As markets digest the sharp jump in coronavirus cases due to a revised methodology in China we feature two timely exclusives on the outbreak. For the first, former NY Fed and Bridgewater economist Dominique Dwor-Frecuat, gives her take on what it would take for the coronavirus to shake markets out of their current (TINA) regime. Our second exclusive from seasoned markets analyst Gary Licht is a fascinating look at the parallels between coronavirus and Bitcoin, and what it tells us about future political change in China.
On markets, US rates guru George Goncalves delves into the US Treasury’s decision to relaunch a 20-year bond, looking at how the bonds behaved when they were last issued in the 1980s and the implications for the Fed and deficit financing.
We stay with the US for a follow-up piece by credit strategist John Tierney on the T-Mobile / Sprint deal after this week’s landmark decision to allow the merger to go ahead.
Finally, researcher Harshal Babla wrote a preview on Banxico ahead of the meeting later today.
Novel Coronavirus Unlikely To Cause TINA’s Demise, For Now (4 min read) Bad news related to the outbreak of the Novel Coronavirus, COVID19, is unlikely to be fully priced in. Yet over the next few months, I still expect TINA (There Is No Alternative) to remain the prevailing market regime.
(Dominique Dwor-Frecaut | 13th February, 2020)
What Bitcoin And Novel Coronavirus Have In Common (4 min read) On getting up to speed on 2019-nCoV, I observed early the resemblance of its mathematics to a 2019 paper using Metcalfe’s law to value bitcoin. As both are exponential growth models encompassing the network effect, this was unsurprising. However, when I thought longer, the similarities appeared more profound:
• Both show an increasing trust deficit between the Chinese public and its leadership
• Both reveal china’s vulnerability is not economic but political
• A comparison shows the limits and dangers of China’s longer-term AI strategy
(Gary Licht | 13th February, 2020)
20yr Bond Comeback: Treasury Uses 20/20 Vision Back To The 1980s? (5 min read) After much consultation, the US Treasury will be re-adding the 20-year bond back into its suite of marketable debt products in an effort to expand its bond offerings. This is a timely launch in our view as it comes during an era where the US government is poised to run $1 trillion annual fiscal deficits for as far as the eye can see. We explore the significance of this new bond on the curve, ‘the signaling effect’, and macro/Fed implications.
(George Goncalves | 13th February, 2020)
We Need A Telecom Oligopoly – And A New Anti-Trust Framework (3 min read) Much to Mr. Market’s surprise and delight, a federal judge signed off on T-Mobile (TMUS) and Sprint’s (S) merger plans on Tuesday. Sprint’s stock price rocketed 80% on the news. Probably no one is more thrilled than Softbank’s head, Masayoshi Son. He can now wiggle free of what has proved to be nothing less than an albatross about his neck, walking away with a gain on his $20bn investment in Sprint, compared with the prospect of losing it all plus potentially dealing with $39bn in debt if the deal wasn’t approved.
(John Tierney | 13th February, 2020)
Banxico To Maintain A Cautious Stance (3 min read) Banxico is expected to continue its easing cycle with another 25bps rate cut to 7.0% on Thursday. All but one of the 23 respondents in the latest Citibanamex survey expect a 25bps cut and the market is fully priced for 25bps. This will make the fifth consecutive rate cut from Banxico but will still leave the policy rate amongst the highest in EM.
We expect an unchanged vote split (4-1) in favour of a 25bps cut, accompanied with a dovish tone given weak growth, a highly restrictive monetary policy stance (real rates are at ~4%), and reduced domestic uncertainty creating a ‘window of opportunity’ to cut rates ahead of a relatively busy calendar in the second half of the year.
(Harshal Babla │ 12th February, 2020)
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