by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

It’s employment Friday!  We cover the data in detail below, but the quick take is that the data did come in a bit better than forecast.  However, the Bureau of Labor Statistics has conducted benchmark revisions and the changes suggest the labor market was much less robust than the initial data indicated.  Thus, a read on the report is difficult.  We have an update on the Wuhan virus.  There is German political turmoil in the midst of a renewed economic slump.  Irish elections are tomorrow.  Here are the details:

Wuhan virus: The number of confirmed cases is now 31,532 with 638 fatalities.  Although equity markets have risen despite this event, we are seeing a modest pullback this morning.  President Trump and General Secretary Xi had a phone call this week.  It doesn’t appear anything of substance was revealed; we are watching to see if China asks the U.S for additional time to meet its import promises as part of Phase One.  We expect China to ask, and it will be interesting if the USTR recommends giving Beijing time.  Chairman Xi is facing a potential political threat—a doctor who was arrested for trying to warn about the Wuhan virus has died from the illness.  We expect the propaganda machine in China to prevent his death from harming Xi, but it will take some manipulating.  Sometimes, a human story becomes hard to contain and the CPC looks bad with this one.  If the doctor’s warning had been heeded, containing the Wuhan virus would have been much easier.  In other virus news, China is testing an anti-viral that has shown some promise in combating the disease.  There is growing concern that the Chinese property market could be especially hard hit from this crisis and may reduce GDP by 2%.  The PBOC is promising to support the economy.

Germany: Yesterday, we reported that the AfD acted as “kingmaker” for the German state of Thuringia.  Chancellor Merkel has decided this outcome is intolerable and is calling for a different outcome.  The governor, Thomas Kemmerich of the Free Democrats, has offered to step down.  For the CDU, teaming up with the AfD has overtones of the center-right parties that tried to co-opt the Nazis in the early 1930s.  It is no surprise that Merkel has reacted so strongly; it is a mystery why her designated successor, AKK, did not.  Meanwhile, German industrial production has rolled over, seeing its largest monthly decline since 2009.

A drop of this magnitude is usually consistent with recession.

Irish elections: The current PM, Leo Varadkar, called for new elections in the wake of Brexit, assuming that his management of that issue would carry him to victory.  It appears that was a mistake.  Polls suggest it is quite likely he will lose on Saturday.  Sinn Fein, the political arm of the IRA, has been rising in the polls as it campaigned against the austerity that followed the 2008 Financial Crisis.  The lack of housing has become a key issue.  We doubt Sinn Fein can form a government and don’t expect the centrist parties to invite it into a coalition.  But, the rise of Sinn Fein will likely force the mainstream parties to address the policy issues it is raising.  It also shows a generational issue; we are now far enough away from the Troubles that younger Irish voters have no experience of Sinn Fein’s ties to the IRA and simply view it as a leftist party that addresses their concerns.

Huawei (002502, CNY 2.73): A couple items of note.  First, President Trump was apparently not happy with PM Johnson over the U.K.’s decision to use Huawei equipment.  For a country looking to make a free trade deal with the U.S., this isn’t a good sign.  Second, Attorney General Barr has suggested the U.S. government should make direct investments in order to gain controlling stakes of Ericsson (ERIC, 8.32) and Nokia (NOK, $4.20).  To some extent, this second item shows how far we have traveled down the road of opposing China.  Such intervention into private companies by the government smacks of the “military/industrial complex” of the 1950s.

Odds and ends: The U.S. has reportedly killed the leader of al Qaeda in Yemen.  U.S. troops and Russian military contractors are coming into greater contact in Syria, raising the potential for an incident.  The Fed is indicating that leveraged loans and private equity will be a focus of upcoming stress tests.  The Fed is also considering allowing bank Treasury holdings to be part of reserves which, if allowed, would lift market liquidity.  China’s foreign reserves were essentially unchanged in January.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

The rally in equities continues.  An update on the Wuhan virus.  Good news on trade.  Potentially important developments in Germany.  Brazil cuts the policy rate.  Update on the weekly energy data.  Here are the details:

Wuhan virus: Although it is clear that financial markets have already moved past the virus, the disruption is still affecting the Chinese economy.  Confirmed cases are up to 28,349 with 565 fatalities.  The confirmed cases continues to lag our linear model; we suspect the model is closer to the truth and that there are lots of unconfirmed cases as reports suggest China’s medical system remains overwhelmed.

So, why are equity markets, even in China, moving past this event so quickly?  We suspect there are two reasons.  First, financial authorities have added so much liquidity to the financial markets that it is just difficult to sustain declines.  With investors holding about as much cash as they want, additional funds simply find their way to markets.  Second, the economic weakness will be temporary and will likely either keep policy easy or may lead to further easing.  We are seeing increasing signs that Asian policymakers are cutting rates or allowing their currencies to quietly depreciate.  For example, the Philippine central bank today cut its benchmark short-term interest rate by 25 basis points to 3.75%.  That action follows the Thai central bank’s decision yesterday to cut its benchmark rate by 25 basis points to 1.00%.  Singapore’s monetary authorities have also signaled they are comfortable letting the currency depreciate a bit to cushion the blow from the epidemic.

Trade: In order to facilitate China’s agreement to buy more U.S. goods, Beijing has slashed tariffs on $75 billion of U.S. imports.  We still doubt that China will be able to meet its obligations in the short run, but this cut does suggest the country is taking appropriate steps to meet its promises at some point.  Meanwhile, U.S. firms are apparently becoming adept at taking cosmetic steps to avoid tariffs, using transshipments and other tactics to avoid the levies.  This behavior shows why using tariffs as a trade tool isn’t perfect; the tariffs come with rules that can be gamed.

A sign from Germany: As regular readers know, we characterize political affiliation by left/right and establishment/populist.  In general, establishment figures are the ones who lead but in Western democracies they get elected by wooing the populists.  However, there are times when the populists become disgruntled with the establishment and attempt to take control themselves.  We are in one of those times.  Within the populists, there are extremes.  In the U.S., these extremes tend to be diluted within the major parties but, in European parliamentary systems, they often form their own parties.  For example, in Italy, we saw a government of the League and the Five-Star Movement, the former a rather extreme right-wing populist party and the latter a left-wing populist.  In Germany, the centrist parties have shunned the populists, forming a “grand coalition” of the establishment-right CDU/CSU and the establishment-left SDU.  However, in a recent regional election in Thuringia, a government was formed by the right-wing populist Free Democrats in concert with the CDU and the AfD, another right-wing populist party.  The Free Democrats are a more libertarian party, whereas the AfD has evolved from an anti-EUR party to a right-wing identity party.  Giving power to the AfD has sent shockwaves through the German political system, raising fears that the establishment parties may be at the point where they will create coalitions with the populist parties, creating the potential for radical policy agendas to emerge.

Brazil: Banco Central do Brazil cut rates by 25 bps and signaled an end to its rate-cutting cycle which began in 2016.  When the cycle started, the Selic rate was 14.25%; the latest move has taken it to 4.25%.  As rates have declined, the real has also weakened but, so far, currency depreciation hasn’t led to significant inflation or trade retaliation by the U.S.

Energy update: Crude oil inventories rose 3.4 mb compared to the forecast rise of 3.0 mb.

In the details, U.S. crude oil production fell 0.1 mbpd to 12.9 mbpd.  Exports fell 0.1 mbpd, while imports were unchanged.  The rise in stockpiles was in line with forecasts.

This chart shows the annual seasonal pattern for crude oil inventories.  This week’s rise was consistent with seasonal patterns, although the level of inventory accumulation continues to lag historical norms.  As the chart shows, oil inventories usually rise into late spring and then decline significantly into late summer.  Last year, this pattern was disrupted to some extent because of exports.

Based on our oil inventory/price model, fair value is $62.27; using the euro/price model, fair value is $50.26.  The combined model, a broader analysis of the oil price, generates a fair value of $53.84.  We are seeing a steady decline in all of the fair value calculations as the dollar strengthens and oil inventories rise.  However, the combined model is now well below current prices so we may see some consolidation in the coming weeks.

In energy news, OPEC+Russia was unable to come to an agreement to cut production; Saudi Arabia was looking for a 0.6 mbpd cut to address the Wuhan virus.  Oil prices fell on the news.  China has declared force majeure on oil shipments due to the crisis.  China is warning that its oil demand will likely decline 25% due to the economic disruptions caused by the Wuhan virus.  After President Trump hosted Venezuelan opposition leader Juan Guaidó at the White House yesterday, officials warned the administration will soon ratchet up sanctions on firms doing business with President Maduro’s government.  The officials specifically mentioned major international oil firms, which would likely be yet another headwind for the energy sector.  The Guardian Council has disqualified more than 90 sitting parliamentarians and hundreds of reformist candidates from the Iranian parliamentary elections to be held February 21.  The action suggests the hardline constitutional watchdog is trying to boost the position of radical conservatives in parliament, taking advantage of public sympathy for Gen. Qassem Soleimani’s assassination last month by the U.S.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

Global equities are higher as reports of a potential vaccine are lifting optimism.  U.S. considers new trade regulations.  A comment on globalization.  Good news on cancer.  Here are the details:

Wuhan virus:  The level of reported infections worldwide is 24,627, with 493 fatalities.  Although the pace is rising, it does appear to be slowing relative to our trend model.

There are a number of negative headlines.  Hong Kong will now impose a 14-day quarantine on people arriving from China.  Automakers are starting to shut down plants due to the lack of parts from China and warn of broader closures if China does not reopen production.  Airlines are suspending service to Hong Kong as demand declines.  A WHO official openly criticized the Xi government for slow reporting of the Wuhan virus.  Chinese officials are cracking down on online criticism of the government’s handling of the crisis and preventing independent reporting of the epidemic.  Other developments are equally worrisome.  Authorities are trying to track those who may be infected and are using both new and old methods.  Harkening back to the Mao era, citizens are reporting on each other.  The government is also using its “deep state” surveillance to track those who may be carrying the virus.  It is starting to look like the Wuhan virus will also delay the implementation of China’s purchases from part of the “Phase One” agreement, although there has been no official acknowledgement from the USTR.  There are reports that local food prices are rising in the areas isolated from the rest of China.

However, what is sending equities and commodities higher this morning are positive, although unconfirmed, reports that scientists may be close to a breakthrough on a vaccine.  And, there are also unconfirmed reports that researchers in China may have created a new drug to combat the virus.  WHO is warning that it does not have any proven therapies for the Wuhan virus but news of both an anti-viral and a potential vaccine are boosting sentiment this morning.  Another development of note is that there is evidence to suggest the Chinese government may be spurring equity-buying to buoy Chinese stocks.

Overall, our take is that even though there remains a high level of uncertainty and there will undoubtedly be damage to the global economy, the weight of liquidity is such that any declines in asset markets are being met with investors looking to put money to work.  Therefore, any hint of positive news can seemingly overwhelm the bad news and lead to higher equity prices.

Trade:  Lost in all the political news and virus fears, we noted three developments of interest. First, the Commerce Department appears to be setting up a mechanism where it will levy countervailing tariffs on countries it deems to be using a weak currency to boost its exports.  This development is notable on a couple of fronts.  The mandate for forex policy resides with the Treasury, so it isn’t exactly clear how Commerce will determine if a foreign country is violating its rules.  Treasury does have a mechanism to deal with currency manipulation, but it has proven to be ineffective.  If Treasury determines a nation is a currency manipulator, it starts a “clock” that allows for negotiation and if talks fail, then the U.S. can take countermeasures.  It is possible that Commerce could simply act once Treasury makes the determination that manipulation has taken place.  We have serious doubts this plan will work; the likely response from a foreign nation to additional levies would be to simply depreciate its currency further to offset the tariff.  At some point the administration will likely realize that its most potent tool to reduce the current account deficit is a deliberate and credible policy of currency depreciation.  That point has not occurred quite yet.  Second, the White House is considering withdrawing from a WTO program that facilitates international competition for government procurement.  The program is designed to allow foreign nations to bid for government purchases.  By exiting, the U.S. could force purchases to U.S. firms only, or use it as a tool to punish, or reward foreign suppliers.  Third, reports indicate that the U.S. is granting fewer tariff exemptions, meaning that U.S. firms are now being forced to adjust.  The goal is for greater domestic procurement.

Deglobalization:  Although economists and pundits continue to argue that deglobalization is impossible, this position flies in the face of history (the world has gone through cycles of globalization and deglobalization mostly due to the presence of a creditable global hegemon).  It is worth noting that the world was highly integrated before WWI, and nearly deglobalized by the end of WWII.  Our position is that the U.S. is steadily giving up on its hegemonic position and the world will break down into regional blocs over time.  Here are a couple of stories that fit that narrative.  First, the U.S. is pressing for an independent 5G infrastructure that would avoid the use of Chinese components.  Second, Chinese owners are selling off U.S. commercial property, most likely due to pressure from Beijing.

Cancer rates fall: According to the American Cancer Society, the cancer death rate in the U.S. dropped by 2.2% from 2016 to 2017, its largest single year drop ever recorded. This is big news given that cancer is the second-leading cause of death in the U.S. From an economic standpoint, this report suggests that Americans will be able to live longer and more productive lives. Additionally, the longer Americans live the more care they will likely need in old age, therefore the report is generally bullish for industries that offer healthcare services.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

Optimism on the Wuhan virus; equity markets rise.  Iowa caucus fiasco.  Syria heats up; Iraq has a new PM. Here are the details:

Wuhan virus:  There are now 20,696 confirmed infections and 427 fatalities, including one in Hong Kong.  Macau announced it will close its casinos for 15 days starting tomorrow.  Oil markets are lifting today but only after a decline of more than 10%; WTI briefly fell below $50 per barrel yesterday.  OPEC is discussing an output cut but nothing official has been announced yet.  We are starting to see the ramifications of shutting down transportation networks as 300 million chickens in Hubei province are threatened with starvation due to the lack of feed.

And yet, despite everything, equity markets are up worldwide, with U.S. equity futures on a tear this morning.  Even Shanghai lifted today.  What is going on?  First, we were seeing evidence that the global economy was on the mend after weakening last year.  If the Wuhan virus turns out to be a temporary problem (as we expect), recovery should follow.  Second, we have already seen policy stimulus from China.  It would not be a stretch to see the Fed or ECB offer support if there is a slump from this issue.  Third, there is ample liquidity in the world looking for a home and the TINA syndrome (There Is No Alternative) appears to be active.  Fourth, although the virus is clearly spreading, the pace is falling further below trend.

Although it is a rudimentary model, this chart does show that reported cases are not rising as fast as they were earlier.  In reality, the reported cases should be taken with a large grain of salt.  We suspect there are a large number of cases that go unreported because the symptoms are undisguisable from the common cold.  If that assumption is correct, the lethality of the Wuhan virus is very low.  The harsh measures China and the rest of the world is taking to slow travel are probably working, although we suspect historians will argue that the measures were an overreaction to the threat.

If all this is true, the effect on the global economy should be notable but short-lived.  As infections fall and the virus passes, we should see a rebound in economic activity as inventories are rebuilt and pent-up demand is satisfied.  We are concerned about the impact on supply chains.  As we saw with Fukushima in 2011, when a nation that is key to global supply chains is taken offline, it does have a global impact.  Thus, we could see shortages of some items this year that may affect individual companies.

Iowa:  We pay close attention to politics in our analysis but only viewed from the prism of market effects.  Iowa held its caucuses yesterday; we still await results.  The political parties in Iowa manage this process.  It appears that in an attempt to speed up the process, the Democratic Party in Iowa used an untested app and other electronic measures that failed miserably.  Although we should get results later today, the glitch will tend to reduce the impact of the process.  In other words, winners will likely have less momentum and losers will grumble that the process, not the voters, failed them.  On to New Hampshire…

Middle East:  After six Turkish soldiers were killed by artillery strikes in Idlib province, Turkey dispatched F-16s against Syrian positions, reportedly “neutralizing” 35 Syrian troops.  Turkey also warned Russia not to interfere.  Turkey supported rebel forces in Syria and would like to see Assad removed; this puts Ankara in direct opposition to Moscow over this issue.  Meanwhile, in Iraq, Mohammed Allawi has been designated as PM.  He is the cousin of former PM Iyad Allawi and was communications minister in the previous government.  Although Shiite groups loyal to Iran have supported Allawi in this role, other groups are protesting his elevation.

Germany:  The government has proposed giving its Federal Cartel Office the power to police any monopolistic behavior of “big, market-dominating digital companies.”  Although France has recently backed down from its proposal to tax digital revenues, the German proposal is a reminder that big U.S. tech firms operating in Europe also face a growing regulatory threat.

Japan:  As an aging population produces more labor shortages and fiscal challenges, the government is proposing a new law that would encourage firms to let more people keep working up to age 70.  The draft law calls on firms to choose one of five options, including: 1) raising the retirement age; 2) scrapping mandatory retirement altogether; 3) allowing employees to keep working past the firm’s retirement age; 4) outsource some operations to retirees who start their own business or become freelancers; and 5) assign older workers to philanthropic projects run by the firms.

Japan and coal:  Japan announced it will build 22 new coal-fired electricity plants to replace nuclear facilities that were closed nearly a decade ago after the Fukushima incident.  Although this decision flies in the face of pledges to curtail greenhouse gases, the government found itself stuck between the need for reliable power and climate issues.  However, we are somewhat surprised that Japan didn’t consider natural gas-fired plants.  Given the global glut of LNG (with more coming from the U.S. soon), natural gas would seem to be a better alternative.

What would Minsky say?  Two headlines caught our attention this morning.  First, emerging markets set a new record for foreign currency-denominated debt issuance in January.  This category sold $118 billion of new foreign currency-denominated debt (mostly USD and EUR) last month.  An example?  Saudi Arabia recently issued $5.0 billion of USD bonds with a term of 35 years and 3.84% yield.  Second, global high yield issuance hit a new monthly record in January, with $73.6 billion of new debt sold, eclipsing the old record of $70.8 billion set in March 2017.  The late Hyman Minsky, whose work was plucked from obscurity during the Great Financial Crisis, argued that business cycles end because of credit quality deterioration.  Just sayin’…

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

Happy Super Monday!  There is a lot going on this morning.  We have an update on the Wuhan virus.  Chinese equity markets reopen and the PBOC eases.  Tensions rise on EU/U.K. trade.  Iowa caucuses are tonight.  We see a turn in Venezuela.  Here are the details:

Coronavirus:  There is growing speculation that we may be on the verge of a global pandemic.  The current confirmed infection count is 17,205, with 361 fatalities, the first death outside of China, and a fatality in the Philippines.  Building on its earlier move to reduce travel from China on account of the Wuhan coronavirus, Hong Kong today ordered that 10 of its 13 border crossings with the mainland be totally closed.  Separately, the Chinese foreign ministry has blamed the United States for spreading fears about the disease and not helping to stop it.  China has completed building a hospital in 10 days.  In many respects, the Wuhan virus shows the strengths and weaknesses of China’s authoritarian system.  It is amazing that the country can build a facility so quickly; a powerful government can simply override opposition to move fast.  On the other hand, there is growing evidence that doctors in Wuhan were dealing with a unique virus in early December but officials there quashed the discussion on social media.  A more open society might have been able to use this information to move quickly and contain the disease before it spread.  China’s political system is bad at processing and gathering information it doesn’t want to hear, but effective at taking mass action once a crisis occurs.

We have enough data on infections to put some charts together.

This is a “good news, bad news” chart.  We took the infection rate, log-transformed it and regressed a linear trend through it.  The good news is that the rate of infections appears to be falling below the trendline.  The bad news is that the trend would suggest 100k infections worldwide by Friday.  The disruption from the Wuhan virus will likely be with us for several months, although the impact will lessen over time.

As expected, the reopening of China’s equities led to a sharp selloff, but for the most part it matched other markets in the region.  The PBOC took action, cutting repo rates by 10 bps and injecting CNY 1.2 trillion ($173 billion) into the financial system.  Although China’s equities were weaker, the Hang Seng was mostly steady and Western equities are rallying.  OPEC, facing a plunge in oil prices, is considering further supply cuts to bolster prices.  Overall, the Wuhan virus will weaken global growth but the impact is expected to be transitory.

EU/U.K. trade talks:  We are now heading into the next phase of Brexit, which is establishing trade relations.  The EU wants Britain to remain closely knit to EU rules so as to not create conditions of regulatory arbitrage.  The Johnson government wants a looser arrangement; otherwise, leaving the EU was pointless.  Why would the U.K. give up representation only to follow EU rules that it can no longer influence?  At this point, both sides are bellowing.  The EU is staking out a maximalist position; the U.K., a minimalist one.  In the end, we expect they will eventually agree on something between these two points, but, in the meantime, the fear that a hard Brexit will occur after all sent the GBP falling today.  We doubt that a comprehensive plan can be put together in less than a year and would not be surprised if the two sides follow the arrangement Switzerland has with the EU, which is a series of narrow treaties that cover various areas of trade.  Meanwhile, the sniping is escalating; Donald Tusk, the former European Council president, suggested he would favor Scotland rejoining the EU, seeming to support a breakup of the U.K.  Such support might end up leading to separatist activity elsewhere in the EU.

Iowa caucuses:  Iowa will hold its caucuses to kick off the primary season, and thus the official political season begins today.  Usually there is a poll from the Des Moines Register but a glitch led it to be pulled, meaning we are sort of flying blind into tonight’s vote.  Axios has an easy-to-follow flow chart of the process involved.

Taiwan-United States:  The U.S. government has given its permission for Vice President Elect Lai Ching-te to visit Washington and New York this week for meetings with high-level business and political leaders.  The move is likely to provoke strong condemnation from China, which sees Taiwan as a renegade province.  It could also further strain China-Taiwan ties, though it will be interesting to see what will happen with China distracted by the coronavirus crisis.

Japan-South Korea:  The Japanese government has filed a fresh complaint with the WTO over South Korean shipbuilding subsidies.  The move points to a possible new round of bilateral trade tensions between the countries, following a period when their World War II-era dispute seemed to be cooling.  If tensions do rise again, it would be negative for Japanese and Korean stocks.

Eurozone:  In an interview with the Financial Times, ECB Chief Economist Philip Lane said the EU’s consumer price index is undercounting inflation because it doesn’t take into account the cost of owner-occupied housing and only assigns a weight of 6.2% to rental costs.  He said he has started presenting policymakers with adjusted inflation figures that give extra weight to housing.  Those figures are currently 0.2% to 0.3% higher than the official data.  As central banks around the world keep falling short of their inflation goals, Lane’s action is a signal that they may start “moving the goalposts” to suggest they’re being more successful and fend off pressure for even lower interest rates.  Such a move would be negative for bonds.

United Kingdom:  The final Markit/CIPS purchasing managers’ index for manufacturing was revised upward to a nine-month high of 50, beating expectations that it would be unchanged from the initial estimate of 49.8.  The reading provides further evidence that the British economy has regained some strength after the divisive election over Brexit in December.

Turkey-Syria-Russia:  After Syrian troops shelled Turkish observation posts in northwest Syria over the weekend, President Erdogan said Turkish forces have launched massive retaliatory attacks on Syrian positions in the Idlib province.  Erdogan also accused Russia of not supporting efforts to de-escalate the civil war between Syrian government forces and the remaining rebels.

Odds and ends:  We are seeing the Maduro administration in Venezuela back away from its interference in markets and, lo and behold, conditions appear to be improving somewhat (arguably from a low base).  However, the benefits of the thaw appear to be mostly falling to the rich, which is in opposition to the goals Hugo Chavez established during his presidency.  Those benefiting from the boom should be cautious; Cuba has a history of easing up on market interference during downturns only to return to controls when the recovery develops.

In Ireland, Sinn Fein is surging in the polls in front of this weekend’s election; although it isn’t running enough candidates to govern alone, it may do well enough to force the centrist parties into a coalition or lead to a minority government.  U.S. farm bankruptcies hit an eight-year high in 2019.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

Happy Super Bowl Friday!  It’s also Brexit Day.  We update the latest on the Coronavirus.  Eurozone GDP comes in weak.  Global equities continue to lose ground.  Abe appoints a new member to the BOJ.  More movement on global tech taxes.  Here are the details:

Coronavirus:  Yesterday, the WHO officially declared an international emergency, but then went on to say that it shouldn’t affect travel, or border security.  Equities actually rallied on the news, but the optimism didn’t stick.  We are approaching 10k in confirmed infections and the death toll has now exceeded 200.  New cases are being reported in Europe.  Despite WHO recommendations, Singapore and Mongolia have closed their borders to anyone coming from China.  The U.S. has implemented a Level 4 travel ban to China, a simple “do not travel” warning.  Countries outside of China are trying to isolate the spread. Reports say even North Korea(!) is suspending trade with China and has stopped issuing visas to Chinese citizens.   China is extending the New Year’s holiday; reports from contacts indicate that most businesses will remain closed and are telling their employees to work from home.  Airlines are bearing the brunt of the weakness, although the turmoil in China will almost certainly affect global manufacturing supply chains.  Since mainland Chinese markets remain closed, we have been paying close attention to the Hang Seng; it closed down again today, but the pace of the decline is moderating.  Overall, we are looking at probably two to three weeks of volatility.

Eurozone:  In an initial estimate, fourth-quarter GDP grew by a seasonally-adjusted 0.1% from the previous quarter, short of the expected rise of 0.2% and much slower than the third-quarter increase of 0.3%.  GDP in the fourth quarter was up just 1.0% from the same period in 2018, and full-year GDP in 2019 was up just 1.2% from 2018 its weakest annual gain in six years.  Not only is Eurozone growth being dragged down by global trade tensions and a struggling auto industry, but the data shows fourth-quarter GDP unexpectedly contracted in both France and Italy.  The disappointing numbers are weighing on global equities today.  Since the figures suggest the ECB may have to loosen monetary policy further in the coming months, bonds are reacting positively to the news.

Brexit:  At 6:00 EST, the U.K. will leave the EU.  In reality, nothing changes all that much immediately.  The U.K. will remain under EU rules for the next 11 months while a trade deal is worked out.  The most immediate impact will be on the EU; the European Parliament will shift rightward as center-right parties will capture most of the exiting U.K. seats.  The EU will be more dominated by Paris and Berlin after losing British influence.  For the most part, the Brexit seems to be a bit anti-climactic after all.

BOJ:  PM Abe has appointed Seiji Adachi to the BOJ, replacing Yutaka Harada on the nine-member board.  Adachi is considered an extreme dove, but the composition of the board won’t really change because Harada was dovish too.  The current composition of the board is three reflationists and six moderates.  In June, Yukitoshi Funo’s term will end; he is a moderate; if Abe adds another reflationist, we could see a weaker JPY.

Global Tech Taxes:  The 137 countries working with the OECD to develop new, global rules for taxing multinational companies has issued a statement reaffirming their goal to reach a deal by the end of 2020.  The statement suggests the participants have had a fire lit under them by the recent dustup between the U.S. and France over France’s proposal for an interim tax on global tech firms’ digital revenues.  A new tax regime like the one being discussed could have a big impact on corporate earnings for years into the future, so we’ll be watching how things develop over the course of the year.

United States-South Korea:  The Pentagon has warned its South Korean employees they could be furloughed on April 1 because of insufficient funds to pay them.  The warning is being taken as a sign that the U.S. and South Korea are still deadlocked over a new cost-sharing deal for the 28,500 U.S. troops stationed in South Korea.

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