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

[Posted: 9:30 AM EST]

It’s a rather quiet Wednesday as global equity markets continue their steady rise.  We have an update on the COVID-19 virus (it now has an official name), along with some disquieting data from JOLTS and headlines about consumer debt.  The EU fires back at the U.K.  The NZD rallies.  Here are the details:

COVID-19:  The Wuhan virus now has an official name; this was done by the WHO to reduce the stigma applied to China.  However, changing the name doesn’t change the general perception.  Documented infections are now 45,171 with fatalities at 1,115.  There are worries that the diagnostic process is missing a lot of cases.  Beijing continues to take aggressive actions to contain the virus, seizing hotels, hospitals and autos to manage the situation.  CPC leadership is following a time-worn tactic of blaming local officials for the crisis; this practice was common during the emperor periods.  At the same time, General Secretary Xi is expressing concern about the economic damage from the virus, cautioning against an overreaction.  Leaders walk a fine line in these situations.  President Ford’s aggressive reaction to the swine flu in the mid-1970s turned out to be an overreaction as the vaccine proved more dangerous than the illness itself.  At the same time, if COVID-19 turns out to be the “big one,” warning of overreaction will look incredibly foolish.  There is growing worry about supply disruptions; commodities have obviously been adversely affected but drug makers are also worried.  Still, overall, financial markets are continuing to look through this issue.  In a world with accommodative policy, it is hard to contain risk assets.

JOLTS:  The Bureau of Labor Statistics releases a dataset that covers job openings, hires, quits and labor flows.  Although the report gets less attention than the payroll and household surveys, it does offer some granular information about the labor market.  The number that has caught everyone’s attention is a sharp drop in job openings.  However, as we show in the chart below, the decline probably had more to do with January than weakness.

The blue line on the chart shows the non-seasonally adjusted report.  The decline in January is remarkable as job openings fell by nearly 600k.  However, when we seasonally adjust the data, the decline is significant, around 250k, but much less than the headline data would suggest.  The number bears watching; if it continues to decline it would suggest an early warning that the labor market is starting to soften.  We would not be surprised to see a recovery in the coming months as the drop appears to be exacerbated by seasonal factors.

Another chart violation:  The NY FRB publishes data on consumer lending and there are headlines this morning talking about how household debt is at a new record level.  Well, that is true, but the pace of debt accumulation appears rather manageable.

From 1999 into 2008, annual growth rates averaged between 10% to 20%.  Last year’s growth rate was 4.4%.  On a per capita basis, the average person is carrying $51,740 of debt; although that number has been rising, it is below the $53,040 peak set in Q3 2008.  In other words, on a per capita basis, the growth rate is a mere 3.1%.  Overall, households remain cautious about debt and lenders are being careful, too.

By far, the most mortgage originations are for the highest credit score.  Note that before the Financial Crisis, low credit scores acquired nearly twice as many mortgages as they do now.

EU/U.K.:  Yesterday we noted that the U.K. indicated it wants “permanent equivalence” for its financial services industry; today, the EU signaled this isn’t going to happen.  Instead, access will always be temporary and subject to removal with 30 days’ notice.  If a deal cannot be worked out, London’s financial services industry will be in big trouble.

German trouble:  We have been documenting the turmoil within the CDU/CSU and the rising threat to Chancellor Merkel’s tenure.  Foreign policy experts are starting to see the void developing as a leaderless Germany essentially becomes a leaderless Europe.

Odds and ends:  The Reserve Bank of New Zealand indicated it was leaving policy rates at 1.0% and did not intend to cut further.  The NZD rallied on the news.  The USTR has issued a report critical of the WTO’s appellate mechanism.  The U.S. wants the WTO to become less of an adjudicator and more of a facilitator of talks.  This is more about advancing national sovereignty over supranational power.  The FTC is expanding its anti-trust investigation of big tech.  The U.S. is accusing Huawei (002502, CNY 2.72) of having the ability to access telecom networks in a bid to discourage allies from using the company’s equipment for 5G.  President Trump is planning a trip to Africa.  In order to bolster a coalition against Iran, the U.S. is expected to recruit the help of Sudan and Morocco.

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

[Posted: 9:30 AM EST]

Global equity markets continue to grind higher.  We have an update on the Wuhan virus.  Chair Powell goes to Capitol Hill today and tomorrow.  The New Hampshire primary is underway.  News on Brexit.  The conflict in Syria continues.  The Philippines ends a long-standing security arrangement with the U.S., creating a gap in the first island chain.  CO₂ emisions are slowing.  Here are the details:

Wuhan virus:  The number of infections is now above 43k and fatalities are over 1k.  China tried to go back to work yesterday but turnout was rather low as quarantines and fears of the virus kept workers away from the factory and office.  It appears the recovery will be slow and we would expect to see supply problems begin to develop soon.  There is evidence to suggest the pace of infections is slowing (but men appear to be worse off from the disease).

However, as we have warned, this data should be taken with some degree of caution as actual infection rates are probably understated.  In related news, Chairman Xi made a tour, the first time he has been seen in a while.  We note that Xi has added Chen Yixin to the team overseeing the government’s response to the Wuhan virus.  Chen is the secretary general of the party’s law enforcement and is considered a protégé of Xi.  Adding such a high-profile person to the team suggests that (a) Xi is taking the event seriously, and (b) if a crackdown against unrest and social criticism is necessary, Chen would be a good candidate to lead it.  The first tranche of PBOC liquidity was offered yesterday.  Crude oil prices are getting a bounce this morning but problems within OPEC continue to pressure prices.  Finally, an example of the power of rumors has emerged in Hong Kong; there has been a run on toilet paper.  This run has occurred as other items, such as surgical masks and anti-bacterial soaps, have become scarce.  Once a hoarding mindset develops, the behavior can shift from the reasonable to unreasonable.  It reminds us of the famous toilet paper shortage of 1973, thought to be triggered by a joke in Johnny Carson’s monologue.  Why do we mention this event?  Because, under strain, humans can become remarkably irrational and investors should take care that although we think the odds favor the Wuhan virus being a one- to two-quarter event, that doesn’t mean odd things won’t happen.

The Fed to Capitol Hill:  Chair Powell will go to the House today and Senate tomorrow for his semi-annual testimony.  Expect him to be peppered with questions about the Wuhan virus and the state of the repo market.  Powell has been in office long enough now that we don’t expect him to make any market-moving statements; in general, the Fed is likely to hold policy steady for now, with a bias to easing further.

Brexit:  Negotiators for the Johnson government are moving to protect financial services, pushing for “permanent equivalence” for that industry in the EU.  Officials admitted that the “smart border” concept of using technology to create a seamless border won’t be ready until 2025.  In the meantime, actual paperwork will tend to slow trade.  In other U.K. news, yesterday the government approved a massive railroad upgrade project that will improve high-speed transport throughout the country and cost upward of £100 billion through 2040.  The “HS2” project, which will be the biggest infrastructure program in Europe, could be bullish for a range of British stocks in the manufacturing and construction industries.

Turkey-Russia-Syria:  Turkey has now lost at least 13 soldiers over the last week as it ramps up its support for the last group of rebels fighting the Syrian government in Idlib province.  Even though Turkey has asked Russia to help convince the Syrian government to back off, the Putin government has offered minimal help, which in turn has strained the Turkey-Russia relationship.

United States-Philippines:  The government of President Duterte said it has terminated the U.S.-Philippine Visiting Forces Agreement, under which the two countries held joint military operations.  The move will likely cause even more tension between the U.S. and the Philippines, strengthening China’s position in the South China Sea.

Climate change:  The International Energy Agency said global carbon dioxide emissions from the energy sector stopped growing in 2019, largely because of a plunge in coal burning and a shift toward renewables, natural gas and nuclear power for electricity generation in the developed countries.  The U.S. had the biggest drop in emissions (3%) as ultralow natural gas prices continued to prompt a massive shift away from coal generation.  If electricity generation continues to shift toward gas, whether on account of cost or regulation, it could raise hopes for better gas pricing down the road.

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

[Posted: 9:30 AM EST]

Happy Monday!  Global equity markets are flat to down as the world continues to deal with the Wuhan virus.  China officially returns from the New Year’s holiday, but it looks like a slow restart, and China’s inflation rises.  There is political turmoil in Europe.  Here are the details:

Wuhan virus:  Global confirmed infections are 40,649 with 910 fatalities, exceeding SARS.   Reports suggest there is growing anger at Beijing for the handling of the crisis.  Chairman Xi has finally started to make public appearances amid the rising criticism.  Officially, the New Year’s holiday ended today, but reports suggest that business recovery is very slow.  We had the first confirmed fatality of a U.S. citizen over the weekend.  The PBOC has instructed banks to lower rates and facilitate payment extensions; analysts worry this action will weaken the resolve of the banks to deal with bad debt once the crisis passes.

CPI rose 5.4% in January, well above forecast.  Although prices do tend to rise in January, hoarding activity played some role in boosting prices.  Food prices, which rose 20.6%, were a major factor in lifting overall CPI.

PPI was unchanged; we believe the Wuhan virus has not affected producer prices yet and thus we will be watching to see the impact in coming months.

Global equity markets are mostly looking through the current crisis, focusing on expectations of further policy easing.  It is possible that financial markets have gotten a bit ahead of themselves and thus we may be in for a few weeks of consolidation until we get clear evidence that the virus has been contained.

European politics:  There were two major items of note.  First, Saturday’s election in Ireland generated an inconclusive result.  The two centrist parties, the Fine Gael and Fianna Fail, took 20.9% and 22.2% of the vote, respectively.  The winner was Sinn Fein, at 24.5%.  The centrist parties cannot form a majority government without Sinn Fein, but both have historically avoided letting Sinn Fein into government, in part due to its ties to the IRA.  Sinn Fein did well among younger voters who have no memory of its ties to the IRA; the leftist party conducted an anti-austerity campaign that focused on stagnant wages and high housing costs.  The most likely outcome is another round of elections.  If a minority government is formed, we doubt it will last long.

The second item is that Annegret Kramp-Karrenbauer (AKK) has stepped down from leadership of the CDU/CSU in the wake of the Thuringia situation.  Last week, in this German state, the CDU teamed up with the AfD to install a Free Democrat as state premier (who, in the wake of this event, has resigned).  Teaming up with a far-right party has dark historical connotations and clearly upset the CDU/CSU leadership.  AKK’s resignation throws Chancellor Merkel’s succession open again, raising the possibility that her replacement will force her to resign.  The leading candidates include Friedrich Merz, a former leader of the CDU parliament members, Jens Spahn, the current health minister, and Armin Laschet, current prime minister of the state of North Rhine-Westphalia.  The breakdown also reveals the fracturing of German politics and opens the possibility of much more radical outcomes, which would have serious ramifications for the future of the EU.

United States-Japan-South Korea:  The U.S. military has dramatically shifted its schedule of joint drills with Japan and South Korea.  To reward Japan’s participation in the Trump administration’s new “Indo-Pacific Strategy” for containing China, joint drills with Japan have been scaled up.  In contrast, joint drills with South Korea have been downgraded for a second straight year to avoid antagonizing North Korea.

Odds and ends:  One reason the Phillips Curve relationship appears to be broken is due to the difficulty in determining labor supply.  The labor force has continued to grow despite data that would suggest the number of available workers should be exhausted.  Why is this happening?   The labor market is drawing a steady supply of workers who were previously out of the labor force directly back into the labor force.  This pattern should encourage the Fed to keep policy rates steady to continue to foster this development.

In early negotiations, it looks like the EU is offering open access to U.K. financial firms in return for continued access to British fishing waters; in other words, finance for fish.  Thirty-year mortgage rates hit an all-time low.  Global trade growth rose by a modest 1%, the fourth worst over 40 years of data.  The U.S./China trade conflict is the most likely culprit.  Although we don’t expect action in an election year, at some point, we do expect the administration to take direct steps to weaken the dollar.  We note that companies are starting to complain about the strong greenback.

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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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