Markets have stabilised this morning after the rapid spread of COVID-19 in Italy triggered sharp falls in equity markets on Monday. Investors are still mixed on how bearish to be – some like former PIMCO CEO and co-CIO Mohamed El-Erian is very bearish and is in the “L”-shaped growth trajectory, while his old firm PIMCO is more bullish. Meanwhile, the IMF statement from his weekend’s G20 summit suggests a global coordinated policy response.
On the US, we feature several takes on Bernie Sander’s strong win at the Nevada caucuses, Fed Vice Chair Richard Clarida’s view on the Fed’s reaction function and Warren Buffet’s latest annual letter to shareholders.
Turning to Europe, we feature a new paper by Reinhart and Rogoff on why the euro is punching below its weight as a reserve currency. We also have an article on Sweden’s trial of a digital currency.
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Markets have stabilised this morning after the rapid spread of COVID-19 in Italy triggered sharp falls in equity markets on Monday. Investors are still mixed on how bearish to be – some like former PIMCO CEO and co-CIO Mohamed El-Erian is very bearish and is in the “L”-shaped growth trajectory, while his old firm PIMCO is more bullish. Meanwhile, the IMF statement from this weekend’s G20 summit suggests a global coordinated policy response.
On the US, we feature several takes on Bernie Sanders’ strong win at the Nevada caucuses, Fed Vice Chair Richard Clarida’s view on the Fed’s reaction function and Warren Buffet’s latest annual letter to shareholders.
Turning to Europe, we feature a new paper by Reinhart and Rogoff on why the euro is punching below its weight as a reserve currency. We also have an article on Sweden’s trial of a digital currency.
Enjoy!
Bilal
Markets drop on coronavirus fears, IMF hints at co-ordinated policy action
El-Erian: Coronavirus Aiding De-Globalization; Massive Fiscal and Monetary Stimulus Coming (The Sounding Line, 2 min read) Rather than temporary disruption from the coronavirus leaving to a V-shaped recovery a U-shaped or worse outcome could arise as companies reassess concentrated supply chains and globalisation steps back. Large-scale fiscal and monetary stimulus should be expected in Asia.
Remarks by IMF Managing Director Kristalina Georgieva to G20 on Economic Impact of COVID-19 (IMF, 2 min read) The Fund’s new baseline scenario sees Chinese GDP growth slowing to 5.6% this year knocking 0.1pp from the earlier 3.3% projection for world GDP growth. A much worse scenario would require “global cooperation” to contain the spread and economic fallout of the virus.
China’s Great Leap into Epidemic (Project Syndicate, 4 min read) China’s initial attempts at suppressing information on COVID-19 is reminiscent of the initial stages of SARS in 2002 and the widespread famine cause by the Great Leap Forward. Freedom of expression cannot be isolated from other freedoms, including protection from the coronavirus.
Will Korean COVID-19 Patients Get to Use Remdesivir for Compassionate Use? (Korean Biomedical Review, 3 min read) Experimental drug remdesivir is currently being used in trials for patients with severe coronavirus in China and was used to treat the first US coronavirus case. Given the surge in cases in Korea calls for compassionate use, where the drug has not yet been granted approval, are gaining traction.
Reinhart & Rogoff on euro underperformance plus opportunities in EM
Buffett Talks Investing, Takeovers and ‘Dancing with the Stars’ in Letter (CNBC, 7 min read) Berkshire Hathaway’s CEO remains upbeat about the long-term prospects for equity markets, assuming rates remain around current levels, but urges shareholders to focus on company earnings rather than quarterly price gains. Full letter can be accessed here.
A Multi-Asset Approach to Assessing Risk and Opportunity in Emerging Markets (Advisor Perspectives, 5 min read) Franklin Templeton’s multi-asset team are constructive on EM, favouring local currency debt over hard currency due to better liquidity in times of stress and in particularly short-dated Mexican paper.
Why is the Euro Punching Below its Weight? (CEPR, 62 page read) Reinhart, Rogoff and Ilzetzki determine the absence of a safe Eurozone asset, the lack of unity on monetary policy and no European capital markets union as the main factors preventing the euro from rivalling the US dollar as the international currency of choice.
What Do You Like More, Value Or Growth? (JPMorgan Asset Management, 2 min read) Growth stocks have tended to outperform value stocks in moderate growth environments like the current period, or in high growth >5.5% expansions. But with increasingly stretched valuations investors continuing with a growth strategy should analyse each stock individually.
Clarida on the Fed’s reaction function plus Riksbank starts e-korona trial
Financial Markets and Monetary Policy: Is There a Hall of Mirrors Problem? (Federal Reserve, 7 min read) Vice Chair Clarida states that the Fed does not react to moves in asset markets in isolation, but instead considers them alongside various surveys and model-based estimates to conduct forward-looking monetary policy.
All You Need is Cash (Bank of England, 6 min read) Firms that retain access to cash can continue to invest during a financing crisis providing a long-term competitive advantage versus those who rely on credit markets. Young, small firms are those which can benefit most.
Sweden Starts Testing World’s First Central Bank Digital Currency (Reuters, 3 min read) The Riksbank has launched an e-korona trial whereby digital central bank currency can be used for everyday payments, albeit in a test environment. The results of the one-year trial will be watch by various other central banks studying the possible introduction of CBDCs.
Skidelsky on fiscal policy and automatic stabilisers plus the US fiscal shortcomings
The Monetarist Fantasy Is Over (Project Syndicate, 4 min read) Robert Skidelsky views the recent forced resignation of UK Chancellor Sajid Javid as part of the wider shift from monetary to fiscal policy, with Javid seen as standing in the way of the Prime Minister’s spending ambitions. This increasing shift towards fiscal policy needs strengthened fiscal stabilisers.
Good U.S Monetary Policy Can’t Fix Bad U.S. Fiscal Policy (Washington Centre for Equitable Growth, 11 min read) Historically low levels of US unemployment with muted inflationary pressures points to an appropriate stance for monetary policy. Fiscal policy, by contrast, is hampering the US economy with needed investment into infrastructure and research absent.
Is the US an Outlier on Health Care Spending? (Library of Economics and Liberty, 2 min read) The 17% of GDP in US healthcare spending partly reflects inflated costs related to the insurance system rather than higher spending compared with other rich countries.
Japan’s economy shrinks while India moves up the global rankings, for now anyway
Japan isn’t Headed for Recession, it’s in Recession (Money Maven, 4 min read) Japan’s 6.3% QoQ annualised GDP decline in Q4 was the deepest contraction since the last VAT hike in 2014. Given this came before the hit from the coronavirus the country is already in the midst of a severe recession.
Growth, Inflation, and the Potential for Disruption (PIMCO blog, 4 min read) Global growth will slow then rebound ahead of the US with global PMIs already improving, particularly in EM, while business sentiment in Europe has started to improve. Meanwhile, the US faces a hit from the Boeing production cut and political uncertainty ahead of the presidential elections.
India is Now the World’s 5th Largest Economy (World Economic Forum, 2 min read) India has now overtaken the UK and France to become the world’s fifth largest economy (in nominal USD terms). But with growth slowing sharply in recent quarters and the country still accounting for 25% of the world’s poor India faces huge challenges ahead.
Sanders’ big win in Nevada and Trump and the coronavirus
Why Bernie? (Project Syndicate, 4 min read) In the context of wide swings in US election outcome elections over the last 50 year a switch from Donald Trump to Bernie Sanders does not seem inconceivable. Worsening income inequality has hurt moderate Democrats and with voters on both sides increasingly fed up Sanders’ presidential bid should be taken seriously.
Sanders’ Democratic Rivals Seek to Slow His Momentum After His Big Win in Nevada Caucuses (Reuters, 6 min read) Bernie Sanders’ Nevada win has failed to convince his Democratic rivals to drop out, rather the centrists are instead splitting the anti-Sanders vote, making it potentially more difficult to defeat him for the Democratic nomination.
The Coronavirus Outbreak Could Bring Out the Worst in Trump (The Atlantic, 7 min read) Trump’s disregard for experts, institutions and hard facts could prove problematic if the coronavirus takes hold in the US. The US decision to ban entry to foreign nationals who have recently travelled to China comes against WHO guidelines and risks sparking racism against Chinese people.
No Sight of Next Recession: Business Cycle Index Update (iMarket Signals, 2 min read) This BCI using readily available economic and market data would have predicted the last seven recessions with a 20-week leading signal. The current signal is comfortably in expansionary territory.
Coronavirus comes at a time of reduced policy space
It is Naive to Expect Chinese Economy to Collapse (Global Times, 3 min read) The huge scale of the Chinese economy combined with the fairly rapid resumption of activity in key sectors will ensure the country’s economy retains its competitive edge. The hit will undoubtedly be large but nothing the economy cannot withstand.
China’s Coronavirus Health Crisis is Also a Threat to its Economy (Peterson Institute for International Economics, 2 min read) China’s reduced room for policy stimulus will exacerbate the economic slowdown. The large fiscal deficit prevents any significant fiscal stimulus (tax cuts) similar to that enacted after SARS, while the run-up in borrowing in the past decade also prevents any credit expansion.
Will China’s Growth Rebound This Year (Advisor Perspectives, 4 min read) Growth should rebound later this year but not to the extent witnessed in 2016 as the commitment to deleveraging will remain in place. PMIs, credit data and trade and the three data series to watch for the signs the economy is recovering.
Europe’s climate stress tests and ESG branches into derivatives
The Next Boom in Sustainable Finance: ESG Derivatives (IFR, 4 min read) ESG-linked derivatives are becoming big business, but like all ESG investing data limitations make the process slow and the derivatives need to be tailor made for each deal.
These Are the Most Popular Stocks of the Emerging ESG Investing Movement (CNBC, 2 min read) Microsoft, Apple and Alphabet are the most widely held stocks in US ESG funds while in Europe the list includes LVMH, Sanofi and Nestle. Companies focused directly on renewables and climate change were, surprisingly, barely represented.
Climate Risks to European Banks: a New Era of Stress Tests (Bruegel, 5 min read) Establishing European-wide climate stress tests requires balancing banks’ own risk assessment to meet the needs of investors, and devising a standard cross-country methodology to determine any additional capital requirements.
(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.)