Worldwide Economic Impacts Mount as Coronavirus Cases Rise Outside China

Posted on 02/27/2020 7:18 AM

EPA may stop doling out as many small refinery waivers under RFS; Grassley responds

In today's updates:

* Trump defends coronavirus response, names VP Pence to lead efforts
* Calif. patient might be first U.S. case without clear explanation of disease transmission
* CDC: Calif. citizen contracted infection without traveling to countries with outbreaks
* Number of new coronavirus cases outside of China rises
* Virus causes U.S., South Korea to call off joint military exercises *
* Saudi Arabia bans pilgrims in reaction to coronavirus incidents
* Japan asked country’s schools to close for a month to help contain spread of virus
* Bill Bishop's signs to be confident the outbreak really is under control in China
* China's top container ports unclog backlog as virus curbs ease
* How S&P 500 performed during and after significant macro events since the 1940s
* Economic impacts mount re: coronavirus outbreak
* EPA may limit small refinery waivers under RFS; Grassley responds
* House hearing: China resistant to concessions in next phase of trade deal with U.S.
* Benchmark 10-year U.S. Treasury bond yields fell below 1.3%
* Oil's negative outlook
* Yellen: recession possible, but...

Markets: European stocks followed Asia’s lead with heavy declines in morning trading. Data showed new cases of the coronavirus outside of China exceeding those inside the country for the first time. Japan’s Topix closed down 2.4% as the strengthening yen further increased pressure on exporters. U.S. futures pointed to further losses U.S. Treasury bond yields touched a record low of 1.2905% in Asian trading after U.S. health authorities confirmed the first likely case of community transmission of the deadly coronavirus on American soil. Yields fall when prices rise, demonstrating strong demand for this haven asset.

Euro equities


Coronavirus update:

  • Trump defends coronavirus response, names VP Pence to lead efforts. The White House said the risk to Americans remains low, even as cities nationwide made new preparations. President Trump made the announcement during a news conference in which he played down the danger of an outbreak, saying, “The risk to the American people remains very low. We are ready to adapt and we are ready to do whatever we have to as the disease spreads, if it spreads,” Trump said. “There’s no reason to panic . . . this will end.” Trump later said, “There’s a chance it could get worse. There’s a chance it could get fairly, substantially worse. “But nothing’s inevitable.” Trump indicated that he's willing to accept whatever spending level Congress deems appropriate to address the coronavirus-caused COVID-19. "With respect to the money that's being negotiated, they can do whatever they want," Trump said.
  • The Centers for Disease Control and Prevention announced that someone had contracted the infection in California without apparently traveling to countries that have had outbreaks or being exposed to a known patient. There are now a total of 15 confirmed cases in the U.S. Trump said a vaccine should be developed soon, but experts say it's likely close to a year away.
  • The number of new coronavirus cases outside of China rises. South Korea has the next-largest outbreak, with about 1,600 confirmed cases. New infections were reported in at least five European countries, most of them connected to a cluster in Italy. Brazil on Wednesday confirmed Latin America’s first.

    Virus cases outside China
  • Virus causes U.S., South Korea to call off joint military exercises. Washington and Seoul postponed planned exercises “until further notice,” as South Korea struggles to contain the disease.
  • Saudi Arabia barred foreign pilgrims from Mecca. The decision came as the Middle East counted more than 220 coronavirus cases, and five months before the main Hajj pilgrimage, when millions visit the holy site. The pilgrimage has been a vector for disease in the past: cholera outbreaks killed an estimated 20,000 pilgrims in 1821 and another 15,000 in 1865.
  • Prime Minister Shinzo Abe of Japan asked all of the country’s schools to close for a month to help contain the spread of the coronavirus. Meanwhile, officials have so far played down suggestions that the Tokyo Olympics, scheduled to begin July 24, could be altered or canceled. Meanwhile, a Japanese woman tested positive for coronavirus… for a second time.
  • The IMF and the World Bank are considering scaling back their Spring Meetings in April or holding them by teleconference.
  • China watcher Bill Bishop's three signs to look for to be confident the outbreak really is under control in China: (1) Xi visits Wuhan; (2) The announcement of a date for the “Two Meetings”; (3) Kids go back to school. Note: Usually in early March, the Chinese government holds its most important two meetings: the Chinese People’s Political Consultative Congress (CPPCC) and the National People’s Congress (NPC).
  • China's top container ports unclog backlog as virus curbs ease. The ports are tackling the buildup of cargo on their docks as workers return after coronavirus travel curbs, benefiting global supply chains. Link to Reuters for more.

    Ports China
  • How the S&P 500 performed during and after significant macro events since the 1940s (Source: Putnam Investments):

    Macro events history
  • More economic impacts of coronavirus:

    Booking Holdings Inc., the travel reservations website giant, warned room nights booked would drop 5% to 10% in the first quarter, while noting difficulty in predicting the future.

    — Marriott International, the world’s largest hotel company, said it could have about $25 million less in fee revenue a month this year, compared with its outlook, assuming current low occupancy rates in the Asia-Pacific region continue.

    — More companies are warning of an adverse impact from the outbreak. AB InBev posted disappointing fourth-quarter profit and sees muted 2020 growth. The liquor giant stomached a 5.5% drop in core profit and warned coronavirus has hurt its outlook. Meanwhile, Microsoft has warned it will miss its revenue guidance for its Windows and Surface businesses, blaming uncertainty around the coronavirus. Microsoft’s announcement followed a similar warning from rival Apple, which nine days ago said the fallout from the coronavirus meant “worldwide iPhone supply will be temporarily constrained.”

    — Moody's Analytics expects the virus to cause China's economy to contract in the first quarter and knock a full percentage point off of full-year growth, bringing it down to 5.4%. In the U.S., the virus is forecast to knock 0.6 percentage point off of first-quarter gross domestic product and 0.2 percentage point off of full-year figures, leaving growth at a 1.3% in the first quarter and 1.7% for the entire year. That's if the virus is contained. "A pandemic will result in global and U.S. recessions during the first half of this year."

    Moody's estimates

    — Companies are restricting travel and sending workers home, and rapidly reducing their expectations for sales at any business that relies on China as a buyer or supplier.

    — A survey of European companies in China showed that every one of the 577 respondents said they expected to be hit by the outbreak.

    — FGE, an energy consultancy, is now forecasting that global demand growth for oil will be essentially zero in 2020, failing to rise for the first time since the financial crisis.

    — Container shipping lines are idling vessels at a record pace this quarter and have slashed dozens of sailings on major trade lanes.

    Ports impacts
    — The fate of South Korea, Asia’s fourth-largest economy, is closely tied to that of the Samsung group. It is South Korea’s biggest company, with revenues amounting to 12.5% of the country’s gross domestic product (GDP) last year. Exports represent 45% of South Korea’s GDP, and computer chips, a key Samsung product, accounted for about a fifth of all outbound shipments. Per the Financial Times, the government’s tax take from Samsung Electronics, the group’s crown jewel, was more than 12% of the country’s total corporate tax in 2019. The company also accounts for about a quarter of the total market capitalization for South Korea’s benchmark Kospi stock index. Over the weekend the company was forced to pause production at its Gumi plant after a single worker tested positive for the virus.

    — Germany’s thousands of trade-reliant manufacturers are facing severe restrictions on procurement, production and sales in China, the Wall Street Journal reports (link), and many companies expect serious inventory shortages over the next few months. The scrambling at industrial heavyweights and smaller businesses shows how deeply embedded Chinese manufacturers are in global supply chains. German companies are working off stockpiles built up before the outbreak, but as ships arrive over the next week or 10 days, “that will be it from China,” said Joerg Wuttke, president of the European Union Chamber of Commerce in China.

    — France's Macron says a coronavirus “epidemic is on the way.” The president called it a "crisis" while speaking at a Paris hospital today. But Germany is far more linked with China's economy and is feeling major implications from the ongoing virus outbreak.

    China and Europe linkage

    — Airline industry continues to brace for more troubles ahead. Deutsche Lufthansa, Germany’s flagship airline, said it would start slashing costs in anticipation of a coming hit to revenues and profits from canceled flights to China. Some big Asian carriers are resorting to more extreme measures: Cathay Pacific Airways, Hong Kong’s flag carrier, has asked all its staff to take three weeks of unpaid leave.

    China travelers

EPA may stop doling out as many small refinery waivers under RFS. Bloomberg reported Wednesday that EPA is planning to dramatically scale back the number of small refinery exemptions (SREs) it hands out under the Renewable Fuel Standard (RFS) in the wake of the 10 Circuit Court ruling that said three exemptions granted for the 2016 compliance year were invalid.

     Impact: Indications are the decision could mean that most of the 23 SRE requests currently pending for the 2019 compliance year will be rejected, with some suggesting only three refineries could still be eligible to receive them.

     The American Fuel and Petrochemical Manufacturers (APFM) called on the administration to challenge the court ruling while biofuel backers are urging the administration to uphold the court decision. Sen. Chuck Grassley (R-Iowa) said on social media he hoped the report that the administration would dramatically scale back the use of SREs was on the mark. “I hope news reports are true & EPA stops giving RFS exemptions to big oil companies. I spoke w Wheeler 2days after 10th circuit decision & I’m glad he seems 2b taking farmer concerns seriously This wld be a major promise kept by Pres@realDonaldTrump &help him in Iowa+the Midwest,” Grassley said in a tweet Wednesday.

     Bottom line: If EPA does dramatically scale back the SRE use as suggested in reports, it would mean the administration would use the court ruling to extract itself from a potential political issue as the 2020 elections loom.

House hearing: China resistant to concessions in next phase of trade deal with U.S. A former U.S. trade official warned lawmakers Wednesday that China may be increasingly unwilling to end industrial subsidies and make other structural changes in any future negotiations with the United States. Timothy P. Stratford told the House Ways and Means Committee that getting future concessions from Beijing may be difficult. Stratford, a former assistant U.S. Trade Representative, said Beijing made notable compromises on ending forced technology and strengthening intellectual property protections in the Phase 1 U.S./China trade agreement that took effect Feb. 14 But Stratford, who also is chairman of the American Chamber of Commerce in China, said China now regards the U.S. as an unreliable trading partner because of the Trump administration’s use of tariffs to push Beijing to the negotiating table.

     Stratford mostly praised the Phase 1 accord, notably an enforcement mechanism for resolving disputes that uses the threat of tariffs as a prod to settle differences.

     Committee Democrats criticized the agreement as falling short in addressing worker rights, products made by forced labor and policies that give Chinese companies an edge over U.S. companies in trade. Ways and Means Republicans defended the agreement and praised President Donald Trump and Trade Representative Robert Lighthizer for confronting China and forcing some concessions.

     Tim Dufault, a Minnesota wheat and soybean farmer, said he agreed with the administration that China has been a bad actor on trade, but said the retaliatory tariffs triggered by Section 301 and by steel and aluminum tariffs under Section 232 of a 1962 trade law are a drag on the farm economy. “Until China buys we are not buying the promise. While there are some good provisions in the phase one deal addressing nontariff barriers — those are, at best, singles when what we need is a home run,” said Dufault, who is a member of Farmers for Free Trade.

     Richard Guebert Jr., the Illinois Farm Bureau Federation president, said the agreement will hold China accountable for trade violations and expand markets for farmers and ranchers. He said he is optimistic. “We think in this Phase 1 sets the stage to grow,” he said. “We’re very appreciative we got enforcement in phase one for ag commodities or whatever it may be for products shipped into China.”

Other items of note:

  • Pedestrian traffic fatalities rise. The nationwide number of pedestrians killed in car crashes in 2019 jumped by an estimated 5% compared to 2018, according to a study (link) by the Governors Highway Safety Association published yesterday. The number of pedestrians killed is the highest it has been since 1988.

    Pedestrians killed
  • U.S. Dept. of Commerce ruled in favor of American manufacturers of wooden cabinets and vanities in the anti-dumping case against Chinese producers and exporters.

Markets. The Dow on Wednesday fell 123.77 points, 0.46%, at 26,957.59. The Nasdaq rose 15.16 points, 0.17%, at 8,980.77. The S&P 500 declined 11.82 points, 0.38%, at 3,116.39.

     Benchmark 10-year U.S. Treasury bond yields fell below 1.3% for the first time overnight, while the safe-haven yen rallied to 110.17 against the U.S. dollar. "I think the market is just pushing the Fed to cut rates," said Stuart Oakley, Nomura's global head of flow FX in Singapore. CME Group futures suggest at least a 41% chance of a March reduction, a 77% chance the Fed will move by April and a 90% chance of a cut by June.

     Oil's negative outlook. Even if OPEC slashes production by 600,000 barrels per day, the price of oil "could still be weak in March and April, before it improves in the summer," said Kang Wu, head of Asia analytics at S&P Global Platts. "A lot of inventory build up right now needs to be absorbed in April" amid lower crude demand due to the coronavirus outbreak. Oil meanwhile extended declines by 2% to $47/bbl — marking a 52-week low after sliding into correction territory — as some analysts suggested the possibility of a recession in China.

     Yellen: recession possible, but... Former Federal Reserve Chair Janet Yellen said depending on how widely the coronavirus spreads, the economic impact could have a significant impact on Europe and veer the U.S. toward a recession. “We could see a significant impact on Europe, which has been weak to start with, and it’s just conceivable that it could throw the United States into a recession,” Yellen said at an event in Michigan. “If it doesn’t hit in a substantial way in the United States, that’s less likely. We had a pretty solid outlook before this happened — and there is some risk, but basically I think the U.S. outlook looks pretty good.”


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