Three Countries, Three Ways to Manage Coronavirus

Three regions, three distinct monetary authorities, three methods for managing political and economic risk surrounding a growing Coronavirus pandemic. Let us review the economic and political responses of three of the world’s largest economies set to be hit hardest by COVID-19: China, The United States, and The European Union.

Circumstances surrounding the Coronavirus, or COVID-19 as it is formally known, are still unclear. In the short-term, markets have felt a sharp decline in global equity prices. On March 3, 2020, the United States Federal Reserve, in response to a greater than 10% decline in US stock prices, reduced the short-term lending rate by 50 basis points to ease any pandemic-related concerns. Typically markets move higher after such rate cuts. However, this time around stocks continued to decline by nearly 3% during the March 3 trading session. The world has yet to price in the potential economic damage of a global pandemic.

Economic policy is only as effective as the policymakers. From a strategic standpoint, how have governments fared in handling such a “black swan event”? Let us focus on the world’s three leading economic regions: China, The United States, and the European Union.

China

One of the few things we do know about COVID-19 is that China is undeniably the source country, and therefore we have more information about China’s handling of this pandemic than parts of the world where the contagion is less pronounced. Predictably, China initially attempted to cover up and downplay the severity of COVID-19. Oddly, Chinese president Xi Jinping did not even seem to be aware of the existence of a growing pandemic in Wuhan until days after the initial quarantines in Wuhan went into effect. We should not be surprised, as poor upward flow of information to senior leadership is a classic staple of authoritarian regimes. However, authoritarian regimes do have the advantage of being able to rapidly and unilaterally implement country-wide quarantines and travel restrictions.

United States

Despite having the opportunity to observe China’s struggles with the pandemic throughout January and February of 2020, The United States has been slow to acknowledge the severity of COVID-19. In the face of clear evidence that COVID-19 is spreading within the continental United States, the Federal government has yet to implement any form of quarantine or even the most basic testing protocols (as of March 3, 2020). The US government believes any pandemic can be fought with monetary policy, as evidenced by the Federal Reserve’s 50 basis point rate cut along with messaging from Treasury Secretary Steve Mnuchin with the not-so-subtle reminder of the existence “circuit breakers” designed to halt trading if stocks should drop too heavily. Monetary intervention will need to serve as the best treatment for now.

European Union

On an individual country basis, Italy has been hit hardest in the early stages of this pandemic. In terms of the broader economic policy of the European Union, European Central Bank President Christine Lagarde, on March 2, 2020, indicated the ECB’s willingness to take “appropriate and targeted measures” to counter the potential economic impact of Coronavirus on the EU economy. This interventionalist monetary policy statement falls in line with that of the United States. The EU’s response has been arguably the most predictable, rational, and disciplined of the three regimes we have discussed here.

Conclusion

China and the EU have behaved most predictably in managing domestic and political risks. China has centered its handling of the pandemic around bolstering the strength and control of the Chinese Communist Party. The European Central Bank is firmly committed to a policy of monetary intervention. Meanwhile, the United States is seeking to actively downplay the potential severity of a COVID-19 pandemic in order to avoid sparking a panic in the US stock market. The Federal Reserve has already intervened in cutting short-term lending rates, and we are likely to see expanded and unprecedented coordination between the US Federal government and the Fed.

Three regimes, three monetary authorities, three methods for managing political and economic risk surrounding a growing COVID-19 pandemic. Keep in mind, it is still far too early to make judgments on whether or not any of these regimes have handled the problem well. There is no way of knowing the true extent of the political and economic fallout of this pandemic until the dust settles, which could be months from now. For the time being, we can only objectively observe the policies enacted by Federal/Central governments and central monetary authorities. Let’s wait and see. (And wash our hands frequently.)

Daily Writing 02/11/2020

The primary headlines still center around the spreading novel coronavirus which originated in Wuhan, China.[1]  A World Health Organization senior medical advisor indicated that coronavirus infections should be over by April.[2]

Overall, the broader economic impact of the viral outbreak is still unclear, both domestically in China and globally.  Bridgewater’s Ray Dalio believes the market impact of Coronavirus is “exaggerated.”[3]

An interesting knock-on effect of the novel coronavirus: the viral outbreak has started to drive demand for China’s online grocers.[4]

Related to China, Federal prosecutors announced charges Monday against four Chinese intelligence officers for hacking the credit-reporting giant Equifax in one of the largest data breaches in history. [5]

It was a pretty big deal when the Chinese yuan fell above 7.00 USD/CNY.  Now that USD/CNY has risen below 7.00 it could be worth following throughout the coming weeks and months.

 

Sources

[1] https://www.bloomberg.com/news/articles/2020-02-10/death-toll-tops-1-000-mortality-estimate-at-1-virus-update?srnd=premium

[2] https://www.reuters.com/article/us-china-health/coronavirus-may-be-over-soon-in-china-expert-says-as-who-warns-of-global-threat-idUSKBN20504Y

[3] https://www.bloomberg.com/news/articles/2020-02-11/ray-dalio-says-market-impact-of-coronavirus-is-exaggerated

[4] https://www.bloomberg.com/news/articles/2020-02-10/coronavirus-outbreak-drives-demand-for-china-s-online-grocers

[5] https://www.politico.com/news/2020/02/10/us-charges-chinese-spies-with-massive-equifax-hack-113129

Five Hundred Words 7/01/2019

Wednesday, July 1, 2019

Daily Writing

9:25 PM

I haven’t written in my blog in about six months, I apologize for not keeping up with it, but I am grateful to all those who continue to stick with me in one way or another. Writing on China has started to become trickier over the past several months. I last focused on China at the height of a significant drawdown in global equities in global equities. In the following six- or seven-months markets have rallied as we have seen equities rise to new all-time highs. Global bond yields have plummeted, and even Italian bond yields are now lower than those of the United States. However, one thing that has not changed is the status of the United States and China trade talks. We still believe that a deal between the US and China will not lead to a global amelioration between the two countries. China is a theme we will continue to follow carefully moving forward.

In the meantime, stay tuned as we delve deeper into the China-centered macro themes that are growing in importance increasingly each day.

 

Market Data

Resource Commodities

 

July 1, 2019

June 11, 2019

April 1, 2019

December 13, 2018

Gold Spot

1390.10

1326.40

1291.80

1245.00

Silver

15.150

14.725

15.120

14.720

Platinum

832.00

815.00

851.00

802.00

Copper

2.7073

2.66

2.95

2.780

Crude(WTI)

58.80

52.85

61.07

51.41

 

Global Government Bond Yields

 

July 1, 2019

June 11, 2019

April 1, 2019

December 13, 2018

US 10 year

2.02%

2.14%

NA

2.91%

US 30 Year

2.54%

2.61%

NA

3.16%

UK

0.81%

0.86%

NA

1.26%

Germany

-0.36%

-0.23%

NA

0.27%

Brazil

7.27%

7.96%

NA

9.86%

Italy

1.96%

2.39%

NA

2.93%

Japan

-0.16%

-0.11%

NA

0.05%

 

Major Indices

 

JULY 1, 2019

June 11, 2019

April 1, 2019

December 13, 2018

VIX

14.06

18.84

NA

21.00

DOW

268.05

26049

NA

245.76

S&P 500

295.66

288.90

NA

266.45

NASDAQ

8091.16

7822.57

NA

7096.00

CFETS RMB

92.66

93.18

NA

NA

 

Currency Cross Rates

 

July 1, 2019

June 11, 2019

April 1, 2019

December 13, 2018

USD/JPY

108.44

108.5100

NA

113.6700

EUR/USD

1.1284

1.1330

NA

1.1355

AUD/USD

0.6973

0.6959

NA

0.7223

USD/MXN

19.10

19.12

NA

20.069

USD/CNY

6.86

6.91

NA

6.878

USD/HKD

7.81

7.83

NA

NA

USD Index

96.83

96.69

NA

97.15