Paula (not her real name) received a delivery from a UK supplier with a letter apologising for the three week delay in the arrival of her new high waisted yoga pants, great value at €26. They had come from China. Wearing gloves, Paula is sterilising the goods and announced that she won’t be buying anything from China in the near future. Consider Paulas everywhere, including within China, and the global impact if the world’s second largest economy, whose stimulus packages over recent years have bailed out global growth, stalls under the Coronavirus strain.
Overnight the World Health Organisation has called it, this is an international health emergency, hardly surprising given the virulent nature of the strain. Pause to read it;
The Guardian Newspaper is probably the most useful resource in providing current news on the Coronavirus and helps put the WHO statement in the relative context of previous emergencies. It is also worth reading below and links to a range of items. In practice it is best to expect disruption in the economic supply chains and, at least for a period of time, for market volatility to reflect the swings and roundabouts of the unfolding data. This means that risk asset prices are likely to remain under pressure as markets parcel out and assess the impact on company earnings from the disruption which is now inevitable.
Coronavirus is coming a few months after an unexpected sharp upward spike in rates in the $1 trillion US Repo market where financial institutions lend overnight liquidity to each other, secured on assets. The Repo market, purely on its own, is a lingering cause of concern for those of us unconvinced by the decade of quantitative easing and the structural integrity caused by an increasing debt load running ahead of the economic base upon which it stands.
Ever since it happened on Sept 17th last when rates jumped fivefold to 10%, the US Fed has been pumping in market support, now running close to half a trillion dollars. So, despite the US economy at full tilt, the Fed is back at quantitative easing by any other name and looks poised to cut rates again this year. In other words, despite all the stimulus and global economic expansion US growth is vulnerable.
Grasping how the Paulas of this world react to health and safety fears, curtailing shopping and travel, markets are already reacting negatively to the worsening news about the Coronavirus. It is early days and it may quickly resolve over the weeks ahead but if this flu-like virus becomes a global pandemic, it has the capacity to become the trigger for the next crisis, simply because it cannot be fought with any monetary weapon like cutting rates or pumping up quantitative easing. That is blunt but needs to be pointed out.
What we do know is that the virus is very easily spread and can do so before carriers display any symptoms which makes current data on infection suspect. The fatality rate of 2% means it is not a mass killer, not unless it mutates into something more dangerous, but the log of its infection rate looks hockey stick-like unless efforts to contain and quarantine those ill with the virus are successful. Right now that looks improbable which explains the WHO decision.
The timing couldn’t be worse for China which is struggling under cooling economic growth and high internal debt especially among State Owned Enterprises (SOE) and not helped by the collateral impact of Trump’s trade war. The recent sharp fall in copper prices may herald deeper problems when the Chinese adjust to life under the Coronavirus regime. A Chinese recession which looked highly unlikely at year end could yet be avoided but, if not, it has the capacity to quickly spread into other areas of the global economy vulnerable to falling Chinese demand, leaving European manufacturing and European banks exposed and US markets at risk of sharp reversals in valuations.
Nothing is yet clear, but the Coronavirus is a wake-up call about the interconnections and interdependencies of the global economy, why what happens elsewhere matters to us all and why political party manifestos based on current economic momentum should be treated with the same caution as a home delivery from China.
Eddie Hobbs,
January, 2020
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