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Good Morning: The Long & the Short of it and The Bigger Picture - 17 April 2020 - ADM ISI

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Ostwald, Marc

09:11 (35 minutes ago)

to Marc

- Digesting China GDP and monthly indicators, Singapore Exports and fund
flow data, but focus on hopes for Covid-19 drug treatment tests and
some gradual lifting of lockdown measures; smattering of central bank
speakers

- China: GDP and monthly indicators paint very mixed picture, Production
rebound likely to be short-lived and rather lacklustre given higher
frequency indicators and shutdowns elsewhere

- Fund flow data underline 'rush for risk' following Fed measures above
all HY Credit purchases, but credit conditions still tight despite
easing, central banks to struggle to unwind any, let alone all measures

- Charts: Fed Balance Sheet; US, Eurozone, UK & Asia ex-Japan Financial
conditions

..........................................................................

********************
** EVENTS PREVIEW **
********************

Another week of very extensive Covid-19 shutdowns in Europe and North America ends with some glimmers of hope that a peak may not too far away, accentuated by the news of potential virus treatment, even if a very substantial drop in the number of cases and fatalities will likely take a good deal longer, with some setbacks possible / likely along the way. In that context, the overnight China Q1 GDP data and run of monthly activity indicators along with Singapore Exports and EU New Car Registrations are the focal points, with the remainder of a modest schedule unlikely to trouble markets as they wind down for the weekend. On the US Corporate Earnings schedule are more financials - Blackrock, Morgan Stanley and State Street - along with Kansas City Southern and oil services giant Schlumberger. The official part of the IMF/World Bank Spring meetings get under way (concluding over the weekend), while there is central bank speak from Fed's Bullard and BoE's Broadbent and Haldane.

Unsurprisingly markets overnight have decided to largely dismiss the China data as already 'discounted' (hugely debatable), and focus on the Trump three stage plan to re-open the US economy, and that a report about Gilead Sciences' experimental Coropnavirus drug suggesting encouraging partial data from trials of the U.S. company's Rremdesivir in severe COVID-19 patients. The China Q1 GDP data at -9.8% q/q -6.8% y/y were broadly in line with forecasts, though the monthly indicators were far more mixed, with Industrial Production at -1.1% y/y easily beating a forecasts of -7.3%, but Retail Sales much weaker than forecast at -15.8% vs. projections of -10.0%, and a small downside miss on FAI at -16.1% y/y vs. an estimate of -15.0% y/y. The problematic on the Industrial Production is that higher frequency data unsurprisingly suggests that while there was a spike in activity when lockdown measures were lifted, that momentum has largely been lost with activity levels now around stall speed levels, and with external demand set to remain weak given the extant swathe of restrictions on movement and activity, China's recovery during Q2 will at best be very lacklustre.

Lipper Fund Flow data saw inflows into all asset classes, including money market funds (though at a much slower pace than recent weeks), and with a record $7.66 Bln inflow into HY Credit funds, following on from the Fed's decision to start buying HY Funds. The simple perspective is apart from the Fed crossing the Rubicons of moral hazard and indeed outright monetary financing (ECB, BoJ and BoE have also crossed the latter), the scale of the expansion of its balance sheet relative to the 2008-2009 GFC measures is eye watering (see chart). Secondly, while financial conditions clearly were the prompt for all the central bank actions, and have certainly prevented a tightening on the scale of the GFC, conditions remain tight across the US, Eurozone, UK and Asia ex-Japan - as can be seen from the attached charts. There is clearly no way that any of these actions can be described as 'targeted', and per se the primary achievements are to encourage a rush for risk assets despite dismal corporate earnings prospects, major future supply chain challenges as the likes of the UK and France join the US in calling for a major overhaul (i.e. reduction) of supply chains from China, which will be costly in investment terms, and will surely sharply reduce what are in some cases already challenging margins, and encourage protectionism that will see trade growth impaired for much of the coming decade. Per se what the central banks are doing is ensuring further corporate zombification, and portfolio investment strategies that have no fundamental rhyme or reason other than 'don't fight Fed/ECB/BoJ, etc' flows, in other words a total dislocation of the financial economy from the real economy, and leaving them in a very deep hole in terms of ever escaping from all these measures. As my father used to say to me: 'Money has not intrinsic value, it merely represents value' - clearly this is no longer true, money is in effect now a Panglossian delusion.

 

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