Markets have tumbled over the past week as the coronavirus has led to over 100 fatalities in China. US stocks are down over 2.5%, US ten-year yields have fallen close to 20bps and the dollar has rallied. Chinese stock markets remain closed for Chinese New Year. We feature a selection of articles that capture the latest thinking on the outbreak, and include some good sites to track the spread of the virus.
We also have a special section on Brexit as in three days the UK will formally leave the EU. We have the latest update on the upcoming Iowa caucus for the Democratic Presidential hopefuls. Elsewhere, we have our new section on ESG investing. And we have our usual round-up of all things macro, which includes Nouriel Roubini trademark pessimism on global growth.
Two good sites to track the virus – both showing around 4,500 confirmed cases and over 100 deaths. Here’s the Chinese site with good details on cities and here’s a US site with better graphics. There has now been one death in Beijing and one in Shanghai.
Using a broader definition of having the virus, Hong Kong University experts estimate the number of affected patients are closer to 44,000. And we may start to see deaths related to the way people are being quarantined.
However, many are expecting a more limited impact on the economy and markets due to the template of SARS, the lower mortality rate compared to SARS and the larger share of online retail compared to the SARS period. A good summary of this view is presented by former Chief Economist of the Asia Development Bank, Shang-Jin Wei. There could be a more negative fall-out for the government in terms of its handling of the event according to George Magnus.
Lessons from Commonwealth history as the UK Finds its Place in a Post-Brexit world (The Conversation, 4 min read) With less than 10% of British exports destined for Commonwealth countries any hope that stronger trade links with former colonies could make up for lost trade with the EU is highly unlikely. [Bearish UK growth]
The Global Impact of Brexit Uncertainty (NBER) International firms exposed to the UK reduced hiring and investment and lost market value following the Brexit vote. Firms expect difficulties in regulation, labour mobility and market access once the UK leaves the EU. This new research uses earnings and conference calls to construct a measure of the impact of Brexit. [Bearish UK growth]
How to capture credit ahead of rating action plus two metrics to help tech investors
Rating Events: One Theme to Follow in Global Credit Markets in 2020 (PIMCO Blog, 3 min read) By individually rating issuers and their capital structures investors can identify value in credits ahead of rating agency moves and position accordingly. Particularly important to capture rising stars (credits upgraded to investment grade) and avoid fallen angels (those downgraded to junk).
Allocation Views: Taking a Nimble Approach to 2020 (Advisor Perspectives, 5 min read) Franklin Templeton’s multi asset team see risks skewed to the downside this year with lingering concerns over weakness in business investment, spillovers from the manufacturing recession in Germany and disconnect between equity market performance and corporate profits. PMs see fatter tails and a need to be nimble and diversified. [Bearish equities]
Most Tech Companies Aren’t WeWork (Tech Crunch, 4 min read) A delve into 21 US Software-as-a-service-startups (SaaS) shows cash burn and revenue growth + profit margins are two useful metrics to determine whether a company can achieve high growth while maintaining margins. [Bullish tech stocks]
Emerging markets central banks forge ahead with digital currency
Impending Arrival – a Sequel to the Survey on Central Bank Digital Currency (BIS, 19 page read) Rapid development of CBDCs in emerging markets could see around 20% of the world’s population with access to digital CB money in the next few years. Sweden is among a handful of countries already running a pilot project.
The Interest Rate Puzzle (Stumbling and Mumbling, 3 min read) Lower interest rates have boosted house prices more so than equities because either; housing was previously under-priced, both markets are concerned over distributional risks between profits and wages, or housing is now over-priced. [Bearish housing]
Permanent spending cuts are needed to rein in the US fiscal deficit plus Europe’s fiscal multipliers remain sub 1
Structural, Not Cyclical, Budget Reform (Economics One, 2 min read) John Taylor cautions against reforming automatic fiscal stabilisers in the US as they work as well now as in the past. Instead, gradual reduction in the spending/GDP ratio would provide a structural improvement in the fiscal deficit and debt position.
Learning About Fiscal Multipliers During the European Sovereign Debt Crisis (VoxEU, 6 mins read) Rising fiscal austerity had an increasingly negative impact on economic growth during Europe’s sovereign debt crisis. But, in contrast to earlier studies, the fiscal multiplier did not rise above 1.
Peter Thiel on the Funding of Science (Marginal Revolution, 2 min read) Advances in science are being held back by increased bureaucracy and a slow regulatory process. A body channelling funding towards more high-risk research, as well as moving away from the standard double-blind trials could boost scientific progress.
Roubini’s pessimistic view on global growth and avoiding Japanification of East Asia
How to Prevent the Japanification of East Asia’s Economies (Project Syndicate, 4 min read) Productivity-enhancing investments to raise potential growth, alongside increased labour force participation rates for women and older cohorts are needed in East Asia to avoid the entrenched low growth-low inflation experience of Japan.
Dr. Nouriel Roubini: Global Economic Slowdown Likely to Continue (The Sounding Line, 4 min read) Lack of improvement in major economies points to the global slowdown persisting this year. Global recession will, however, be avoided but stagflation is a risk given deglobalisation and rising populism. [Bearish equities]
Housing Speculation and its Economic Consequences (VoxEU.org, 6 min read) The share of non-owner-occupied home purchases is an additional factor explaining the US real estate bubble and subsequent collapse in the 2000s. It is independent of the surge in subprime lending and had consequences for house prices, employment and wider business conditions.
America’s polarisation of news and education divides
Election Update: Sanders Is On The Upswing (FiveThirtyEight, 3 min read) The Iowa caucus is coming up on Feb 3rd. Sanders has gained ground and is now tied with Biden for the vote. Meanwhile Sanders is leading in New Hampshire.
Republicans and Democrats Live in “nearly inverse news media environments,” Pew finds (Nieman Lab, 3 min read) Democrats overwhelmingly trust CNN while Republicans trust Fox News. But while Democrats also trust a variety of other sources including The New York Times and PBS, Republicans trust little else. Sean Hannity’s radio show is the one exception.
Michael Lind, College-Educated vs. Not is the New Class War (Supply Side Liberal, 3 min read) A college education defines the political and cultural divide in the US and other rich countries according to Lind’s new book. Rising populism in Europe and elsewhere is the result of alienated, and mostly native, working-class voters standing up to the educated elite.
Exchange rates moves reconnect with risk and what we have in common with algos
Exchange Rate Reconnect (VoxEU, 4 min read) Since the financial crisis movements in the US dollar can be explained by changes in global risk metrics and (net) foreign bond purchases, pointing to a structural break in the earlier disconnect between exchanges rates and risks.
Financial Trading Bots have Fascinating Similarities to People (The Conversation, 4 min read) Anticipating others and concealing their true identity and two common characteristics between humans and algorithms. Understanding how algorithms interact could develop the next stage of AL, think self driving cars.
UK set to allow Huawel some access to its 5G network
The Man at the Center of Brussels Spy Probe (POLITICO, 7 min read) German authorities suspect former EU ambassador Gerhard Sabathil of providing classified information to China. A 30-year EU veteran and dual German and Hungarian national, Sabathil held several senior positions in Brussels.
British Officials Propose Limited 5G Role for China’s Huawei: Sources (Reuters, 3 min read) Despite pressure from Washington the UK government will opt against banning Huawei from its 5G network. A limited role will, however, keep the Chinese equipment outside the core, data-heavy functions.
Investors already positioning for green QE
Investors Who Don’t Embrace ESG Will “Underperform Dramatically” (ETF Trends, 2 min read) Repricing and reallocation of assets due to ESG considerations could mean significant underperformance for those not invested, according to MSCI CEO Henry Fernandez. ESG investing is currently directional but will become more metrics-driven over time.
Vanguard: OCIO Clients Want More Info on ESG (pionline, 2 min read) The transition to ESG investment strategies remains in its early stages with clients continuing to request information, rather than actively adjusting investment portfolios. Exclusionary versus inclusionary strategies, and depth of screening are the two main questions.
ESG To Dominate European ETF Issuance In 2020 (Markets Media, 4 min read) Franklin Templeton expects another strong year for ESG-focused ETFs after a bumper 150% increase in European AUM in 2019. Many investors are already positioned for the possibility that the ECB extends its asset purchases to ESG-focused ETFs.
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