EU’s general antipathy towards entrepreneurs remains a huge barrier” to economic improvement. Although the nominal benefits of membership in the EU may be easy to see in terms of reduced trade barriers, the net benefits are far less clear to those who are aware of the true cost of the EU bureaucracy. Not only does EU membership come with high transaction costs in terms of added regulations, but the nature of the EU’s unelected and foreign institutions likely made the bureaucracy less responsive, less flexible, and more permanent. That in itself is an added burden above and beyond the regulations themselves.

Some anti-Brexit commentators have noted the obvious: namely that Brexit does not automatically bring relief from regulatory burdens. This is certainly true, but all this means is that British entrepreneurs and consumers are presently banking on the idea that at least some regulatory relief will come, and that the cost of international trade will not rise to crippling levels.  But it also means that if UK policymakers want to change or reduce these bureaucratic burdens, it’s not necessary to go to Brussels to beg for relief. In other words, the private sector appears to be taking a long-term view while the anti-Brexit pundits are obsessing over the immediate future.

So, those who are anticipating economic advantage from Brexit are not without reason to be optimistic. As was noted by numerous pro-Brexit observers, the UK’s trade relationships are global, and not lopsidedly reliant on favorable terms with the EU bloc. In many ways, membership in the EU has restricted UK trade with the outside world. China and eastern Asia are quickly becoming more important to a global trade strategy than the EU. This is true even for core EU countries such as Germany. Moreover, should political coalitions of entrepreneurs, taxpayers, and consumers seek regulatory relief, they will have greater ability to seek change in London than in Brussels.

Economists Can’t Predict the Future

So what happens next?

Admittedly, the fact that a severe economic slide in the wake of Brexit hasn’t happened so far doesn’t mean that it can’t happen. But then again, even if the UK’s economy goes downhill, how much of that is attributable to Brexit? Boom-bust cycles are still a reality, and they can be triggered by many factors beyond leaving a trade bloc.

But there’s one thing we do know: the same “experts” who predicted immediate economic chaos following a “leave” vote are unlikely to accurately accurately predict any coming effects of Brexit.

Indeed, the complexity of the coming changes in the legal, political, and international landscape is such that any responsible economist should admit that he or she doesn’t know what’s going to happen.

In an article titled “Mission Impossible: Calculating the Economic Costs of Brexit,” Roch Dunin-Wasowicz writes at the London School of Economics:

As a matter of fact, estimating the costs surrounding a future stochastic event (or structural break) is as easy as predicting next year’s weather. Financial mathematicians know this matter better than anyone. Considering that there has not been a previous exit from the European Union (nor in any highly integrated economic area), estimating the full costs was never going to be possible. The attempts that were made prior to the referendum involved many and heavy assumptions, including strong premises regarding the reaction of the other economies and trading partners within the EU, and beyond. Moreover, the issue involves a multitude of aspects beyond those strict[ly] trade-related, such as productivity and competitive edge, labour mobility, education, firm complementarity across borders, macroeconomic interdependence, (macroeconomic) policy alignments, financial interdependence, financial market flexibility, financial innovation, liquidity, systemic risks and financial stability, or prudential policy effectiveness.

This reality, however, won’t stop anti-Brexit activists from blaming every negative development in the UK in coming years on Brexit – or on the people who supported it.

After the year stocks just had, millions of Americans should be feeling the ‘wealth effect.’ But for thousands of European bankers who saw their bonuses cut by as much as 20% for 2019, these are the equivalent of hard times for the 1%.

As a result, at least one banker with a purported ‘seven-figure pay packages’ has resorted to stealing from the company canteen just to quiet his rumbling stomach (or possibly because they simply forgot to pay after being distracted by work, honestly neither would surprise us).

According to the FT, Citigroup has suspended one of its most senior bond traders in London after accusing him of stealing from the company canteen.

Citigroup has suspended one of its most senior bond traders in London after the US investment bank accused him of stealing food from the office canteen.

Paras Shah abruptly left his post last month as Citi’s head of high-yield bond trading for Europe, the Middle East and Africa.

The bank suspended Mr Shah after alleging he had stolen food from the canteen at its European headquarters in Canary Wharf, London, according to four people familiar with the matter. Citi declined to comment.

Mr Shah declined to comment over email, referring inquiries to Citi.

Paras Shah has a reputation for being one of the most high-profile credit traders in Europe, stretching back to before he joined Citigroup back in 2017.

The 31-year-old was one of the highest-profile credit traders in Europe, having joined Citi in 2017 after about seven years at HSBC. His job entailed matching buyers and sellers of junk bonds – debt from companies judged to be riskier borrowers – with two former colleagues telling the Financial Times that he was a well-liked and successful trader.

Even more painful for Shah: He was suspended just weeks before bonuses were due, though it’s unclear how this might impact whether he will receive the bonus or not. Revenue in Citi’s FICC group soared during Q4, but the bank’s European bankers still saw bonuses reduced alongside most of their counterparts at European banks.

This isn’t the first time a big bank has punished a senior banker for petty theft. In 2016, Mizuho fired a London banker after he was caught stealing a small part from a colleague’s bike (the part was worth just £5).

And in 2014, Britain’s FCA banned a former BlackRock executive from working in senior roles after he was caught dodging the train fare for his daily commute (he ended up paying £43,000 for being one of the Tube’s most egregious scofflaws).

Authored by Paul Joseph Watson via Summit news,

While the media continues to fret about “racist” bat soup memes, a Muslim cleric just issued a fatwa celebrating the coronavirus outbreak and calling for the “annihilation” of Chinese people.

On January 23rd last month, Syrian jihadi cleric Abd Al-Razzaq Al-Mahdi celebrated the spread of coronavirus in China and urged Muslims to pray for Allah to “annihilate” the people of China.

“Al-Mahdi is a prominent cleric who is well respected by jihadi factions, and who is known for his sermons and fatwas, in which he encourages Muslims to take part in jihad and carry out attacks inside Russia,” reports MEMRI.

Titled ‘Fatwas from the Land of Sham’ – Al-Mahdi was responding to a question from Muhammad Abu Nassir, who asked, “Is it permissible that we express our joy for what China is experiencing – the coronavirus and the death of the Chinese people?”

“Yes, yes we should express our joy and pray for their annihilation,” responded Al-Mahdi.

“They [the Chinese] have declared resounding war and they killed, slaughtered, imprisoned, and oppressed the Uyghurs and non-Uyghur Muslims. They are the enemies of Allah and are Buddhists and communists.”

Al-Mahdi’s fatwa was issued via Telegram, but he is also apparently active on Twitter, which presumably permits jihadist fatwas yet just banned Zero Hedge for questioning the official story on the coronavirus outbreak.

Al-Mahdi’s fatwa is apparently not as newsworthy as the media’s primary obsession – patrolling “racist” bat soup memes.

There have been innumerable articles published over the last 10 days suggesting that the spread of bigotry in the form of criticism of Chinese people’s bizarre dietary habits is more concerning than the spread of the global coronavirus epidemic.

The fact remains; Whatever the source of the coronavirus (the source of both Ebola and SARS was bats), eating bats, dogs, pulling the intestines out of live frogs and dipping baby mice in sauce then chomping down on their wriggling bodies – is all objectively disgusting.

*  *  *

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