Daily Comment (January 21, 2020)

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

[Posted: 9:30 AM EST]

It’s Davos week!  World leaders in politics, business, academia and media are all gathering in Davos, Switzerland.  Your Daily Comment team is skipping the event this year, remaining in picturesque downtown Webster Groves instead.  It’s a risk-off market this morning as the Chinese coronavirus has clearly mutated to person-to-person transmission.  With the Chinese New Year coming on Friday, massive travel is likely which could foster the spread of the virus.  In other news, the IMF has lifted its growth forecast modestly.  Iran changes tactics on its nuclear program.  Here is what we are watching this morning:

Coronavirus:  This new respiratory virus, originating in central China, is spreading rapidly as it becomes evident that the disease can be spread via human contactThe number of confirmed cases has tripled, to 218, and six fatalities have been blamed on the disease.  New cases have been reported in Thailand, Japan and South Korea.  Another worry is that the Lunar New Year begins on Friday; this event usually triggers a mass migration in China as workers who have moved to cities return home for the week-long holiday.  The concern is that this new virus will have a similar effect to SARS, which noticeably slowed China’s growth.  China has faced some criticism for the slow reporting of this virus, but authorities argue that the reporting and testing systems created after the SARS crisis are likely to blame.  Worries about this virus have triggered some selling in equities this morning (gold is down as well); we suspect the mere uncertainty surrounding the virus is behind the selling, although one could argue the near unidirectional pattern of equities recently was overdue for at least a period of consolidation.

Davos:  It is the 50th anniversary of this gathering.  Although it is an important event, it has taken on a sheen of tone-deafness in recent years.  Last year’s theme of inequality being discussed by billionaires is a good example.  Still, this is one of the few times when leaders across different areas gather simultaneously, which does mean the potential is elevated for newsworthy events.  One interesting side note: local officials say they broke up a probable Russian effort to bug the venue last summer.  Police were alerted when a pair of ostensibly Russian plumbers had an unusually long stay at the resort.  Police and Swiss federal officials suspected the pair of posing as tradesmen to install surveillance equipment at key facilities around town to monitor the private conversations of the world leaders attending the forum.

IMF:  The IMF has released its semiannual report on global growth.  It is looking for a modest lift to GDP this year, at 3.3%, up from 2.9% in 2019.  Monetary policy easing (there were 71 rate cuts by 49 central banks last year) and a détente in the trade war with China account for the improved outlook.  Although this is positive news, it should be noted that in October the IMF projected 3.4% growth for 2020.  Interestingly enough, CEOs are not nearly as optimistic as the IMF.  It should be noted that globalization continues to retreat; foreign investment has declined to a near-decade low.

Iran:  After the EU moved to begin the process of reimplementing sanctions in light of Iran’s nuclear activity, Tehran abruptly declared it would not take any further steps to violate the 2015 agreement.  However, in a change of tactics, Iran indicated it would withdraw from the nuclear Non-Proliferation Treaty if its nuclear program is referred to the U.N.  In other words, if the EU brings Iran’s recent violations of the 2015 agreement to the UNSC, Iran will threaten to sell its nuclear technology.  It appears that Iran has concluded that further violations of the JCPOA would be counterproductive, but it has shifted its threats to sway the Europeans.

Russia:  President Putin has released a draft of the constitutional changes he floated last week to help him stay in power past the end of his term in 2024.  As we reported earlier, the changes will weaken the power of the president and prime minister.  The draft amendment shows that the State Council – an advisory body made up of parliamentary leaders and provincial governors that Putin already heads – will gain new responsibility to “coordinate . . . the organs of state power.”

Eurozone:  The European Central Bank’s latest bank lending report showed corporate loan demand fell 8% in the fourth quarter, even though credit standards were broadly unchanged and the ECB had cut interest rates in September.  Surveyed banks expected corporate loan demand to fall 9% further in the first quarter of 2020.  According to the ECB, the decline in corporate demand largely reflects weak economic conditions and reduced capital investment.  In contrast, high consumer optimism and low interest rates boosted demand for housing loans by 25% in the fourth quarter.  As in the U.S., the question is whether soft corporate investment and manufacturing will eventually offset the strength in the consumer sector.

Digital tax:   Facing the threat of U.S. tariffs, Paris has suspended its levy on U.S. tech firms.  Treasury Secretary Mnuchin has warned the U.K. and Italy over their digital tax initiatives.

Odds and ends:  China’s growing bad debt is catching the attention of U.S. vulture investors.  Meng Wanzhou’s extradition trial began yesterday.  The transportation strike in France appears to be fizzling as workers need their wages and unions are dividedNorth Korea has replaced its foreign minister; there was no official announcement and it isn’t clear what exactly happened to Ri Yong Ho.  Moody’s has cut Hong Kong’s credit rating to Aa3 from Aa2 due to continued social unrest.

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