Coronavirus Market Impacts Accelerate Amid Signs of Stabilizing Today

Posted on 01/28/2020 6:23 AM

Can China virus impact Phase 1 commodity purchases, or use price drop to import?

In today's updates:

* Hong Kong to limit visitors from mainland China by air, rail and ferry
* China reports more than 2,700 infections and over 100 deaths from coronavirus
* Number of confirmed coronavirus cases climbs to more than 4,500 worldwide
* Economic impacts of virus mount
* OPEC signals extension of output cuts as coronavirus fears rise
* Is coronavirus an escape clause in U.S./China Phase 1 agreement?
* China says it is bringing its domestic ag supports into compliance with WTO ruling
* Dairy producer's deal talks spark U.S. probe
* USDA’s Perdue pushes EU to follow ‘science’ in its policies on food, ag products
* Bolton revelations renew pressure to call witnesses in Senate impeachment trial
* Rep. Doug Collins (R-Ga.) planning to announce a Senate run
* Blue collar workers turning to Republican party
* Trump's Mideast peace plan already rejected by Palestinian leaders
* Taliban claims they shot down American communications aircraft, killing all six aboard
* Trump announces plans to broaden tariffs on imported steel and aluminum
* High speeds seen increasing costs of stock trading
* Yield curve on watch as Fed meets
* CBO holds media briefing this afternoon on annual Budget and Economic Outlook

Markets: The coronavirus flight to quality continues, pushing up the value of the yen, the dollar and gold and pushing down the price of oil over fears that weaker economies would mean less demand for fuel. Global agricultural commodities also have been under pressure, with U.S. soybeans down for a sixth consecutive day. U.S. livestock futures have been tumbling. Global dry bulk shipping costs (for commodities) are at the lowest level since early 2016. The VIX curve inverted on Monday (front end), which tends to happen during periods of uncertainty. The market is now pricing in the possibility that the U.S. Fed will cut rates more than once this year while inflation expectations continue to sink. Meanwhile, global stocks were mixed this morning. S&P futures forecast a positive market opening, while European stocks rebounded modestly.

Late-night laughs: James Corden: “This just goes to show you that sometimes political figures will have the moral courage to go against their party as long as it’s perfectly timed with the release of a book.”


Coronavirus update:

  • Hong Kong will limit visitors from mainland China by air, rail and ferry, a major escalation of concerns over the risks of the coronavirus. Beijing has quarantined more than 50 million people — about as many as in California, Oregon and Washington combined. Meanwhile, the director-general of the World Health Organization met with Chinese officials to assess the response.
  • Chinese health authorities said the coronavirus outbreak has killed 106 people and infected 4,515. The new numbers represent a sharp increase from yesterday. The U.S. State Department raised its travel advisory for China from Level 2 to Level 3, asking Americans to "reconsider travel to China" because of the fast-spreading virus. More experts are signaling there could be hundreds of thousands of cases not yet confirmed. Epidemiologists estimate that each infected individual will transmit the illness to two or three others. Link to tracking maps of the virus from Johns Hopkins.
    China virus cases
    China virus map
  • The number of confirmed coronavirus cases has climbed to more than 4,500 worldwide — mostly in mainland China, but also in Hong Kong, Japan, Macau, Malaysia, Nepal, Singapore, South Korea, Taiwan, Thailand and Vietnam, and as far away as Australia, Canada and the United States (CDC is monitoring 110 possible coronavirus cases across 26 states in U.S.) The growth rate in the number of coronavirus cases outside of China appears to be slowing.
  • Economic impacts are growing. China’s economy is the source of roughly one-third of world economic growth, so the slowdown could be felt widely. Wuhan, where the virus began to be reported, is an industrial city of 11 million people and is frequently dubbed the Chicago of China (New York City has 8.5 million people). The Wall Street Journal noted If the virus spreads, “China might have to resort to a draconian lockdown that could trigger a recession that its trade deal with President Trump was intended to prevent.” The 2002-03 outbreak of severe acute respiratory syndrome, or SARS, killed nearly 800 people and significantly slowed the Chinese economy, dropping the annual growth rate to 9.1% in the second quarter of 2003 from 11.1% in the previous quarter. China’s banking and insurance regulator announced moves to help businesses affected by the crisis. The China Banking Regulatory Commission said companies would receive support “through measures such as encouraging appropriate lowering of loan interest rates [and] improving arrangements for loan renewal policies.” As for the U.S., Ryan Sweet of Moody's Analytics, says: "The coronavirus outbreak poses an enormous risk for global public health, but for the U.S. economy, fear of the disease is currently a bigger worry than the disease itself. ... We don’t anticipate making an adjustment to our baseline forecast for the U.S. economy.”
  • China’s lockdown over the coronavirus is starting to cast clouds over the global trading economy. The country extended the Lunar New Year holiday for at least a week, the Wall Street Journal reports (link), and Shanghai and the nearby manufacturing hub of Suzhou went even further, ordering residents not to return to work until Feb. 9. The longer break will stretch out a period in which Chinese imports of natural resources that feed production lines typically decline. It could also disrupt industrial activity and prompt Chinese processors to run down stockpiles of crude oil and base metals, instead of buying new material. Oil and copper prices already are taking a hit, and Goldman Sachs is forecasting a drop in daily oil demand of 260,000 barrels. The disruption may push back outbound trade flows, including containerized shipments for U.S. retailers that replenish their inventories for the spring, the WSJ noted.
  • Explainer: coronavirus. Wuhan coronavirus is one of seven known coronaviruses that affect humans. Four cause the common cold, and two are SARS and MERS, which caused two major epidemics. Link to details from Quartz.
  • OPEC signals extension of output cuts as coronavirus fears rise. Reports indicate that OPEC is considering to extend the current output reductions on crude oil until at least June as demand concerns are on the rise with the Chinese coronavirus situation. Saudi Arabia was joined by other OPEC countries Monday in trying to tamp down concerns about oil market demand. Internal discussions on how the cartel will respond to the situation are underway, with Reuters quoting sources as saying OPEC is mulling keeping the current output targets in place through at least June and that deeper reductions in output are also possible.

U.S./China trade policy update:

  • Is coronavirus an escape clause in Phase 1 agreement? That is what a growing number of traders and others are asking. No word yet from USTR and USDA officials when asked about the topic. Link to an NBC News article that says the effects of China’s coronavirus could disrupt the country’s ability to meet the terms of the Phase 1 deal with the United States. However, some analysts think China could use the recent downturn in commodity prices to get coverage on needed imports.
  • Phase 1 deal with China is expected to boost U.S. seafood exports. Link to Associated Press article. American lobster exports to China were worth more than $138 million through the first 11 months of 2018, and fell to less than $47 million through the first 11 months of last year. Four members of the congressional delegation in Maine, the biggest lobster fishing state, sent a letter to U.S. Trade Representative Robert Lighthizer on Jan. 23 asking him to hold China to its commitment to the new trade deal. The letter said knowing an “exact dollar value of lobster that China has agreed to purchase will enable independent verification as to whether China either has met or again shirked its trade commitments” to the U.S.”

China says it is bringing its domestic ag supports into compliance with WTO ruling. While much attention in a meeting of the WTO Dispute Settlement Body (DSB) Monday focused on the stalled appeals process as the US continues to block appointment of new judges to hear appeals to WTO rulings, China offered a status report on their efforts to comply with a WTO ruling against their use of subsidies for domestic wheat, corn and rice producers. “Chinese government agencies [have] conducted intensive consultations aiming to implement the recommendations and rulings of the DSB in this dispute,” China said. Internal processes “with respect to amending relevant measures” are ongoing, officials told the WTO, noting the “complexity of measures at issue.”

China said it would “accelerate the internal process and fulfil our implementation obligation in due course.”

China is facing a March 31 deadline to bring its domestic ag supports for wheat, corn and rice into compliance with the ruling in the case brought by the United States. The U.S. said it would “engage bilaterally with China on specific amendments it will make to bring its measures into compliance.”

Federal antitrust regulators are reviewing a potential dairy industry merger between the largest U.S. dairy cooperative (Dairy Farmers of America) and the biggest milk processor (Dean Foods), interviewing farmers and retailers about how the merger would shift the competitive landscape in dairy, the Wall Street Journal reports (link). “We are investigating Dairy Farmers of America’s potential acquisition of Dean Foods and the potential loss of competition for selling raw milk,” a Department of Justice antitrust attorney wrote in a message to a dairy farmer that was reviewed by the WSJ. The DOJ is discussing with farmers and retailers the potential impact of a deal on milk prices and competition.

Perdue confers with EU farm leaders on potential trade agreement. USDA Sec. Sonny Perdue is in Europe, on Monday meeting with farm ministers in Brussels to discuss the prospects for a partial trade agreement, which President Donald Trump and European Commission President Ursula von der Leyen have both said could come together quickly. Following a session with EU Trade Commissioner Phil Hogan, Perdue told reporters there won’t be any deal unless Europe agrees to concessions on food standards such as acid-rinsed chicken. Perdue said smaller measures won’t be enough: “We’re not going to get there with apples and pears and shellfish.”

Perdue pressed EU officials to follow “sound science” when it comes to matters on food safety, genetically modified organisms (GMOs) and other matters.

The issue of poultry trade figures to be a key as Europe said it will not accept so-called “chlorine-washed” poultry, referring to the U.S. practice of using a chemical wash to remove pathogens from chicken. Perdue said the U.s. does not use chlorine but peracetic acid. “Peracetic acid . . . is a great pathogen reduction treatment,” he told reporters in Brussels. “You know what it is? It’s vinegar, essentially. To say that’s unsafe or not to be used, we don’t think there’s a basis for that in sound science.”

On biotechnology, Perdue also chided Europe for its views on GMO crops. “I use the example of table salt that can be hazardous if you consume it in too much quantity, but we use it regularly,” Perdue explained. “And that’s why we have the MRL (maximum residue level) for pesticides.” Perdue said the stance by Europe is going to put European farmers behind since they are not able to adopt technology used by growers in other areas of the world.

Perdue heard complaints from EU farm ministers on U.S. trade policies, including the use of tariffs on a host of goods. His stance on including agriculture in any U.S./EU trade deal was also emphasized, with him criticizing offers to remove barriers to U.S. apples, pears and shellfish as insufficient. "We're not going to get there with apples and pears and shellfish. There are other things have to happen," he said.

Other items of note:

  • A few Senate Republicans appeared to be moving closer to joining Democrats in voting to subpoena John Bolton, the former national security adviser whose upcoming book reportedly corroborates a central piece of the case against President Trump. The Senate will also vote this week on whether to call witnesses.

  • Rep. Doug Collins (R-Ga.) is planning to announce a Senate run, challenging appointed GOP Sen. Kelly Loeffler, who sits on the Senate Agriculture Committee after taking over former Sen. Johnny Isakson's seat at the beginning of January following his retirement. Collins and Loeffler will run in a November special election to fill the remainder of the six-year term Isakson won in 2016.

  • Dayton, Ohio, used to vote Democratic. As its economy soured, blue-collar workers turned to Republicans, a pattern that’s repeating nationwide. Link to NYT article. Meanwhile, Democrats in Pennsylvania are worried that calls to ban fracking could hurt their chances of winning the state in November (link to NYT article).

  • Middle East peace plan proposal to be released today by President Trump. It reportedly would give Israel sovereignty over much of the Jordan Valley, a strategic area on the eastern edge of the West Bank. Palestinian leaders have already noted their opposition to that and other likely provisions because, they say the plan can’t succeed if it excludes their views.

  • The Taliban claimed they had shot down an American communications aircraft, killing all six aboard, including what they said were high-ranking CIA officers. America has acknowledged the crash of a Bombardier E-11A, but revealed nothing more.

  • High speeds seen increasing costs of stock trading. The U.K.’s financial regulator says ultrafast trading costs stock investors almost $5 billion a year. High-frequency traders earn nearly that much on markets by taking advantage of slightly out-of-date prices, imposing a small but significant tax on investors, according to a new study by Britain’s Financial Conduct Authority. The study focused on “latency arbitrage,” in which high-frequency traders use sophisticated computers and other technology to react to market-moving news within milliseconds. This amounts to a tax of about 0.0042% on transactions in Britain. Extrapolated worldwide, that means those traders earned about $4.8 billion, the study finds. The findings come as presidential candidates like Senators Bernie Sanders and Elizabeth Warren push for a financial-transaction tax to curb high-frequency trading and exchanges weigh “speed bumps” to limit latency arbitrage.

  • President Trump announced plans to broaden tariffs on imported steel and aluminum, saying that existing levies haven’t done enough to spur domestic production. Link to NYT article. The White House cites a big rise in imports of steel nails, staples, aluminum wire, car bumpers and other goods in its latest proclamation: "The net effect of the increase of imports of these derivatives has been to erode the customer base for U.S. producers of aluminum and steel."

    Metals impact

Markets. The Dow on Monday finished with sharp losses, falling 453.93 points, 1.57%, at 28,535.80. The Nasdaq dropped 175.60 points, 1.89%, at 9,139.31. The S&P 500 lost 51.84 points, 1.57%, at 3,243.63.

Yield curve on watch as Fed meets. The U.S. Treasury yield curve, measured by the gap between yields on three-month and 10-year bonds, briefly inverted overnight for the first time since October as Treasuries rallied for a sixth day. The two-year/five-year curve already inverted on Monday, while the gap between two-year and 10-year yields — considered a recession signal —was at the flattest since Nov. 29. "If the signs were to multiply, there could be a more severe impact not just in China but globally," said Philip Shaw, chief economist at Investec. "Markets are starting to speculate the Fed could bring rates down by summer."

Congressional Budget Office holds a media briefing this afternoon on the annual Budget and Economic Outlook, including updated economic and budget projections spanning the period from 2020 to 2030

New single-family home sales fell to an annual pace of 694,000, down 0.4% from November and below expectations. It was the weakest decade on record for new-home sales.

New home sales for the year and decade


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