Markets continue to shrug off worries over the rising economic cost of the coronavirus with the S&P at another all-time high. Yet with the death toll from coronavirus now above the official number from SARS, we continue our coverage on the virus. One piece to note is new research from Imperial College, which estimates a lower fatality ratio of 1% than initially thought.
Outside of the virus, we feature FOMC member Lael Brainard on digital currencies. We continue the debate on the efficacy of fiscal policy and the apparent breakdown of the Philips curve. For our ESG section, we take a look at ratings and what it will take to generate more standardised methodologies.
We also feature an exclusive on the unusual strength of the Hong Kong dollar by top Asia strategist Mirza Baig.
Hong Kong: Convergence Trade (2 min read) Hong Kong’s economy is in its deepest recession since 2008. Real GDP contracted by 2.9% YoY in Q4. Q1 is on track for a sub -5% YoY print.
And yet, spot USDHKD has fallen close to the strong side of its 7.85/7.75 trading band. And 3m HIBOR continues to fix stubbornly 50bps above 3m LIBOR – a symptom of tight liquidity.
The unusual strength of the HKD and tight liquidity are out of whack with the state of the economy. In my view, it is time for HKMA to make a course correction, and utilize what policy space it has within the Linked Exchange Rate System (LERS) to ease financial conditions in the Hong Kong economy.
But why is the HKD so strong and liquidity tight in the first place? There are three reasons, in my view.
(Mirza Baig, 11th February 2020)
Report 4: Severity of 2019-novel Coronavirus (nCoV) (Imperial College, 12 page read) An updated estimate for the overall case fatality ratio from coronavirus stands at 1%. The ratio for Hubei cases is higher at 18% given testing is done when illness is more severe. Outside mainland China the ratio is 1.2-5.6% with testing done at an earlier stage. Researchers scale the Hubei results for the level of infection to calculate the fatality ratio for all infections.
Why the coronavirus has Become a Major Test for the Leadership of Xi Jinping and the Communist Party (The Conversation, 6 min read) A delayed reaction to the virus outbreak, followed by censorship and blaming local government officials, the response to the coronavirus is testing the leadership of Xi Jinping and China’s political system more broadly.
Four Charts That Help Explain How the Coronavirus Spread (Sixth Tone, 4 min read) Insightful visual journalism from the Chinese media showing the spread of the virus in China and beyond, including the absence of any link between length of stay in Wuhan and likelihood of becoming infected.
Satellite Images Show how Coronavirus Brought Wuhan to a Standstill (MIT Technology Review, 1 min read) Before and after shots of Wuhan’s train station and airport during the lockdown. Plus the construction around the two new hospitals being built at record speed.
Why stock splits are a thing of the past to an end to the earnings recession
Corporate Debt: Where is the Danger? (Munich Personal RePEc Archive, 66 page read) Authors perform debt sustainability analysis for US corporates. Based on liquidity needs and embedded leverage, rather than net repayments, shows some sectors are more resilient that often assumed. The utilities sector is, however, significantly exposed through interest rates and profitability shocks.
Stock Splits – What Happened to Them? (Trinity Asset Management, 2 min read) Whether it’s less rich valuations compared to the 1990s (and reduced need for perceptions of cheaper valuation), the growth of passive funds or fewer companies compelled to keep shares available to loyal fans, the accounting exercise of stocks splits is increasingly rare.
Regression to Trend: Another Look at Long-Term Market Performance (Advisor Perspectives, 2 min read) The inflation-adjusted S&P reached 133% above its long-term trend at the end of January, an all-time high and more than three standard deviations above trend. The 2007 peak was around two standard deviations above trend.
Earnings Recession Set to End, as S&P 500 Earnings Growth Turns Positive (Fidelity, 1 min read) Fourth quarter earnings are on track to eek out a positive performance ending three consecutive quarters of contraction in corporate earnings. But only once earnings season is complete can the earnings recession be fully assessed.
The banks benefiting most from forward guidance to more Philips curve research
Inflation in a Changing Economic Environment (VoxEU, 6 min read) From choosing an appropriate measure of inflation, decomposing inflation expectations and understanding drivers of labour costs and the wider pricing chain, ECB conference participants shed light on the disconnect between inflation and economic slack in the Euro Area.
Operational Issues for Countries with Evolving Monetary Policy Frameworks (IMF, 57 page read) Monetary policy transmission in low and middle-income countries with volatile overnight rates and weak monetary policy frameworks can benefit from targeting short-term interest rates rather than reserve money.
Forward Guidance and Corporate Lending (Munich Personal RePEc Archive, 66 page read) Reduced borrowing costs and increased willingness to lend can be directly attributed to forward guidance from the Fed following the financial crisis. The impact is most pronounced for highly capitalized banks.
Another take on the size of fiscal multipliers and quality versus size in government functions
Understanding the Size of the Government Spending Multiplier: It’s in the Sign (Barcelona GSE, 48 page read) The fiscal multiplier is above 1 during austerity, and larger if the economy is operating with spare capacity. Expansionary fiscal policy, by contrast, has a multiplier of less than one and does not vary with the economic cycle. A contrasting view from the research we included previously on fiscal multipliers from VoxEU.
Quality Of Government Matters More Than Size Of Government For Human Development, Education And Life Expectancy (Then Do Better, 6 min read) Health, education, peace and human development are more dependent on the quality of government, rather than its size.
Leveraged loans and the next US recession plus how to avoid an empty planet
Corporate Credit, Housing, and the Next Recession (PIMCO Blog, 3 min read) Corporate credit is one possible trigger for the next US recession, in particularly from leveraged loans, high yield debt and private credit. By contrast, the housing market is seen as an area of strength rather than weakness.
The End of Economic Growth? Unintended Consequences of a Declining Population (Stanford University, 43 page read) Negative population growth can result in a stalling of living standards and population decline towards an “empty planet”. Waiting too long to shift to a higher optimal population growth risks still being stuck in the empty planet outcome.
A Roadmap for Digital-led Economic Development (VoxEU, 7 min read) Developing countries can use digital technology to improve efficiency through automation, lower transaction costs and better system design. But conditions must also be put in place to ensure technology is inclusive.
The importance of healthcare costs in Trump’s re-election bid and investing in a stronger Europe
Embracing Europe’s Power (Project Syndicate, 4 min read) EU countries must invest in a stronger Europe by reaching internal agreements (and avoiding vetoes), and by concentrating action where it aligns with the bloc’s goals and capabilities. Action should be based on common values and interests.
Trump’s Biggest Vulnerability (The Atlantic, 5 min read) Rising healthcare costs could prove more important in Trump’s re-election bid than the economy or stock market performance. This matters most for the “next cluster of voters”, or those not immediately drawn to Trump’s policies in other areas.
Unintended Consequences: Can the Rise of the Educated Class Explain the Revival of Protectionism? (IZA Institute of Labour Economics, 40 page read) A rising share of skilled workers who generally benefit globalization, but leave reduced support for redistribution, can foster resentment and a protectionist push from those left behind.
The Fed and CBDCs
The Digitalization of Payments and Currency – Some Issues for Consideration (BIS, 14 page read) Lael Brainard points to concerns over data privacy and lack of financial protections for consumers as big tech rather than banks dominate payment systems. For any sovereign digital currency the Fed must consider the impact on the payment system, how resilient it would be, the intermediaries needed and the cross-border implications.
Not fully back to work, and more on the BRI
Back to Work (Trivuim China, 1 min read) China returned from its extended New Year holiday on Monday but activity remains subdued. Traffic on the Shanghai metro was 20% below normal while weekend rail travel was down 80% compared with the end of the 2019 New Year holiday.
Assessment of the Effects of Infrastructure Investment Under the Belt and Road Initiative (China Economic Review) Some countries have suffered from China’s BRI initiative while trade and labour links have become more concentrated. Most countries have, however, seen benefits to economic growth and terms of trade.
Biasing growth strategies under ESG and standardising ratings
Central Banks and Climate Change: from Black to Green Swans (Money Maven, 5 min read) Direct macroeconomic costs, financial risks and mitigation policies bring climate-related challenges into the remit of central banks. Both physical risks and transition risks (as the economy adapts to cleaner technologies) can generate financial risks, but opportunities also exist from eliminating climate costs and switching to more efficient energy.
Who Will Be the Moody’s of ESG Investing? (Money USA, 5 min read) Lack of relevant data and an absence of an accepted framework for measuring ESG compliance has left wide disparities in the ESG ratings currently available. Better company disclosures are needed before ESG ratings can become more standardised.
The Unintentional Biases of ESG Portfolios (Advisor Perspectives, 4 min read). ESG portfolios based purely on risk scores can favour growth strategies over value, as well as developed markets and large caps.
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