Market volatility reached a new high this week with the oil price war compounding the fallout from the ongoing spread of COVID-19 outside China. We featured an Exclusive on Russia and the oil war in our letter yesterday. Today, we also include updates on our recession indicators and US election predictions.
I should also add that we have a whole stream of high-end research in our Professional product. Recent notes have included our estimates of the growth shock from a pandemic, trade ideas around the oil decline, how FX trades around recessions and the latest market positioning. If you’re interested in learning more about the Professional product, drop me a message.
Back to our curations, this week we feature a piece by Juliette Declercq on why mitigation measures in Europe won’t work, Bruegel on the shortcomings in Hong Kong’s decision to introduce helicopter money and Brookings on why COVID could worsen Saudi Arabia’s already deteriorating domestic environment.
On the US election we feature FiveThirtyEight on Bernie Sanders’ last chance to remain in the race for the Democratic presidential nomination. Our less time sensitive features are a ranking of the world’s greenest companies and the expected end of dollar dominance.
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Market volatility reached a new high this week with the oil price war compounding the fallout from the ongoing spread of COVID-19 outside China. We featured an Exclusive on Russia and the oil war in our letter yesterday. Today, we also include updates on our recession indicators and US election predictions.
I should also add that we have a whole stream of high-end research in our Professional product. Recent notes have included our estimates of the growth shock from a pandemic, trade ideas around the oil decline, how FX trades around recessions and the latest market positioning. If you’re interested in learning more about the Professional product, drop me a message.
Back to our curations, this week we feature a piece by Juliette Declercq on why mitigation measures in Europe won’t work, Bruegel on the shortcomings in Hong Kong’s decision to introduce helicopter money and Brookings on why COVID could worsen Saudi Arabia’s already deteriorating domestic environment.
On the US election we feature FiveThirtyEight on Bernie Sanders’ last chance to remain in the race for the Democratic presidential nomination. Our less time sensitive features are a ranking of the world’s greenest companies and the expected end of dollar dominance.
Enjoy!
Bilal
• Prediction markets are now giving more than 50% odds of a US recession this year. This is in contrast to market models (29%) and economists (25%).
• We’re more in the recession camp than not, and the fact that economists haven’t made that call yet suggests that there is more room for market downside.
(Bilal Hafeez | 9th March, 2020)
• Recent polls show Trump losing some support and importantly prediction markets now have the Democrats winning the US Presidential election, just.
• Stock market weakness and Biden’s win on Super Tuesday is likely behind this shift in polls.
• Later today, we get the next wave of primaries in Michigan, Washington, Missouri, Idaho, North Dakota and Democrats Abroad. Michigan will be a key state for Biden, as it would signal his support amongst the white working class. He is expected to win.
(Bilal Hafeez | 11th March, 2020)
VoxEU’s new COVID-19 ebook plus risks to US shale
Economics in the Time of COVID-19: A New eBook (VoxEU, 123 page read) 14 essays on the virus from top academics covering; trade and travel, bank runs, migration, monetary policy and the upside from the coronavirus.
Six Facts About Our Oil Supply (EconLife, 2 min read) From America’s rise to become the world’s top producer and which states produce the most, to which countries have the highest demand for oil and a long history of oil prices.
Oil Price Crash: 50% Of U.S. Shale Could Go Bankrupt (Naked Capitalism, 4 min read) Shale producers are already reducing investment plans and the sector is bracing for layoffs and bankruptcies. Upcoming debt redemptions and weak cash flow positions exacerbate the situation.
Why the earlier run up in stock prices is the problem and earnings estimates little changed
The Problem is the Bubble, Not the Pin (Advisor Perspectives, 6 min read) The roughly 35% gain in stock prices since December 2018 left the market vulnerable to any unexpected shocks. The huge falls over the past few weeks reflecting the size of the initial bubble.
How 2020 SP 500 Sector Growth Estimates Have Changed (Trinity Asset Management, 2 min read) The 300bps decline in S&P expected earnings growth since the start of the year is actually lower than during the same period a year ago. Tech earnings have held up while healthcare is down ‘just’ 100bps.
What the Fed can do a rates continue to decline and how QE and act as a substitute for rate cuts
The Decline of the 10-Year Treasury: Implications for Fed Policy (Macro Musings Blog, 6 min read) The ongoing decline in the 10-year UST yield leaves the Fed with reduced options within its current policy toolbox. To counteract this the Fed can use a dual reaction function where the money base is used as a target when rates are below zero, target nominal GDP and incorporating helicopter money.
Are QE and Conventional Monetary Policy Substitutable? (International Journal of Central Banking, 36 page read) Doubling the size of a central bank’s balance sheet is equivalent to a 3pp cut in the policy rate. But QE can only substitute effectively for rates cuts when LT rates have room to fall.
The Information Channel of Monetary Policy Has Disappeared in the US (VoxEU, 3 min read) Improved Fed communication (including release of FOMC minutes) and forward guidance on policy has removed the Fed’s ‘information advantage’ and led to the information channel on monetary policy – changed behaviour after an unexpected policy announcement – disappearing.
Why fiscal policy is the better tool to offset the impact from coronavirus and global health care rankings
The Fiscal Fight Against COVID-19 (Project Syndicate, 4 min read) Fiscal policy can have a more direct impact on the sectors hurt by the coronavirus and should be deployed quickly. Low interest rates and excess savings in Japan and elsewhere make deficit levels less relevant than in the past.
Ranking Health Care Systems By Country (Econospeak, 3 min read) The US scores poorly in these health system rankings although the results are admittedly quite mixed. The UK performs well on some metrics, it comes top of the international insurance 11-country rankings, fourth in the Cigna ranking and ninth on Health Care tracking.
Why containment and mitigation doesn’t work and Hong Kong’s ill-defined fiscal stimulus
Covid-19: A Macroeconomic Plague (JDI research, 8 page read) The strategy of containment and mitigation outside China has not worked due to the high number of individuals needing hospital care. This makes mitigation unworkable and the need for extra hospital beds is likely to outstrip supply in Europe by the end of this month.
Downsides to Hong Kong’s Untargeted Cash Handout (Bruegel, 3 min read) Hong Kong’s cash handout is both untargeted and regressive and may leak out in the form of capital outflows. Diverting these resources to SMEs in sectors hit hardest from COVID-19 could better protect jobs and household incomes.
Women Have Been Hit Hard by the Loss of Routine Jobs, Too (Liberty Street Economics, 5 min read) Job losses for women aged 25-54 in “routine” roles in production and admin are three times greater than for men over the past two decades. Women have moved into jobs in healthcare and into low skilled service sector roles. The share of women not working has also increased.
Sanders’ last chance and Saudi’s leadership shortcomings
Can Sanders Make Up Ground In Tuesday’s Primaries? (FiveThirtyEight, 8 min read) Tuesday’s primaries are the last chance for Bernie Sanders to remain in the race for the Democratic presidential nomination. Michigan is key with the largest number of delegates and his chances here look slim. Bu this state had a huge polling error in 2016.
Bloomberg’s Money Bought Him Something — Just Not the Nomination (FiveThirtyEight, 2 min read) The $500mn spent by Bloomberg on ads saw him gain recognition and rise sharply in the polls, peaking at 16.5% last month. But unsurprisingly it did not translate into votes.
What COVID-19 Means for International Cooperation (Project Syndicate, 4 min read) The coronavirus, like climate change, highlights the need for more international cooperation. Both have uncertain consequences, albeit undoubtedly negative, and both need a coordinated approach despite the initial and required de-globalisation.
In Saudi Arabia, the Virus Crisis Meets Inept Leadership (Brookings, 5 min read) The holy cities of Mecca and Medina have been closed due to fears over COVID-19 and the hajj is no longer certain to go ahead in July/August. Saudi has already changed for the worst under Crown Prince Mohammed bin Salman and with the virus outbreak things could deteriorate further.
Ending dollar dominance and deciphering term premia during hiking cycles
The Rise and Fall of International Currencies (Project Syndicate, 8 min read) Two new books, Currency Stagecraft and How Global Currencies Work, offer insights into the history, politics and economics of global currencies. Both see ending dollar dominance as a much-needed and inevitable outcome.
Do Treasury Term Premia Rise Around Monetary Tightenings? (Liberty Street Economics, 5 min read) There is no evidence that term premia increase sharply when the Fed shifts to a tightening cycle with rising LT rates instead attributable to upwardly revised expectations for ST rates. But a consideration going forward is that expectations over the Fed’s balance sheet policy will impact term premia.
Hubei infections stabilise plus the threat to the CP from a unhappy middle class
China Reports No New Locally Transmitted Coronavirus Cases Outside Epicentre (Reuters, 5 min read) Despite an absence of new COVID-19 cases outside Hubei for two days the authorities are advising people to remain “cautious”. The airport remains closed and activity is still a fraction of normal levels.
Will the Coronavirus Topple China’s One-party Regime? (ASPI Strategist, 3 min read) The disruption to daily life threatens to erode support for the Communist Party, particularly within China’s middle class. Should economic growth falter the support for the party could fall further.
China’s Continuing Credit Boom (Liberty Street Economics, 5 min read) China’s rapid debt build up over the past 15 years may be even higher than official data suggests with loans swapped for municipal bonds currently excluded. Reduced efficiency of credit and a greater reliance on non-deposit financing add to the risks. But the country’s huge savings and fx reserves leave significant buffers.
Proposed Residency Changes Spark Racist Backlash in China (Sixth Tone, 6 min read) Chinese citizens have reacted with hostility to a proposed relaxation of requirements for foreigners to obtain permanent residence. Social media forums have warned against increase crime and perception of preferential treatment of foreigners.
European companies more green than elsewhere and Blackrock defends its dirty investments
Where Are the World’s Most Sustainable Companies? (Visual Capitalist, 4 min read) Europe is home to 49% of the world’s most sustainable companies with North America in second place with 29% and Asia just 16. Denmark’s Orsted comes out on top.
How Green is ESG? (Politico, 2 min read) BlackRock’s focus on climate change earlier this year has exposed it’s investment into non-green companies such as refiners, chemical companies and oil and gas companies. These companies have “a unique ESG” profile according to BlackRock which each pillar of ESG deemed to be equally important.
ESG Factors More Significant For Developed Market Sovereign Credit (Pensions&Investment, 1 min read) Higher ESG scores are associated with tighter CDS spreads in developed markets. Some impact is also seen between credit spreads and ESG scores in EM but this remains less robust.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)