PANDEMIC RISK RISING / CREDIT BUBBLE BULLETIN

Pandemic Risk Rising

Doug Nolan


Coronavirus cases in China have surpassed 76,000. Deaths have reached 2,345. The number of new cases has slowed markedly, perhaps owing to repeated changes in the methodology of counting infections. Developments elsewhere are less encouraging. Plans have been drawn to add 19 temporary hospitals in Wuhan.

There are reported cases of Chinese being re-infected after hospital discharge. This week saw a surge in coronavirus cases in Beijing to 396. Two hospitals in Beijing were quarantined, as concerns of a rapid escalation mount. Infections are now spreading in multiple Chinese prisons. Twelve cases have been reported at a single Wuhan nursing home.

A Friday evening New York Times headline: “With 4 Deaths in Iran and More Cases on 3 Continents, Fears of Coronavirus Pandemic Rise.” Alarmingly, new South Korea coronavirus cases spiked to 142 on Friday. Cases quadrupled in two days and surged ten-fold in four (from Monday’s 30 infections). At 346, South Korea is now second only to China (excluding the Diamond Princess). A troubling Wednesday Bloomberg headline: “As Cases Mount, Japan Rapidly Becomes a Coronavirus Hotbed.” Cases tripled over the past week in Japan to 92.

Reported cases in Iran went from zero to 18 in three days. With four deaths, the number of infections could already number in the hundreds. Most are in Qom, but there has been an infection reported in Tehran. A member of the Iranian Health Ministry was quoted by the New York Times: “A coronavirus epidemic has started in the country.

It’s possible that it exists in all cities in Iran.” The United Arab Emirates now has 11 cases. Israel and Lebanon both recorded their first infections Friday. The World Health Organization is particularly worried about outbreaks unfolding in areas with inferior healthcare systems. Cases tripled to nine Friday in Italy, with the first death reported.

Friday from the New York Times (Vivian Wang, Donald G. McNeil Jr., Farnaz Fassihi and Steven Lee Myers): “Further bolstering the idea that the virus is spreading widely, an epidemiological modeling team from Imperial College in London estimated Friday that two-thirds of the people infected with coronavirus who left mainland China before restrictions were imposed had traveled throughout the world without being detected.”

The infection count from the Diamond Princess cruise ship now exceeds 600. It appears 28 infected American passengers have been brought back to the U.S. Forty seven infected Canadian passengers are being treated in Japan, while 129 Canadians having not yet tested positive flew back to Canada on Friday. Four Australians rescued from the Diamond Princess have tested positive, bringing the total to 46 Australians infected on the ship.

Friday evening from the Washington Post (Gerry Shih, Michael Brice-Saddler, Lateshia Beachum and Miriam Berger): “There are outbreaks. There are epidemics. And there are pandemics, where epidemics become rampant in multiple countries and continents simultaneously.

The novel coronavirus that causes the disease named covid-19 appears to be on the verge of that third, globe-shaking stage. Amid an alarming surge in cases with no clear link to China, infectious disease experts think the flu-like illness may soon be impossible to contain. The World Health Organization has not declared covid-19 a pandemic, and the most devastating effects… are still in China.

But the language coming from the organization's Geneva headquarters has turned more ominous in recent days as the challenge of containment grows more daunting. ‘The window of opportunity is still there, but the window of opportunity is narrowing,’ WHO Director General Tedros Adhanom Ghebreyesus said Friday. ‘We need to act quickly before it closes completely.’”

February 19 – Financial Times (Robin Harding and Alice Woodhouse): “The hundreds of passengers being released by Japan from the Diamond Princess posed an ‘ongoing risk’ of spreading the coronavirus, the US Centers for Disease Control warned as about 500 people began disembarking from the stricken cruise ship. The leading American public health institute said that attempts to quarantine the 3,700 passengers who were on board the vessel moored off Yokohama had been ineffective, after several hundred people on board contracted the infection. The warning from the CDC, which said it was imposing immediate travel restrictions on the ship’s passengers and crew, came as Japan… released some of the remaining passengers…”

As the trading week came to an end, cracks appeared to emerge in the irrepressible global market boom. Initial indications of de-risking/deleveraging were apparent at the emerging markets “Periphery.”

With coronavirus cases spiking, the South Korean Kospi equities index sank 3.6%. While Chinese stocks rallied this week, equities dropped 2.0% in Thailand, 1.5% in Vietnam, 1.1% in Taiwan and almost 1% in Malaysia. Stocks were down 2.8% in Turkey and 2.7% in Chile. Local currency bond yields jumped 83 bps in Turkey and 15 bps in Brazil and Chile.

The more intriguing moves were in the currencies.

Curiously, the yen sank a quick two percent in two sessions to trade to the low versus the U.S. dollar since April. The South Korean won dropped 2.15%, the Thai baht 1.55%, the Malaysian ringgit 1.28% and the Taiwanese dollar 1.21%. But it wasn’t just Asian currencies under pressure. The Brazilian real declined 2.21%, the Mexican peso 1.87%, the Chilean peso 1.41% and the Russian ruble 0.79%. Notable moves in “developed” currencies included losses of 1.38% in the New Zealand dollar and 1.30% in the Australian dollar.

I view heightened currency market instability as a harbinger of “risk off” de-risking/deleveraging. Increasingly volatile and unpredictable currency swings engender a risk-mitigating reduction in speculative leverage. This, on the margin, reduces marketplace liquidity while weighing on market prices. Such dynamics typically unfold at the “Periphery.” And it is the “Periphery” that happens to be increasingly exposed to Global Pandemic Risk.

The safe havens enjoyed a big week. Gold surged $59 to a seven-year high $1,643. Playing some catch-up, Silver jumped 5.0% to $18.613. Ten-year Treasury yields sank 12 bps to 1.47%, nearing the lowest yields since 2016. Swiss 10-year yields fell five bps to negative 0.76%, with bund yields down three bps to negative 0.43%.

While the moves were not dramatic, it is worth noting late-week reversals throughout the Credit default swaps (CDS) universe. After closing last week near lows going back to 2007, investment-grade CDS rose three bps to 46.6 bps. High-yield CDS jumped 10 bps to an almost three-week high 295 bps. EM CDS rose seven bps to 196 bps, the high since January 31st. Some of the bigger moves were in European high-yield. CDS for the big global banks also reversed higher. It’s also worth noting Japanese banks dropped 1.9% this week, with European banks down 2.3%.

Chinese January Credit data were out this week – and the numbers were gargantuan! Chinese lending surged in what is typically the strongest Credit expansion of the year. Aggregate Social Financing (a measure of total system Credit) surged a record $720 billion – for the month (history’s greatest monthly Credit expansion?). This was more than double December growth and 25% above estimates. Credit growth was 8% ahead of the previous monthly record from January 2019. This put one-year growth at almost $3.70 TN, or 10.7%.

New Bank Loans surged a record $475 billion, up from December’s $162 billion. Bank Loan growth exceeded the previous record – January 2019’s $459 billion - by about 3%. This put one-year growth at $2.408 TN, or 12.1%. Bank Loans expanded 27% in two years and 87% in five.

January’s Credit boom was driven largely by a surge in corporate lending – that, considering the backdrop, could be viewed ominously. Government lending was strong. Even “shadow banking” showed a pulse, reversing course for a marginal expansion during the month.

Curiously, Consumer (chiefly mortgage) Loans increased only $90 billion for January, the weakest growth since October. Monthly Consumer Loan growth was down 36% from January 2019. Still, two-year growth was at 35%, three-year at 64% and five-year growth of 137%.

February 16 – Reuters (Yawen Chen and Se Young Lee): “New home prices in China grew at their weakest pace in nearly two years in January as the economy slowed and a fast-spreading coronavirus outbreak brought the country’s property market to a standstill. Worryingly, analysts say the worst is yet to come for the property market, noting that with stepped-up measures to contain the spread of the epidemic, aggressive price-cutting by developers and widespread business disruption will be fully reflected only in coming months. Average new home prices in China’s 70 major cities rose 0.2% in January from the previous month…”

We’ll wait about a month for February Credit data, yet it would appear China’s housing markets had already begun a meaningful slowdown prior to the coronavirus outbreak. With apartment sales slowing dramatically, February Consumer lending volumes will be dismal.

How quickly apartment sales bounce back is a critical issue for Chinese finance as well as China’s economy. Increasingly, however, it appears that great uncertainty surrounds economic prospects for Japan, South Korea, greater Asia and the emerging markets, Europe and globally. The bullish hypothesis that the coronavirus would be largely limited to China and soon contained is increasingly suspect.

February 21 – Bloomberg: “China car sales plunged 92% during the first two weeks of February as the coronavirus outbreak kept buyers away from showrooms. It was even worse in the first week, when nationwide sales tumbled 96% to a daily average of only 811 units, the China Passenger Car Association said in a report released earlier this week. Deliveries this month may slide by about 70%, resulting in a roughly 40% drop in the first two months of 2020, the association said.”

And Wednesday from CNN (Yoko Wakatsuki and Junko Ogura), one of the more alarming reports from the week: “More people from the quarantined Diamond Princess cruise ship tested positive for the novel coronavirus Wednesday, according to the Japanese Health Ministry. The ministry said 79 new cases were confirmed, adding that 68 of the people were said to be asymptomatic.”