THE DAILY EDGE: 13 APRIL 2020

Virus Update

Everything is flattening…

…even testing…

  

• China reported an additional 108 cases for April 12, of which 98 were from overseas, according to the National Health Commission. There were 61 asymptomatic cases. China has 1,064 asymptomatic coronavirus cases under medical observation as of April 12.
• Japan urges public to reduce social contacts by 80% Experts fear half-measures could hurt the economy without stopping spread of coronavirus
• Spain reported the smallest number of new coronavirus infections since March 20 on Monday and saw the daily death toll decrease.
• WHO says 70 vaccines are in development. The furthest along in the clinical process is an experimental vaccine developed by Hong Kong-listed CanSino Biologics Inc. and the Beijing Institute of Biotechnology, which is in phase two. The other two being tested in humans are treatments developed separately by U.S. drugmakers Moderna Inc. and Inovio Pharmaceuticals Inc., according to a WHO document.
• Pfizer Inc. has found a promising but early potential coronavirus treatment, which the drugmaker aims to begin testing in patients this summer.
• Chinese Doctors at Coronavirus Hub Say Evidence on Chloroquine Is Inconclusive Chinese doctors who have for months treated patients on the front lines of China’s fight against the new coronavirus offered a sobering assessment of the potential treatments, saying they hadn’t seen clear evidence that drugs such as chloroquine were effective.

“There’s no scientific conclusion.” (…)

The doctors also cautioned that some recovered patients had tested positive again, while expressing concern about asymptomatic cases, dozens of which have been disclosed in recent days across China. (…)

Chloroquine has been the subject of fierce debate within the U.S. administration. President Trump has at times touted it as a remedy and in recent days he has advised even those without symptoms to take the drug. That has come in defiance of advice from public health experts and some of his own medical advisors. (…)

A study published last month in the New England Journal of Medicine, based on a test on severe coronavirus cases at Jinyintan, concluded that Kaletra wasn’t effective. But Jinyintan’s Dr. Zhang said supplementary data in the study suggested it had potential. (…)

Fed Heeds Bagehot: Lending to ‘This Man and That Man’

(…) Now the Fed is devising new tools, relying on the advice of British journalist Walter Bagehot, author of an 1873 book that central bankers still use as a guide for crisis management: “The holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others,” Bagehot wrote. “They must lend to merchants, to minor bankers, to ‘this man and that man,’ whenever the security is good.”

For the Fed on Thursday, “this man and that man” was expanded to include:

• Some riskier classes of corporate debt beyond the investment-grade space.
• The highest-rated tranches of existing commercial mortgage-backed securities and newly issued collateralized loan obligations.
• Short-term debt from states, counties and cities.

Mr. Powell deflected worries that the expansion of credit by the Fed would lead to inflation. “I worry that in hindsight, you will see that we could have done things differently. But one thing I don’t worry about is inflation right now,” he said.

• Powell Pledges Aggressive Fed Action; Says Congress Will Need to Spend More to Combat Coronavirus Shock

(…) “We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,” Mr. Powell said in remarks at an online forum hosted Thursday by the Brookings Institution in Washington. (…)

“All of us are affected, but the burdens are falling most heavily on those least able to carry them,” he said. “As a society, we should do everything we can to provide relief to those who are suffering for the public good.” (…)

Mr. Powell also said the U.S. needed a national plan for reopening the economy based on the best analysis from health officials. “We all want it to happen as quickly as possible. We all want to avoid a false start,” he said. (…)

• The Federal Reserve unveiled programs to lend directly to states, cities and midsize businesses that have seen revenues evaporate.
• Mnuchin, Kudlow say U.S. economy could open in May, defying experts The Trump administration’s top economic officials said on Thursday they believe the U.S. economy could start to reopen for normal business in May, despite health experts’ emphasis on prolonged social distancing measures to defeat the coronavirus.
• Parts of the U.S. may be ready to ease emergency measures in May, said Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases.
• U.S. May Face 18 Months of Rolling Shutdowns, Kashkari Says
• Renault aims to reopen two Spanish plants that were shut due to the outbreak, Spanish newspaper El Norte de Castilla reported, citing an interview with Jose Vicente de los Mozos, the company’s chairman for Spain.
• G20 nations close in on debt deal for poor countries Proposed six-month freeze on payments aims to avoid emerging market health crisis
• Government, businesses and some households will be loaded with debt once the coronavirus crisis subsides. The federal government budget deficit is on track to reach a record $3.6 trillion in the fiscal year ending Sept. 30, according to Goldman Sachs. Meanwhile, businesses are drawing down bank credit lines and tapping bond markets and preliminary signs are emerging that some households are turning to credit, too.

EU Finance Ministers Agree to Funding to Cushion Virus Impact Officials worked through deep differences to agree to a package of measures totaling half a trillion euros aimed at blunting the coronavirus crisis, officials said. But a bigger conflict over whether to share the costs was deferred.

(…) Under the deal, member states will be able to receive precautionary credit lines from the region’s bailout fund amounting to at least 2% of a country’s economic output, or some €240 billion ($262 billion) of the available credit in the region’s bailout fund, known as the European Stability Mechanism. (…)

The finance ministers also backed a program extending up to €200 billion in loans to EU businesses, underwritten by €25 billion in member state guarantees for the European Investment Bank, the bloc’s finance arm.

They gave the go-ahead for a €100 billion jobs support program proposed last week by the European Commission. Once set up, that will see the EU’s executive body borrow directly in the markets, with guarantees provided by member states, to help governments fund programs that prevent companies laying off workers. (…)

But southern countries say immediate guarantees of common debt issuance are crucial to allow them to spend what they need to handle the coronavirus crisis. Without that promise, governments in the hardest hit countries may constrain stimulus now to avoid high debt level spiraling further and sparking a sovereign debt crisis as the bloc looks toward an economic recovery. (…)

It said only that discussions on financing the fund would include “innovative financial instruments, consistent with EU Treaties.” The Netherlands, Germany, Finland and others have long opposed Eurobonds, saying they would turn the eurozone into a financial transfer union and are inconsistent with EU and domestic laws. (…)

Carsten Brzeski, Chief Economist, Eurozone and Global Head of Macro at ING, said that given the disagreements, he doubts the recovery fund will “fly any time soon.”

“This aid package…leaves the question whether any of the countries will be satisfied,” he said. “As so often in eurozone decision making, small historic steps have been taken toward more integration, but many would argue this isn’t yet enough.”

U.S. Consumer Price Index Declines and Core Prices Slip

The CPI fell during March by the largest amount since January 2015. Consumer prices were off 0.4% (+1.5% y/y) following two consecutive 0.1% increases. The CPI excluding food & energy slipped 0.1% (+2.1% y/y) last month after two months of 0.2% increase. (…)

Goods prices excluding food & energy moved 0.3% lower (-0.2% y/y) following a 0.2% rise. The decline was led by a 2.0% fall (-1.6% y/y) in apparel prices. (…) Services prices were little changed (2.8% y/y). (…)

  

China consumer price growth slows after hitting 8-year high Lower inflation suggests goods supply is increasing while factory gate prices fall

WeWork’s lessons for US real estate The company’s troubles hint of what is to come — a long period of falling property prices in global cities

China’s Car Sales Improved in March

Sales last month were down 43% from a year earlier, the government-backed China Association of Automobile Manufacturers said Friday, an improvement on February’s 79%. There were 1.43 million vehicles sold nationally. Sales in the first quarter as a whole were off 42%, to 3.67 million vehicles.

Tesla expands locally made line-up, blunting trade war impact

U.S. electric vehicle maker Tesla Inc (TSLA.O) said on Friday it has started China sales of two more Model 3 variants built at its Shanghai plant, meaning all Model 3 sedans sold in the country are now locally made and not subject to import tax. (…)

The move contrasts with a previous plan from Tesla’s billionaire chief executive, Elon Musk, under which the automaker would only make more affordable versions of the Model 3 sedan at its $2 billion Shanghai factory. (…)

Japan to pay firms to leave China, relocate production elsewhere as part of coronavirus stimulus Japan has earmarked US$2.2 billion of its record economic stimulus package to help its manufacturers shift production out of China

(…) The government’s panel on future investment last month discussed the need for manufacturing of high-added value products to be shifted back to Japan, and for production of other goods to be diversified across Southeast Asia. (…)

A February survey by Tokyo Shoko Research found 37 per cent of the more than 2,600 companies that responded were diversifying procurement to places other than China amid the coronavirus crisis. (…)

THE OIL SLICK

U.S., Saudi Arabia, Russia Lead Pact for Record Oil Cuts Twenty-three countries committed to withhold 9.7 million barrels a day of oil collectively from global markets. The deal, designed to address a mounting glut, came as President Trump intervened to help resolve a Saudi-Mexico standoff.

As part of the agreement, 23 countries committed to withhold collectively 9.7 million barrels a day of oil from global markets. (…) Under the final deal disclosed Sunday, Mexico will cut 100,000 barrels a day of output, some 250,000 barrels fewer than Saudi Arabia initially wanted. The U.S. unlocked the standoff by pledging to compensate for the Mexican amount with 300,000 barrels of reductions of its own, the delegates were told. It couldn’t be determined whether that was in addition to other U.S. cuts, or how the U.S. cuts would be implemented. (…)

The U.S., Canada, Brazil and the other Group of 20 leading economies that aren’t part of the OPEC alliance will hold back four million to five million barrels a day, OPEC said in a draft press release.

Canada wasn’t asked to impose production cuts on its oil producers, said Sonya Savage, energy minister for Alberta, Canada’s largest oil-producing province. Instead, the decrease will come through market forces, as companies tend to cut production voluntarily when prices drop, she said.

In addition, Saudi Arabia, the United Arab Emirates and Kuwait have agreed to cut a combined two million barrels a day above their quota, Iranian Oil Minister Bijan Zanganeh said in a televised interview.

Industrialized nations that are part of the International Energy Agency are set to announce crude purchases to fill their national inventories as a way to take some surplus oil off the market, according to people familiar with the matter.

Overall, the measures, combined with existing sanctions on Iran and Venezuela and outages in hot spots such as Libya, could withhold 20 million barrels a day of supplies from the market, OPEC said in the draft press release. (…)

Some Republican senators spoke with the Saudi energy minister for nearly two hours Saturday, warning him a longstanding U.S. alliance with the kingdom would be damaged if he didn’t cut output. “The Saudis spent over a month waging war on American oil producers, all while our troops protected theirs. That’s not how friends treat friends,” Sen. Kevin Cramer, a North Dakota Republican, said. (…)

There are so many ways to do the math for this “deal”. The official version is a 9.7 mb/d cut. But, as Goldman says

Taking into account updated core-OPEC production guidance from April, this 9.7 mb/d “headline” deal represents a 12.4 mb/d cut from claimed April OPEC+ production (given the Saudi, UAE, Kuwait ongoing surge) but an only 7.2 mb/d cut from 1Q20 average production levels.

Then the G20 seems to have agreed to reductions in output of 3.7 mb/d, mainly from the U.S., Brazil and Canada, but the figure was 5 mb/d on Friday and 4 to 5 mb/d yesterday morning…some pipelines must be leaking somewhere…and these are eventual total reductions due to market forces…So

Given the difficulty for most producers outside of core-OPEC to implement large cuts, today’s agreement leaves the voluntary cuts as still too little and too late to avoid breaching storage capacity, ensuring that low oil prices force all producers to contribute to the market rebalancing. Ultimately, this simply reflects that no voluntary cuts could be large enough to offset the 19 mb/d average April-May demand loss due to the coronavirus. We therefore reiterate our view that inland crude prices will decline further in coming weeks as storage capacity becomes saturated and expect further weakness in WTI timespreads and crude prices in coming weeks, as already presaged on Friday, with downside risks to our short-term $20/bbl forecast.

The U.S. is said to have saved the deal by pledging to make up some 250,000 barrels a day of cuts demanded of OPEC+ member Mexico with U.S. reductions. But GS explains that

In fact, the US SPR may be how the reduced 300 kb/d Mexico’s cut are allocated as its caverns cannot mix sweet and sour crude, with 85% of the current spare capacity only suitable for sour (and not shale) purchases (Mexico in fact already accounts for the largest historical source of US SPR crude).

The other story in the saga comes from Bloomberg:

(…) With markets collapsing, Putin agreed to cut more than 2.5 million barrels a day of crude from the 11 million of combined crude and condensate Russia pumps each day, more than four times the reduction that he turned down in early March and more than what Saudi Arabia is obliged to cut from its output level last month.

If the cuts are achieved, Russia’s output for the next two months will drop to the annual average last seen in 2003, according to Bloomberg calculations based on data from the Russian Energy Ministry and BP Plc’s Statistical Review. Russia agreed to continue smaller cuts until May 2022, though it did manage to hold onto one concession by keeping condensate, a light fuel of which it is a major producer, out of the quotas.

Moscow’s climbdown marks a dramatic role reversal. Due to climate and geography, Saudi Arabia can turn the taps on and off much more easily than Russia and, until now, Russia had dawdled on cuts, avoiding full compliance while Saudi Arabia bore the brunt of the output curbs to maintain market stability. (…)

Don’t count Putin out, he is also pretty slick. Russia meeting its quota would be a first. It has also always refused to disclose the data on its condensate production…

SENTIMENT WATCH

Goldman Says U.S. Stocks Have Likely Bottomed Unprecedented policy support and a flattening viral curve have “dramatically” cut risks, the bank says.

If the U.S. doesn’t have a second surge in infections after the economy reopens, equity markets are unlikely to make new lows, they said. (…) “These policy actions mean our previous near-term downside of 2,000 is no longer likely” for the S&P 500 Index. (…)

“Despite the likely steady stream of weak earnings reports, 1Q earnings season will not represent a major negative catalyst for equity market performance,” they wrote. “Our year-end S&P 500 target remains 3,000.”

David Kostin also wrote:

It is remarkable that the US is in the midst of its greatest economic crisis in nearly a century and unprecedented societal disruption while the stock market trades at the same level as it did in June 2019, just 10 months ago. At that time, our top-down EPS estimate for 2020 was $174; today it is 37% lower at $110. The path to earnings normalization is everyone’s focus. At 2790, S&P 500 trades at 16x our baseline 2021 EPS estimate of $170 and 24x our downside scenario of $115.

(…) the index level and consensus 2021 EPS forecast of $177 equate to a P/E multiple of 16x. If consensus EPS forecasts are revised lower, as we expect, the implied market multiple will become even more elevated. Put differently, our macro valuation model indicates that either the S&P 500 index should be 25% lower, consensus 2021 EPS should be 25% higher, or that equity valuations today are tied more closely to policy support and investor sentiment than to the traditional drivers captured in our model.

Kostin adds that “the market’s sharp rally makes clear the importance of risk sentiment in driving equity prices.” Here’s Ed Yardeni’s rendering of sentiment:

THE RULE OF 20 STRATEGY

The Rule of 20 Strategy allocates cash based on the Rule of 20 P/E and the trend in the Rule of 20 Fair Value, only using known trailing data. Be warned that at today’s opening of 2765, the R20 P/E is 19.3 based on trailing EPS of $160.30 which will most likely drop rapidly as Q1’20 results start coming in this week.

This is only 3.6% away from 20.0 which would trigger a move to 40% cash from the current 0% set March 16 at 2405.

Other charts FYI:

U.S. Officials Target Chinese State-Owned Telecom Provider Trump administration officials sought to revoke federal licenses used by China Telecom to do business in the U.S., ratcheting up pressure on a state-owned enterprise close to Beijing.

Coronavirus Coverage. In China, It’s Easy to Get. Insurance companies in China are taking on an unusual mission: They are promising to cover business losses from the coronavirus pandemic as hundreds of millions of people return to work and the country tries to rev up its economic engine.

Since February, dozens of Chinese property-and-casualty insurers have rolled out new policies or expanded existing ones to provide compensation when workers contract Covid-19, the respiratory disease caused by the new coronavirus.

The insurance payouts would help companies that are forced to close temporarily if staffers fall sick, other employees have to be quarantined and business activities are disrupted.

Some of the policies are provided free-of-charge by insurers, while others have low premiums that are subsidized by local governments. Many sellers of coronavirus-related coverage are state-owned insurers, which can likely fall back on state support in the event of major losses. (…)

Dozens of local governments have pledged to foot between 50% and 70% of the policy premiums. Some have asked companies to band together to sign up for group policies at better rates. (…)

Many policies are tailored for small businesses that have been among the hardest hit as revenues have stalled, and are provided at no cost to them. (…)

Mobile payments giant Alipay is offering a business-interruption policy, also at no cost, with a maximum daily payout of 800 yuan for 14 consecutive days for companies that employ no more than 20 people. The policy has a duration of 60 days. (…)