CMR is the leading provider of funding and management support for small to medium-sized businesses and entrepreneurs 

Submitted by Michael Every of Rabobank

Markets have finally woken up to the threats being presented by COVID-19, which comes on top of what was hardly a healthy global economy. Yesterday saw the S&P down a further 3% to 3,128 and the Dow down 3.1% to leave us close to the “27,000!” base-ball cap level. At the same time we hit new record lows in US Treasury yields. The 10-year touched 1.31%, although this morning we have seen yields backing up again to 1.37%, while the 30-year hit 1.79% and is now at 1.85%. FX markets were somewhat less phased, for once, with EUR/USD still over 1.0860, AUD/USD holding over 0.66, GBP/USD around 1.30, USD/CNY around 7.03, and even USD/JPY around 110.50.

Not waking up so much is the White House. “All is well!” is the tweeted message from the president, when he isn’t busy talking about the US justice system in what can be seen as worrying detail given that little thing called separation of powers. White House economic advisor Larry Kudlow went even further: “We have contained this. I won’t say airtight, but it’s pretty close to airtight,” he said, adding while the outbreak is a “human tragedy” it will likely not be an “economic tragedy” and “At the moment…there’s no supply disruptions out there yet.” Markets seem to disagree. So does the US Centre for Disease Control (CDC), which has stated that it is when and not if COVID-19 hits the States. Of course, if you aren’t testing people you aren’t going to be finding any cases - and there is not a whole lot of testing going on in the US right now.

Indeed, the WHO--who still won’t call it a pandemic, which would be a major ‘event’ trigger--are saying that the globe is “simply not ready”. And they are right: imagine the strain on health services even in developed countries if COVID019 were to sweep in, especially with up to 20% of the population aged over 65 and hence most vulnerable based on the observed mortality pattern so far. We simply don’t have enough hospitals or ICU units anywhere.

Yet at time of writing there were further signs that the virus continues to spread, even if within China the data is pointing in the right direction (this being the one the data-providers want to see: note that Caixin is today saying that in one sample 14% of recovered virus patients in Guangdong tested positive when checked up again, and hence may still be infectious). Elsewhere, we have many more cases and a few more deaths in Italy; a case in Germany near the Dutch border linked to Italy; a case in Austria, and in Croatia; 1,000 people quarantined in a hotel in Spain, again linked to Italy; 169 new cases in South Korea, even despite a draconian lockdown; a US solder in South Korea testing positive, risking infection within the US army; a Korean airline stewardess who may have spread the virus in many locations; suspicions of infections stemming from Bali, where there is also not a lot of testing going on; and cases right across the Middle East, including the Iranian deputy health minister, who could recently be seen sweating profusely--maskless--in a televised public health announcement telling the public “All is well!“; and what looks like a case in Brazil, the first recorded in Latin America.

Economically, the “anti-Kudlow” argument, or the “Kud-LOW” argument is even clearer: Guangdong is keeping schools closed until 2 March, and Hong Kong until 20 April (ouch!); Virgin has cancelled all flights from Australia to Hong Kong; Kuwait has cancelled all flights to Singapore and South Korea; China is freezing some flights to South Korea too; and other global-connectivity threads are being snipped away one by one. There is even muttering that the Olympics is under threat as Japan closes down major public events “for the next two weeks”.

This is all as the WHO and the EU keep insisting that nothing and nobody should interfere with free movement of goods and people across borders, presumably for fear of setting a precedent for anti-globalization forces…who will equally naturally be making political hay from the establishment’s inability to apply standards consistently, this time on quarantine: within national borders completely draconian measures are laudable - with reports on social media alleging that some Chinese firms are even micromanaging where and when workers go during the day, for example. Expect that inconsistency to change in just one direction. The clamour will be for international lockdowns as well as local in the same way that while it was fine to provide unlimited liquidity to banks and nothing at all to the public a few years ago, the current trend is now to provide unlimited liquidity to banks and public money to the public too.

On which note, battered Hong Kong has just announced it will be electronically handing over HKD10,000 (USD1,274) to each of its adult permanent residents in an attempt to try to juice the collapsing economy. Yes, the special administrative region sits on vast fiscal reserves that it usually does nothing useful with other than white elephants and tax rebates. No, this won’t help an economy much when nobody is going out or coming to visit. Yes, it’s ironic that the first location to go the helicopter money route doesn’t even have an endogenous sovereign currency given HKD is pegged to the USD. Imagine how fiscally creative a country that CAN run MMT policies could get in the face of the virus threat. Indeed, recall China has in many ways been doing this quasi-MMT thing for years if you consider the IMF’s estimate of a consolidated fiscal deficit of 12% of GDP even before this crisis started. This is why it cannot afford to run a trade deficit, exposing its currency to the downside of such an ‘MMT-like’ policy. Yet a flood of foreign firms leaving the country due to this virus is going to make that more, not less, likely ahead - as is the fear that Beijing will increase central control over the economy once the dust has finally settled. As mentioned earlier, USD/CNY is still not that Kud-LOW at around 7.03. Think how low global bond yields will go when this hits home and it’s trading nearer to 8.

Summary:

• CDC reports 6 new cases among repatriated Americans
• 83 being monitored in Nassau County
• 8 quarantined in Westchester
• HHS confirms 15th case
• Iran deaths hit 19
• Brazil confirms first case in South America
• France confirms 2nd death
• Tokyo pushes back against Tokyo Games cancellation talk
• Greece confirms first case
• Germany unleashes fiscal stimulus after confirming new cases
• Dems one-up Trump with $8.5 billion package.
• Kuwait, Iraq, Lebanon, Bahrain confirm new cases
• Finland confirms 2nd case
• 1st 2 cases reported in Pakistan
• HHS Secretary tells Congress infectious disease fund has no extra uncommitted cash
• Congress begins talks on corona virus spending bill with vote expected early next month
• Germany health minister warns we're at beginning of epidemic in Germany; 5 new cases
• Italy confirms 12th death, cases soar above 400
• North Macedonia confirms first case
• South Korea cases soar above 1,200 as gov't begins testing of 200k patients
• Brazil confirms infected patient came on plane from Paris
• Ericsson confirms one of its employees in Croatia tested positive

* * *

Update (1435ET): County officials in Westchester have just confirmed that 8 people are under quarantine.

New York City has reiterated that it has zero confirmed cases.

* * *

Update (1430ET): Iraq is taking more steps to protect its fragile economy from the virus, closing schools and universities for 10 days, while banning citizens from traveling to a list of 8 virus-impacted countries, including Iran.

* * *

Update (1345ET): If you're wondering what caused the latest leg lower in stocks, we believe we've found the answer: 83 people in Long Island's Nassau County are being monitored for coronavirus infection, threatening to make the CDC's warnings about imminent community outbreaks come true.

The story was initially reported by a local radio station before it was picked up by other local outlets.

Nassau County Executive Laura Curran told residents "do not panic" at a press conference. Six have been tested so far, five confirmed to not have it.

WATCH: Nassau County Executive Curran and Health Commissioner Eisenstein provide updates and guidance on #coronavirus.https://t.co/zDcPSePWMM

— Laura Curran (@NassauExecutive) February 26, 2020

Nassau health officials say they're working with both state and federal agencies to monitor the situation. Gov. Cuomo has weighed in on the situation, affirming that only one possible case is still pending after 27 were tested. He added that no matter what happens here, he expects the virus will eventually arrive in NY State. Though an outbreak is inevitable, Cuomo added that there's "no need for undue fear." He added that he believed the pending case was in Nassau County.

Earlier, HHS Secretary Alex Azar confirmed the 15th coronavirus case in the US, while the latest tally from France put the total at 18, up from just a handful yesterday. Germany has also seen a run-up, as we noted earlier, confirming 7 new cases on Thursday as its leading health official declared an "epidemic", and urged local officials to prepare for a pandemic.

Meanwhile, five new cases were recently confirmed in Germany, according to Bild, this after Health Minister Spahn gave a stirring warning earlier, part of which we mentioned below: He also confirmed that some infection chains in Germany can't be tracked. That would bring the total to 23.

* * * 

Update (1250ET): A few days ago, the CDC's Dr. Fauci was on CNBC affirming a WSJ report that human trials for a coronavirus vaccine could enter testing in a matter of months, though we're likely still at least a year shy of a usable vaccine.

Now, another FDA official is reportedly claiming that the three-month time-frame for human trials to begin might be a little too optimistic.

In recent days, the market has found solace in optimistic vaccine headlines. We're curious to see if that dynamic will continue.

Over in hte UK, British Airways just announced plans to scrap 22 round-trip flights to Milan.

* * *

Update (1235ET): Another twist revealed: The coronavirus case in Croatia is reportedly an Ericsson employee.

• ERICSSON CONFIRMS ONE OF ITS EMPLOYEES IN CROATIA HAVE TESTED POSITIVE FOR NOVEL CORONAVIRUS

* * *

Update (1225ET): Italy has confirmed some new cases.

• ITALY HAS 400 CONFIRMED VIRUS CASES: EMERGENCY CHIEF

Back in the US, an FDA official told the press that the situation is "on the cusp" of a pandemic, apparently violating WHO Director General Dr. Tedros's request that people kindly refrain from using the "P" word.

• FDA OFFICIAL WARNS CORONAVIRUS ON CUSP OF PANDEMIC

Meanwhile, over in the Balkans, health officials in North Macedonia has confirmed its first infection in a woman who recently returned from Italy, Reuters reports.

"The patient tested positive for coronavirus... She is the first patient in North Macedonia to have tested positive for this pathogen," said Venko Filipce, adding that the patient was in a stable condition. The woman, a Macedonian citizen, reportedly drove from Italy to North Macedonia in a van. All her fellow passengers are being tested. This comes one day after neighboring Croatia reported its first case, someone who had just visited Milan.

* * *

Update (1150ET): The CDC has reported six new cases among the group of Americans repatriated from the Diamond Princess and Wuhan, bringing the total to 45, and the total cases in the US to 59.

Though they couched the information in a weird, opaque way, perhaps to try and blunt the impact the market rally.

• U.S. CDC SAYS 14 CONFIRMED CASES OF COVID-19 AS OF FEB. 26, 45 CASES AMONG THOSE REPATRIATED TO U.S.

The good news is that no more cases have been identified among the general public. But it looks like the rally is starting to fade.

* * *

Update (1130ET): It's been another relatively hectic morning for coronavirus-related news in the US. Here are some of the latest updates"

• Finland has confirmed its second case of coronavirus as the outbreaks spread into northern Europe.
• Pakistan reports first case, despite closing border with Iran
• German health minister warns we're at the beginning of an epidemic, tells hospitals to review planning
• Brazil is worried about an interruption of medical supplies from China like facemasks (they're not the only ones)
• White House weighs appointing coronavirus czar (though the administration has denied)
• Nice latest town to cancel Carnival celebrations
• Air China cancels flights between Beijing and Vienna through March 20
• US issues travel advisory for Iran, warns US citizens of risk of infection on top of kidnapping and detention
• HHS Secretary Azar tells Congress during testimony on Wednesday that all of the infectious disease rapid response fund is "already committed or obligated"
• House could vote on coronavirus funding plan during week of March 9
• Congress begins talks on virus emergency spending bill
• Delta Air Lines reduces flights between US and Seoul
• Brazil tracking 20 patients suspected of having the virus
• Brazil sees number of cases rising in coming days
• Lebanon health ministry confirms 2nd case
• Matteo Salvini says Italy should spend €10 billion on coronavirus aid
• Russia says it will halt issuing visas to Iranian citizens

The focus remains on Europe and the Middle East now that the number of new cases being confirmed outside China is outbumbering the number of new cases being declared in China (at least according to the 'official' numbers).

* * *

Update (0940ET): The Brazilian health ministry said the coronavirus patient arrived in Brazil on a plane from Paris. Exactly when isn't known.

* * *

Update (0855ET): In the US, Dems are officially doubling-down on their push to politicize the coronavirus outbreak and use it as a cudgel against President Trump by proposing a plan calling for even more money to be spent.

According to Fox's Chad Pergram, Chuck Schumer is planning a $8.5 billion package that he plans to hand over to the appropriations committee later on Wednesday.

Schumer preparing emergency spending pkg for coronavirus funding totaling $8.5 Billion.

— Chad Pergram (@ChadPergram) February 26, 2020

President Trump is holding a press conference later today to discuss the outbreak. Yesterday, he said he would be handing off his administration's $2.5 billion rescue package to Congress. President Trump has repeatedly insisted that the outbreak is under control, so we suspect that he fears a large number might spur panic.

Of course, in a situation like this, money can only go so far. As the CDC has demonstrated, containing an outbreak is more about decision-making and hard choices.

In other news, as we mentioned earlier, Germany is moving to implement some fiscal stimulus of its own.

* * *

Update (0750ET): While the Germans oppose closing borders in response to the outbreak in Italy, it appears Berlin has stepped up to rescue the market and placate economists begging them to roll out a fiscal stimulus program to stop the European economy from sliding into the gutter.

• GERMANY PLANS TO TEMPORARILY SUSPEND LIMIT ON PUBLIC BORROWING

Futures soared on the headline, which is hardly surprising, as the market has already been primed for German stimulus, even if Berlin has always held the idea at a distance. Back in September, there was all that talk about a "shadow budget".

As sentiment plunges, WHO's Dr. Tedros has stepped in to try and soothe rattled investors, warning that government officials, economists, infectious disease researchers and any self-styled 'experts' should avoid using the word 'pandemic' to describe the outbreak.

Yes, while it does technically meet the definition of a pandemic, that word has some seriously negative connotations which Tedros feels isn't really appropriate here.

Italy, meanwhile, has reported its 12th death after confirmed cases soared above 300 earlier.

* * *

Update (0730ET): The UK has announced plans to start randomly testing citizens with flu-like symptoms for COVID-19. The plan is part of measures to contain the virus as the UK has managed to avoid reporting any new cases over the past week. In England, random testing will take place at 11 hospitals and 100 doctor's offices.

"This testing will tell us whether there’s evidence of infection more widespread than we think there is. We don’t think there is at the moment," Cosford said. He added: "The other thing it will do is, if we do get to the position of more widespread infection across the country, then it will give us early warning that that’s happening."

So far, only 13 people have been infected.

* * *

Update (0715ET): Abe's government has officially denied comments made by a senior IOC member who suggested that the Tokyo Games might need to be canceled if the virus is still a threat in late May. IOC member Dick Pound told the AP that "a decision would have to be made by late May" about whether to cancel the games, according to the Washington Post.

The official position of the Japanese government is that the Games will not be canceled. Besides the obvious blowback for Japan's already sagging economy and tourism industry, cancelling the games would likely have a serious psychological impact on consumer confidence in the world's third-largest economy.

In other Japan news, Hokkaido, a prefecture in the north ofJapan, has urged schools to temporarily close as it struggles to contain the virus after a string of new cases popped up in the area. It was the prefecture's first order to close schools since the epidemic began.

* * *

After cementing its largest two-day percentage drop in two years (going by points, it was the biggest two-day drop ever), stocks fell in Europe Wednesday as France reported its second virus-linked death (and first French national; the first was an 80-year-old Chinese tourist), while Spain confirmed 8 new cases within 24 hours.

The Frenchman who passed away on Wednesday was one of three new cases confirmed by health authorities.

Over in the US, the CDC warned yesterday that "community spread" of the virus is "inevitable," while President Trump and his administration continued to insist that everything is fine and that the outbreak in the US would soon die down. We also saw Croatia, Austria and Switzerland report their first cases on Tuesday following the EU health commissioner's declaration that closing borders would be "disproportionate and ineffective."

"We're talking about a virus that doesn't respect borders," said Italy's Health Minister Roberto Speranza yesterday.

Are we the only ones who feel that this sounds like justification for closing the border?

Mirroring the situation on the Canary island of Tenerife, Austrian authorities placed a hotel in the Alpine city of Innsbruck under lockdown after a receptionist (an Italian who had recently visited outbreak epicenter Lombardy) tested positive, according to the Washington Post.

Just hours after Brazil confirmed the first case in South America, some of its continental neighbors are going on "maximum alert". Guatemalan President Alejandro Giammattei said the country was battening down the hatches, and that its hospitals are fully stocked and supplied.

On Wednesday, Greece confirmed its first case in the city of Thessaloniki, while Iran reported 19 new deaths, bringing them, within swinging distance of the 50 deaths that a local lawmaker reported earlier this week. Confirmed cases in the revolutionary Islamic Republic have climbed to 139. According to Al Jazeera, Kuwait confirmed six more cases on Wednesday, bringing its total tally to 18. Bahrain reported three new cases, bringing its national total total to 26 as three women who recently traveled to Iran carried the virus back.

While European officials largely avoided the heavy-handed tactics used in China, government ministers urged people to avoid all "non-essential" travel as the outbreak spreads across Europe. The mystery at the center of the outbreak in Italy has compounded fears, as the lack of understanding contributes to the hysteria surrounding the outbreak.

"There is no prohibition," said Spain’s health minister, Salvador Illa, according to El Pais. "But unless it is essential, do not go to a risk zone. It’s common sense."

Rumors circulating around twitter yesterday claimed an official who had met with the Ayatollah only days ago had tested positive for the virus, becoming at least the second government official to catch the virus after the deputy health minister.

The Hong Kong government said it had been contacted by more than 3,000 Hong Kongers in Hubei Province, including 532 in Wuhan, asking for help getting them back to Hong Kong. In order to return to HK, the government said all Hong Kongers in Hubei must register with the government by Feb. 28.

Mongolia has become the latest neighbor to tighten its borders and restrict internal travel. The country said it would restrict travel to and from its capital, Ulaanbaatar, to other provinces until March 3. A transportation minister said the country would take precautions with other flights from Europe, Russia Turkey and Kazakhstan. Egyptair has extended its shut-down of flights to China; flights were supposed to resume on Thursday.

The Philippines, which adopted travel restrictions directed at China, said Wednesday it would also impose travel restrictions on South Korea. The government announced an immediate ban on entry to travelers from North Gyeongsang province, where the coronavirus-hit city of Daegu is located. Japan also announced that it would bar travelers who had visited Daegu or Ceongdo.

Overnight, South Korea reported 115 more cases, in keeping with its 2-3 daily updates. The new total: 1,261. That number is, of course, expected to climb over the coming days as the country begins the mass-testing of 200,000 people, including members of the cult-like church that's found itself at the epicenter of the outbreak in Korea.

Korea also reported that an American soldier was among the 169 cases reported earlier in the day (we noted it late last night).

Israel has yet to detect the virus within its borders, but another hair-raising revelation came to light Wednesday when South Korea's CDC confirmed that the Korean Air cabin crew infected with the coronavirus had been on a flight between Israel and Incheon.

As Shinzo Abe's government goes all-out to keep the Olympics on track, the PM announced on Wednesday that all major sporting and cultural events in the country taking place over the next two weeks should be postponed or canceled. This comes after the International Olympic Committee said the Olympic Games would go on no matter what, even if the outbreak keeps travelers away, the Japan Times reports.

Russia says the United States and other UN members are floating the idea of establishing a "truce" with anti-Assad jihadist groups now battling Syrian and Russian forces in Idlib. 

The problem is, as Moscow pointed out, these groups which are also bolstered by thousands of foreign fighters, include internationally designated terrorist organizations —especially the main group occupying the northwest province, Hayat Tahrir al-Sham (or HTS, formerly Nusra Front).

Addressing a press conference at the start of this week alongside Tajik Foreign Minister Sirojiddin Muhriddin, Russian FM Sergey Lavrov said he was "concerned about the attitude of some Western states" toward al-Qaeda groups operating in Syria. He noted these groups "are officially on terrorist organizations' lists compiled by the U.N. Security Council, they are also on the U.S.' national list of terrorist organizations."

But then he lambasted top US envoy for the region James Jeffrey, who was recently in Turkey, for appearing to suggest that al-Qaeda faction HTS should not be recognized as a terrorist organization. 

Newsweek reported of special envoy to Syria Jeffrey's remarks:

The remarks come after James Jeffrey, the U.S. special representative on Syria and special envoy to the U.S.-led coalition against the Islamic State militant group (ISIS), told a press briefing earlier this month he had not seen Hayat Tahrir al-Sham "planning or carrying out international terrorism attacks." He made similar comments days earlier.

It follows a years-long pattern of both Washington officials and mainstream US media soft-peddling and even romanticizing terrorist groups in Syria, on the mere basis they are fighting to overthrow America's enemy Assad. 

And it's no secret that the CIA and Pentagon were actively funding, arming, and training violent Islamist factions for years, branding them as "moderates" — even helping jihadists take over Idlib in the first place in 2015.

.@SecPompeo on Syria’s #Idlib province: The Assad regime’s brutal new aggression, cynically backed by Moscow and Tehran, imperils more than 3 million displaced persons. The answer is a permanent ceasefire and @UN-led negotiations. pic.twitter.com/efJMokZvU3

— Department of State (@StateDept) February 25, 2020

The main group under the brunt of Syrian-Russian airpower, Hayat Tahrir al-Sham, has since March 2017 been a U.S.-designated terrorist organization. For this reason Lavrov  told a UN Human Rights Council meeting on Tuesday that some UN members are seeking to "justify the atrocities of radical and terrorist groups."

Lavrov further said that US officials have "repeatedly made statements that mean that they consider Hayat Tahrir al-Sham to not be a terrorist organization as such and that it would be possible under certain circumstances to enter into a dialogue with it."

The Russian top diplomat added, "this is not the first time we hear such transparent hints, and we consider them completely unacceptable."

Russia perhaps senses that Washington could ensure pressure on Damascus by preserving Idlib as de facto al-Qaeda territory by backing a truce or ceasefire, similar to current US ceasefire talks with the Afghan Taliban. HTS itself has long been described as "the Syrian Taliban" — given its harsh brand of radical Islam imposed by the sword on the local population wherever it gains a foothold. 

Seemingly in response to Russia's criticism, the US State Department published a video Tuesday afternoon of Secretary of State Mike Pompeo emphasizing the only way forward is a "permanent ceasefire" in Idlib, also as calls grow from the usual hawkish corners of the beltway for greater US intervention in the conflict.

After trading up over 500 points, the Dow is back in the red as BTFDers have failed once again.

All the majors are in the red!

It's been a dip-buying-famine...

Traders are unsure of the immediate catalyst (just as many scratched their heads at the rebound), but some are pointing to headlines that 83 people in Nassau County being monitored for possible coronavirus exposure.

This all fits with comments from the infamous Dennis Gartman, who last year ended his daily newsletter after three decades, who appears to be right in his retirement.

Equities are “egregiously” over-valued relative to measures such as sales, profits and the size of the economy. The spread of the coronavirus is threatening global growth, and investors should buy safety assets such as gold and government bonds, he said.

“I’m afraid rallies are to be sold into, not weakness to be bought,” Gartman said in an interview on Bloomberg Radio with John Tucker.

 “I’m amused or dismayed at how many people are still willing to buy the dip, and this dip is far more serious than people want to anticipate at this point.”

Gartman's view echoes that of Mohamed El-Erian, who wrote on Tuesday that the virus-induced sell-off “isn’t a buy-the-dip opportunity” because there’s little evidence right now supporting the notion of a V-shaped recovery.

Dr.Doom, Nouriel Roubini, is also a skeptic, calling hopes for a quick rebound in China’s economy “delusional.”

It would appear that bond yields agree...

Authored by Bill Blain via MorningPorridge.com,

“Failure is not falling down, but not getting back up again..”

Someone important in the Hong Kong Government reads the Morning Porridge! Last week I was talking about the use of “Helicopter Money” as a policy response; dropping wads of cash direct to consumers to juice the demand side of the economy – and this morning the HK authorities announced a HK$ 10k handout to each and every citizen! 

Back in London, I’ve heard staff were sent home from the London office of a top-rank US investment bank because their spouses had attended the Milan Fashion Week.  They’ve been told to go into self-imposed quarantine.  The Irish govt has called for the cancelation of the Ireland vs Italy game.  Two meetings on one of my deals next week have been switched to less effective conference calls because key staff may be unwilling to travel to Yoorp from the US.  It looks like my annual Lads Ski Trip to the top of the Aosta Valley in 10-days time is unlikely to go ahead.  

Dang.  Covid19 is becoming dashed inconvenient...

The market reality is becoming... fraught.  By the end of this week its entirely likely markets will be down 10% or more from last week’s top (currently 7.5% down and watching!)  That’s serious.  But, what’s scary is that this crash is utterly different to anything that’s gone before... This is outside our normal experience.

Yesterday’s market was like watching Homer Simpson tumbling down a steep slope.  He bounced off a ledge, rose higher for a moment, before gravity inevitably took over.  Doh!  Will the market stop tumbling today?  Probably not – the trend is further economic, virus triggered, reactive slowdown. But, this is not a conventional end-of-the-world-as-we-know it stock death plunge.  This is a slow-motion catastrophe as shocked realisation bites; where the reality of the virus induced snap recession and its consequences will continue to depart from the path of a conventional crash. 

The upside of this slo-mo crisis is it gives market participants more time to think and react – which equally means more opportunity to get it horribly wrong! 

This is going to prove a new experience for everyone.  Most crashes, and this is my 6th or 7th since my first in 1987, see the whole market tumble in lockstep.  This crash is going to be more about unknown coronavirus-driven fundamentals – which sectors and names are most vulnerable to broken supply chains, permanently lost orders, travel lockdown and industrial siege mentality, and which are most likely to benefit from critical sector government support.

It’s also the subject of an exogenous force – the unknowns about the virus.  This will be driven by how governments react to an external pandemic threat rather than the usual internal crisis vectors like stupidly unwise bank lending, or a stock bubble bursting (although it doesn’t help the valuation bubble looked very close to popping!)  The effect is the tempo of the crisis will rise and fall dependant on the non-economic factors – the spread (contagion) and effect (mortality) of the disease. 

Someone will suggest can probably write that as a formula:

P = f{(C*Ci/1/M*(CP)})*G 

Where Panic (P) is a function of Contagion (C ) * the increase in Contagion rate (Ci) / Mortality (M) * 1/Cured Patients (CP) multiplied by the Government (G) factor on whether policy is good/bad .. or something like that… 

Problem is… none of us in markets are experts on pandemics – hence we’re as likely to be wrong as anyone.  Industry talking-heads pretending they understand the virus are likely to be as wrong as anyone. 

Take it for granted that the experts advising governments on lockdown are experts, and while they might not know all about it, they know more than us...  

That’s a reason to be worried.  The crisis, the disease, has only just burst out of China, and as it explodes elsewhere the shock effect on market sentiment has already been massive – perhaps out of all proportion – or so say a number of market pundits. As the pace of cases rises and falls, deaths occur, treatments and cures are found, and we see more reaction from the authorities, then the likelihood for sustained market volatility increases. See my formula above. 

The slo-mo crisis gives time to make investment calls. I’ve said before I’m not so worried about solid names like Apple – if you can’t buy an iPhone today, you will be able to buy one in a few weeks, months, next year. I was tempted to buy Spotify and Netflix, till figuring that if people are bored in quarantine skimming through Spotify, then it actually has to pay more in Royalties if more people are streaming content! (Which might be a good reason to buy Music as Asset (guess what? I’m doing a Music deal at the moment!) 

Maybe sell Italy bonds and banks? A cancelled ski trip means resorts at the head of the Aosta – Courmayer and La Thuile (my favourite ski destination) - will effectively close, with multiplier effects down the Valley. I’ve seen the effects of a bad winter before: the following year there are shuttered restaurants, skimped piste maintenance, and older skis in the hire shop. Cancel the whole season a month early – and you are talking a whole regional economic ecosystem in trouble. 

It’s entirely possible restrictions in global travel will push the more vulnerable airlines into default – although it’s also predictable governments will step into support them. That’s a market call – which airlines have enough government clout and support to sustain them through a lean period? Norwegian will be one to watch. And how much pressure will bailing out a Middle East national carrier create when the underlying economy depends on the oil price – which has been pummelled by uncertainty on virus slowdown, and the strained Saudi/Russian relationship? 

Spread that analysis out over every sector of the whole economy. The Chinese are trying to do it by mandating no layoffs, and telling the banks to lend and assuring them they will be bailed. (That’s a whole can of unintended consequential worms in terms of possible banking behaviour…) Western economies might have to make similar calls. 

The closest parallel I can think of is the organisation and management of a wartime economy. There are some fascinating histories comparing the success of the UK coalition government directing the economy through 1940-1945, compared to the undirected dither, competitive powerplays and wastage within the German Reich – most folk will be entirely unaware how badly the German economy failed to adapt, and why it’s a major and often understated reason they lost the last global conflict. 

Meanwhile… 

While all eyes are focused on where markets are going in response to the Cataclysm of Coronavirus news.. there is plenty else bubbling down below on the front lines of finance:

Another emerging market debacle is unfolding in Lebanon, US company downgrades as unwise leverage and M&A raising the ire of rating agencies are rising, the Democrats self-immolating in the US, and the doubts about politicians eyeing each other to see who might try to garner a boost from the current virus fixated market. (A bit of competitive devaluation anyone?)Or how about story in FT this morning about the rise of hydrogen – which has enormous implications for the hype over electric cars! 

In short, there is plenty to think about out there aside from the darn virus! When you need something to not understand, let’s move on to Europe. 

The big issue is the UK trade agreement.  Yesterday the Yooropeens agreed that Britain must be punished for Brexit. If we want to trade with Europe, it can only be if we accept every rule of the EU. Does anyone outside Brussels understands that’s going to trigger crisis? The UK will not accept it.

Strip it down to the basics, and it feels like we’ve got a continuation of the 1000 year war. It’s not about protecting the Yoorpeen Union from a more nimble and more perfidious Albion undercutting its trade and good standards. It’s about France getting payback time.  The smart economic outcome for Europe would be a good trade deal with the UK, where the damage to the Union is minimised and trade carries on as before. Instead, the French won the argument, together with their salivating Irish poodle. They want to humiliate us, choosing their moment as a distracted and senile Germany snores in the background, to make its play.   

That’s a bad decision. As M. Barnier struts the stage of history demanding Britons submit as slaves to the Franco-Yooropean hegemony… our politicians will not dither or shilly-shally, but make a very clear guesture to Europe in terms of access to British fish, thus stoking a future of on-going trade protectionism.  The default position from angry right-wing Brits will be simple: Europe is very welcome to our fish – they can buy all the fish they want at whatever the market price is from British trawlers. We might be willing to do a few side deals in return for some consideration. If you want the best fish in Europe – it’s going to cost. It will cost more in France.

That won’t be good for anyone. 

Listening to calm reasonable European parliamentarians a few weeks ago it sounded like a negotiation likely to result in a sensible Canada style deal was underway.  

Now, the UK has to circumvent the French dominance of the hollow EU. Boris and his gang need to deliver messages direct to European leaders telling them the UK is not even going entertain France’s demands. Let’s start again and let it be widely known we are willing to sign up to the agreed Canada style deal with Europe, and negotiate from there. If they refuse, as they have been mandated to do, lets break the rules. 

Let it also be know we’re more than willing to strike side deals with each European state –  except for France and Ireland – on everything and anything. The Spanish want our Fish? No problem. The Germans want to sell us their cars? No problem. The Danes want to sell us Bacon? No problem. Let’s chat. 

Now I know that isn’t possible when dealing with the Yoorp trade monolith – where one size fits all, but France better. Its time to let European voters know what a trade block with the UK will cost. Let the national press, farmers, fishermen, the Eurosceptics and the right wing know, and reinforce the message that France’s singular desire to hurt perfidious Albion can only be achieved by crushing German, Dutch, Danish, Swedish and the rest of Yoorp’s exports. 

The French have tried to mount economic blockades of Britain before. Didn’t take rest of Europe long to work out dealing with a merchantile trading economy like the UK beats dealing with the dead hand of French state policy every time. 

A Freudian slip by billionaire Mike Bloomberg is what seems to be getting most attention following last night's South Carolina debate, even attracting Washington Post commentary and the rare attention of the mainstream in a moment underscoring how the elites view their role in America's two-party system. 

While he was touting his $100 million in donations to House Democrats, he essentially bragged that he "bought" 21 congressional Democrats their seats in 2018 midterms.

Bloomberg came within a hair's breadth of saying he *bought* the Democratic majority in the House and caught himself as it came out of his mouth pic.twitter.com/DG0keVMo2J

— Brandon Wall (@Walldo) February 26, 2020

"Let's just go on the record, they talk about 40 Democrats," Bloomberg said, referring to former Vice President Joe Biden.

"Twenty-one of those were people that I spent $100 million to help elect," he continued.

"All of the new Democrats that came in and put Nancy Pelosi in charge and gave the Congress the ability to control this president, I bough-... I got them."

Incredible. In the #DemDebate, billionaire Bloomberg boasted that he "bought" right-wing neoliberal Democrats like Nancy Pelosi

Then after saying "bought," he quickly corrected himself and said "I bought, uh got them" pic.twitter.com/2mcDgPPhIJ

— Ben Norton (@BenjaminNorton) February 26, 2020

Needless to say the backlash was swift and merciless.

I BOUGHT THEM — Bloomberg accidentally admitting his world view.

— Markos Moulitsas (@markos) February 26, 2020

"Wow!!! He’s admitting he BOUGHT those seats! OMG!" — Donald Trump Jr. had also chimed in.

The billionaire founder of Bloomberg LP has faced deep criticism for leapfrogging other Democratic primary contenders in the national polls, despite being a latecomer. 

He's faced labels of being an "oligarch" and essentially muscling, or rather buying, his way into debates based on his limitless campaign self-funding. 

Via Climateer Investing blog,

Mr. Roach was Chairman of Morgan Stanley Asia and now hangs out at Yale as a senior lecturer. From Project Syndicate:

The COVID-19 outbreak has hit at a time of much greater economic vulnerability than in 2003, during the SARS outbreak, and China's share of world output has more than doubled since then. With other major economies already struggling, the risk of outright global recession in the first half of 2020 seems like a distinct possibility.

NEW HAVEN – The world economy has clearly caught a cold. The outbreak of COVID-19 came at a particularly vulnerable point in the global business cycle. World output expanded by just 2.9% in 2019 – the slowest pace since the 2008-09 global financial crisis and just 0.4 percentage points above the 2.5% threshold typically associated with global recession.

Moreover, vulnerability increased in most major economies over the course of last year, making prospects for early 2020 all the more uncertain.

In Japan, the world’s fourth-largest economy, growth contracted at a 6.3% annual rate in the fourth quarter – much sharper than expected following another consumption-tax hike. Industrial output fell sharply in December in both Germany (-3.5%) and France (-2.6%), the world’s fifth- and tenth-largest economies respectively. The United States, the world’s second-largest economy, appeared relatively resilient by comparison, but 2.1% real (inflation-adjusted) GDP growth in the fourth quarter of 2019 hardly qualifies as a boom. And in China – now the world’s largest economy in purchasing-power-parity terms – growth slowed to a 27-year low of 6% in the last quarter of 2019.

In other words, there was no margin for an accident at the beginning of this year. Yet there has been a big accident: China’s COVID-19 shock. Over the past month, the combination of an unprecedented quarantine on Hubei Province (population 58.5 million) and draconian restrictions on inter-city (and international) travel has brought the Chinese economy to a virtual standstill. Daily activity trackers compiled by Morgan Stanley’s China team underscore the nationwide impact of this disruption. As of February 20, coal consumption (still 60% of China’s total energy consumption) remained down 38% from the year-earlier pace, and nationwide transportation comparisons were even weaker, making it extremely difficult for China’s nearly 300 million migrant workers to return to factories after the annual Lunar New Year holiday.

The disruptions to supply are especially acute. Not only is China the world’s largest exporter by a wide margin; it also plays a critical role at the center of global value chains. Recent research shows that GVCs account for nearly 75% of growth in world trade, with China the most important source of this expansion. Apple’s recent earnings alert says it all: the China shock is a major bottleneck to global supply.

But demand-side effects are also very important. After all, China is now the largest source of external demand for most Asian economies. Unsurprisingly, trade data for both Japan and Korea in early 2020 show unmistakable signs of weakness. As a result, it is virtually certain that Japan will record two consecutive quarters of negative GDP growth, which would make it three for three in experiencing recessions each time it has raised its consumption tax (1997, 2014, and 2019).

The shortfall of Chinese demand is also likely to hit an already weakening European economy very hard – especially Germany – and could even take a toll on a Teflon-like US economy, where China plays an important role as America’s third-largest and most rapidly growing export market. The sharp plunge in a preliminary tally of US purchasing managers’ sentiment for February hints at just such a possibility and underscores the time-honored adage that no country is an oasis in a faltering global economy....

Read more here...

Roach does not mention that the U.S. response to China's trade depredations over the last couple years has had the salutary effect of jump-starting the decoupling of the U.S. economy from China's.

That is not to say the U.S. is inoculated from the economic contagion, just that it was becoming somewhat less exposed to supply chain disruption.

This is something the FT's Rana Foroohar mentioned in passing in her opinion piece, "Coronavirus is speeding up the decoupling of global economies":

"...A gradual decoupling of global economies has been under way for a few years. The South Korean electronics group Samsung, for example, has been closing Chinese plants and opening others in Vietnam. Mexico has benefited from some US corporations moving their supply chains closer to home. But decoupling will undoubtedly speed up as Beijing’s opacity in handling the coronavirusn epidemic highlights the risks of doing business in China...."

I've had an (unrequited) love-hate relationship with Mr. Roach for a few years, see the recycled introduction to:
Stephen Roach—"The Crisis of 2020"

The introduction to our last visit with Mr. Roach, December 1's "Stephen S. Roach: After the US-China Trade War":

Mr. Roach is a sharp guy with a vast knowledge of Asia, one of the reasons MS kept him around as chairman of Morgan Stanley Asia. However... when the U.S. retaliated against China for China's trade practices Mr. Roach seemed to have lost a half-step, focusing on the next quarter rather than the next quarter-century (as the pension/insurance crowd is fond of saying, if not doing) and was too dovish in his estimation of the effects of U.S. tariffs on the Chinese economy.

Because of that we haven't linked to him since July 2017 after years of visiting him for his thoughts on possible futures.

But now he's back to doing what he does so well, getting his audience to think about the picture on the horizon rather than the one immediately in front of one's nose....

All that being said the U.S. is still very dependent on China...

From Statista:

Nomura's Charlie McElligott sees the chances of a meaningful bounce in US stocks (on month-end pension rebalancing flows as well as some sentiment-shifters overnight), but warns that should we fall just a little lower, CTAs will be triggered to "delever" and markets will flush 10-15% lower from here...

McElligott first looks at the state of play...

UST yield curves have now pivoted toward a clear “bull-steepening” on the week, as Fed action SOONER and LARGER is now “assumed” by market into this Coronavirus / Sanders “growth-scare” (an April cut is now 70% and June is 1.2 cuts), following the largest cumulative 3d deterioration of US financial conditions since the Dec ’18 Fed QT panic.

• Remember that during the “end-of-cycle slowdown” careening into “outright recession” panic of last year (thanks to the escalation of “trade war” fear), the Fed’s own research told us that despite a potential re-approach of the zero bound that when they DO cut into a recession fear, it will be BIG and FAST.

• And the grab for the safety of “Duration” into this global growth scare saw both Asian and European “real money” investors continue to buy government bonds overnight, and even at these “rich” levels - which perversely drives greater risk of 1) accelerated convexity hedging and 2) buying from  portfolios which continue getting “shorter” their Duration targets into month-end.

All of this said - and similar in-stance to my comments on VIX futures “stalling-out” overnight below - we are too seeing STIRs unable to rally further here this morning and in-fact, lower, with EDZ0 hitting resistance back at its peak last made Sep 4th, 2019 at the culmination of last Summer’s own “growth scare,” with selling / profit-taking in bullish plays in the options-space / selling outright ED$- and FF- futures in the European session.

Now too we see TY outright “down on the day” and accelerating lower alongside Bunds, following German Finance Minister Scholz’ stating that they plan on temporarily suspending the debt brake on local governments as the German economic slowdown strain grows.

S&P futures at one point were DOWN 70 from overnight highs before thereafter bouncing ~50 handles from the overnight lows on bursts of hedge monetizations (covering dynamically in Spooz shorts, but also as investors sell S&P weekly Puts back to Dealers—who are thus now “long” said Puts—which then forces Dealers to buy S&P futures, in-turn shock-absorbing the market), as well as risk-relief from both the German “austerity easing” news noted above (although “apparently” UNRELATED to Coronavirus is the claim), as well as the Chinese “mini-QE” announced for virus-hit SMEs.

Vol too is stalling-out finally (UX1 down on day after the earlier Spooz puke through 3100) despite the extreme VIX futures curve inversion (tells you that a good chunk of the systematic “roll down” or “short vol” flow is covered which should gradually see front-VIX future fade lower thereafter), which like almost any other “extreme fear / selloff” back-test tells you to “buy the dip” in stocks / “sell the rip” in vol

But what happens next? McElligott suggests two possibilities - short-term bounce or medium-term trounce...

Although I typically “fade” the pension month-end rebalancing stuff as “noise not signal,” I do believe that there is increased potential for this “Equities bot, USTs sold” rebalancing-flow over the next few days, simply in-light of the scale of the Feb moves / extreme MTD “performance spread” of SPX total return vs Agg total return (just 10th percentile since 2004—the more “extreme” it gets, the more “signal” there tends to be)

Nonetheless, there remain a number of headwinds to the stickiness of this “local” US Equities bounce which keep us “chopping,” largely due to the mechanical “lagging” deleveraging from the “vol trigger” / systematic community but also the incremental seller that is currently the massive Asset Manager “legacy long” in S&P futures:

Spot S&P remains deeply into “Short Gamma” territory, which despite the significantly smaller overall $Gamma (%ile rank), is a real flow that will continue to dictate that market makers by-and-large will be “selling into sell-offs” - PARTICULARLY as there remain some large downside tails which Dealers are SHORT but are increasingly becoming “real” / “in-play”

Similarly is the previously unthinkable possibility that the ridiculously “in-trend” positions for CTAs in S&P 500 futures are now “live” for deleveraging as well (after we noted that the Russell was going-to and DID in fact “crack” yesterday, in-line with our model) - just last Thursday, the deleveraging trigger per our Nomura QIS CTA model in the S&P 500 position was ~8.5% away from spot, and now as a snapshot in time (ref futs 3127 vs today’s “trigger” at ~3139), we would expect to see CTA deleveraging today on a close in Spooz below said 3139 level—which would see the legacy “+100%” signal drop to just “+15%” with very significant notional$ in S&P futures for sale (as the trade has been so “in-trend” for a year now on the Fed-pivot induced “vol suppression” environment, which meant more leverage deployed into this “winner”)

The issue is that the 3m lookback window now has “loading” (vs previously “just” 6m and 1y windows), and due to the extent of the extreme price deterioration in the past half-week, meaning that this window’s signal is likely to flip “short” tomorrow

Source: Nomura / QIS

As noted in recent days, our “Vol Targeting” implied rebalancing model has estimated selling of nearly $70B of S&P in the past 1w period, with the %ile “gross allocation” from 91st % allocation to 1m ago to today’s just 18th %ile gross notional exposure since 2010—this selling continues to passively execute in the market in coming days in standard “lagging” fashion on account of the “drag-up” in trailing realized vol above “trigger” levels.

Source: Nomura

And finally, the 100th %ile / $190B of Asset Manager “net $ long” in SPX futures certainly looks to be “the” incremental “sell-flow” after what had effectively been a year of continuous buying - we will know more when the CFTC data comes out Friday (bc it will capture both Mon and Tue of this week), but per our “ES Trade Imbalance” monitor for lot sizes 100-500 in futures, Tuesday was a “one-way” SALE flow for what we consider as the proxy for this participant-type

And finally, McElligott details where the 'avalanche' sell pivots are (once again highlighting that 3139 'deleveraging' swing point in the S&P)

And as far as sensitivity to movements across asset classes:

Source: Nomura

So, BTFD for a short-term bounce but be ready to flush the pension-rebalancing flows stall and lows are revisited.