- Fatality rate of 3-5% is underestimated (SARS was 17%). Data needs time to track from Infection to Symptoms, Diagnosis, Treatment + Result (recovery or death).
- Current Rate of Infected Cases (2.13) likely underestimated. For now, EVERY 6 days, the case count doubles.
- Transmission Rate is underestimated. Wuhan as epicenter of epidemic is also where 53% of ALL International travel from China takes place.
- Contagion Rate has roughly a 2 week lag to infect other Chinese regions (Beijing, Macau, etc) at current rate of infected cases. And “5 million people left Wuhan due to Chinese New Year” says the Wuhan mayor BEFORE experts warn “this particular epidemic may be about to become a global epidemic”
- Wuhan most likely won’t peak in case count until April/May. And that’s a wall of headline worry for the market to climb.
Please Read that last bullet point again: WUHAN MOST LIKELY WON’T PEAK IN CASE COUNT UNTIL APRIL/MAY
Since Chinese authorities say the virus is not under control, the problem for markets is nobody has any idea how long this will last, how big it will get and how far it will spread. This introduces market uncertainty which breeds volatility. The irony is that the markets are faced with a Perfect Storm of Risk at the same time this lethal flu spreads.
- Fed stops expanding its balance sheet just as a major pandemic panic rocks global markets. Worldwide markets fall hard.
- $DXY breaks out just as treasury yields collapse to cause a real curve inversion again.
- VX board inverted into the weekend (triggering 20% spike Monday) just as the gross-exposure of the S&P Futures position for CTAs at “extremes” last seen in January 2018, triggering a very large treasury short stop-out.
- The surprise breakdown in oil from January 7th is smashing energy credit in high-yield. At the same time, China’s quarantine of 40M people (and growing) fuels fears of economic contraction as economic and financial output in China is affected.
- Contagion risk grows as “5 million people left Wuhan due to Chinese New Year”, says the Wuhan mayor, BEFORE experts warn “this particular epidemic may be about to become a global epidemic.”
- Middle Eastern geopolitical tensions grow with the US embassy attack in Baghdad and downed American military plane in Afghanistan.
- Iowa is only a week away from picking their Democratic and Republican nominees for the race to be POTUS 2020. Sanders is leading. Bernie is leading all other Dems in the polls..
- FOMC meeting this week and big corporate earnings reports in full-swing. AAPL will set the tone for Tech tomorrow night after market closes.
- CTAs and risk parity funds are positioned maximum long, U.S. hedge funds are leveraged up to the highest levels in a decade, and U.S. mutual fund managers have record-low cash levels. Expect many of these to raise cash to try and keep their returns in the green should prices continue to fall.
- Oh yeah, and Trump’s Impeachment trial is taking place on a side-stage.
CoronaVirus is Not Contained
The dean of HKU’s med school revealed research during a presser on Monday showing that the virus had already infected nearly 44,000 people in Wuhan. Meanwhile, Professor Neil Ferguson, at least the second UK academic to publicly share his projections, said over the weekend that 100,000 people could already be infected with the virus around the world, according to the Guardian.
“We have to be prepared, that this particular epidemic may be about to become a global epidemic,”
Though Leung warned that additional measures to contain the virus could improve projections, the team’s model predicted the number of infections in five mainland megacities – Beijing, Shanghai, Guangzhou, Shenzhen and Chongqing – would peak between late April and early May, and at the peak of the pandemic, as many as 150,000 new cases could be confirmed every day in Chongqing alone because of its large population and intense travel volume with Wuhan.
Online Coronavirus Dashboard
I took this picture at noon ET. By 9PM, the following update was posted…
- 2714 Cases in Hubei (up 1291 overnight – a stunning 91% surge)
- 4295 Cases confirmed worldwide
- 100 Dead in Hubei (up 24 overnight – a 24% surge)
- 106 Dead worldwide
- US raises travel alert for China to Level 3 (2nd highest)
Scientific Read: (h/t Datatrek)
Science News published an article on “how the new coronavirus stacks up against SARS and MERS… For the third time since around 2003, a coronavirus has jumped from animals to people.” It answers everything from what it is and where it came from to what are the available treatments and how dangerous it can be. You can read it here.
Treasury Short Stop-Out with Short Gamma Flip
As market rotated into risk-off trades, namely bonds, treasury yields collapsed, triggering a very large treasury short stop-out. 5Y Real Yields are now back to the most negative they’ve been since April 2017 – acting as a major bullish catalyst for Gold and Bitcoin.
Dealer Gamma analysis actually shows that the Dealer Gamma position has now pivoted NEGATIVE on the move in futures below 3263…meaning that the lower we go from here, Dealers have to (perversely) “short more” into the down-move to dynamically hedge.
The Nomura QIS CTA model estimates that through last Friday, the gross-exposure of the S&P Futures position for CTAs is back to “extremes” last seen in January 2018 (a nearly +3 standard deviation gross-position dating back to 2002). Question remains: how much left in the unwind?
No getting around it, today was an ugly open – as it is very rare we see an open lower of almost -60 points $SPX. In fact the market has now erased all of this year’s gains – despite the fact Nasdaq hit intraday all-time highs on Friday! So is this a one-day wonder or time to press short?
The low of today happened near the open at $3234 with VIX tagging $19 after closing at $14.56 on Friday – when folks clearly wanted to de-risk heading into the weekend before more “pandemic panic” headlines would hit. We didn’t even know Iran and Taliban would add fuel to the fire – bombing US Embassy in Baghdad and reportedly shooting down a US plane with military personnel. Trump has yet to respond on either attack. When he does, I suspect Oil will rally on supply destruction fears before demand destruction concerns resurface again.
Some US companies will likely be more affected than others:
“Disney, McDonald’s, Starbucks and other U.S. companies with significant footprints in China are suspending operations and instituting travel restrictions as they respond to the outbreak of the coronavirus.” Source: CNBC
China is 35% of luxury goods demand so expect this sector to be hit not to mention airlines. Casinos have pulled back strongly already, after tourist arrivals from China plunged 80%.
The “normal” viral drag on US10Yr has the following tendency – yields fall then bounce back sharply.
The pattern of past outbreaks is so far similar. There is a sell-off that lasts until crowd sentiment is at an extreme bearishness and the outbreak comes under control. Then it is time for a recovery. Sell-offs driven by previous epidemics have created buying opportunities.
Fear Over Slowing Growth Confirmed
Yields have been falling, reflecting concerns about global growth, and also the dramatic change of direction by central banks, which was itself largely driven by fears for growth. The 10-year Treasury yield is now almost a full percentage point lower than it was two years ago, and its trend is clearly downward. Indeed, if we take inflation expectations into account, the real 10-year Treasury yield has just gone negative.
According to the Bloomberg commodity indexes, industrial metals have now under-performed precious metals over the period since Donald Trump was elected U.S. president; and the price of oil is collapsing anew relative to gold. These moves only make sense if people are worried about growth. John Authers, Bloomberg
Into The Safety of the Dollar
Growth concerns have been building for a while. The last few days have validated that concern. Here’s a reminder of my January client newsletter on the USD.
Market Timing Calls from this post from Jan 21 Client Newsletter have been strong:
$DXY – right (so far)
$USDCNH – right (trail stops)
$XLE – right to PT
$WTIC – right
$EWG – right
$XME – right
$TNX – wrong (so far)
$GLD – wrong
$GDX – too early
$XLF – right
$INTC – wrong
$IPO – right
Hope it helped!