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WeekWatch 10/02/2020

WeekWatch 10/02/2020

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” Some 2,500 years after it was written, Sun Tzu’s The Art of War continues to be a staple of military academies around the world, from West Point to Sandhurst to the People’s Liberation Army National Defence University in Beijing.

Xi Jinping’s government may see several enemies on the horizon but, for now at least, the coronavirus is very much dominating the view. Last week, state-run media published claims that a “major breakthrough” had been made in finding a cure for the disease, which has now topped 900 lives. A Hong Kong doctor has pointed out that even the Wuhan fatalities figure only includes cases admitted to hospital – the true tally could be much higher.

Following the reports of a possible cure, the World Health Organization said on Wednesday that, as yet, “no known therapeutics” have been identified. Hopes of a possible lull in the death rate vanished on Thursday, and many Chinese factories remain closed to stem the virus’s spread.

“Our best guess is that the economic disruption related to the coronavirus will cost the world economy over $280 billion in the first quarter of this year,” said Capital Economics. “That would mean that global GDP will not grow in quarter-on-quarter terms for the first time since 2009. We assume the virus will be contained soon, and that lost output is made up in subsequent quarters, so that world GDP reaches the level it would have done had there been no outbreak by the middle of 2021.”

China’s reassurance about making progress in finding a cure did boost markets last week, as did Beijing’s decision to cut tariffs in half on $75 billion of US goods, as part of the process of implementing the recent phase-one trade deal with the US. Oil was another beneficiary, as traders feared major quarantine policies could hit demand.

Traders also returned from their Chinese New Year breaks last week, and the Shanghai Composite rose gradually over the course of weekly trading. Data showed that the country’s services sector grew only sluggishly in January, but business expectations and credit growth both rose. Moreover, until the virus struck, Hong Kong’s economy was finally showing signs of a muted recovery. New analysis by Morgan Stanley posits that Beijing will offer at least as much fiscal stimulus in 2020 as it did in 2019.

In the US, manufacturing orders enjoyed a major boost in December thanks in part to military hardware orders from the Pentagon. With mortgage rates at multi-year lows and small business wages rising fast, there are still plenty of positive signs to be found in the economy. The percentage of S&P 500

sectors at record valuations is at 70% – above where it reached in the tech bubble. But longstanding growth and plenty of Fed support has helped to buoy prices.

Last Friday’s payrolls report offered a further boost, as it showed that 225,000 jobs were added to the US economy in January. The unexpected boost lifted the dollar, although that apparently capped any further gains on the S&P 500, which had risen earlier in the week.

However, the developments that seem to be moving markets most in the US this year come not from New York but from Washington. Donald Trump’s impeachment charges were predictably knocked down in the Senate, where a two-thirds majority is required for them to progress. That removes one worry for the administration.

Yet there are reasons to believe the impact is not yet over. For one, Mitt Romney, a senior Republican, voted in favour of impeachment. For another, the president faces a far bigger vote in November, when the country goes to the polls. With the Iowa caucus now (finally) accounted for, Bernie Sanders has shot ahead to become odds-on favourite to win the Democrat nomination, overtaking the more moderate Joe Biden.

In Europe, the UK’s departure from the EU saw a mistranslation perhaps especially suited to the occasion. It fell to Irena Andrassy, Croatia’s permanent representative in Brussels, to pronounce the EU’s last words to the UK’s own representative at a final meeting of ambassadors in Brussels. Turning to Sir Tim Barrow, she said “Thank you, goodbye and good riddance”.

After the laughter, however, comes the hard work. With the contentious Withdrawal Agreement now formally out the way, the prime minister has been keen to emphasise the need to diverge in key areas. George Osborne, former chancellor and now a senior adviser at BlackRock, sees some sense in this approach.

“For financial services, it does not make sense to align completely with EU regulation – in some ways it makes more sense to diverge,” said Osborne. “The UK was the prominent voice for competitiveness in financial services in the EU parliament – this has now gone and the EU may become less competitive as a result.”

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