27 January 2020
Rat, snake or black swan?
The Chinese zodiac is, in many ways, symbolic of movement. The story goes that 12 animals are said to have been involved in a race to reach the Jade Emperor’s Heavenly Gate (these animals then became the representatives of each zodiac year). What’s more – to celebrate each Chinese New Year, three billion people return home to celebrate with family, making the festival the largest annual human migration in the world.
This year, things are markedly different. Just as the rat from the zodiac legend was halted in the race by a fast-flowing river, the Year of the Rat has been decidedly put on hold by a fast-spreading deadly coronavirus, with the source largely believed to be snakes. The number of people killed by the virus is increasing daily, and has resulted in the government scrambling to put emergency measures in place to prevent the virus spreading during the holiday period. Around 36 million people have been locked down in Wuhan and its neighbouring cities, with public transport services also closed.
To throw another creature into the mix, analysts are describing the virus as a ‘black swan’ event – highly improbable and extremely difficult to predict. Stock markets around the world fell as new cases were reported, but many showed signs of recovery by Friday. The Shanghai Composite dropped 2.75% on Thursday, the biggest drop on the last trading day before Chinese New Year in three decades.
Investors are worried about demand from consumers in China. The halt in activity comes during what is usually a peak period for spending, when Chinese families can spend twice the amount on gifts and food than Americans during Thanksgiving. The decline in air travel is concerning oil traders – the price of Brent crude dropped almost 6% last week.
Markets will be watching closely for signs that the virus is spreading further, wary of the potential economic disruption that it could cause. The risk is emerging just as evidence mounts that the global economy has turned a corner, and will unsettle Xi Jinping, who has pledged to revive the Chinese economy after growth fell to a 30-year low in 2019.
Greta vs Donald in Davos
Last week global heavyweights assembled in Davos, Switzerland, for the annual World Economic Forum. Climate change was top of the agenda, with 17-year-old climate activist Greta Thunberg once again condemning global leaders for their lack of action. President Trump and Secretary of the Treasury Steve Mnuchin drew criticism for defending America’s use of fossil fuels and taking swipes at Thunberg – causing some to wonder if their ultimate goal was to make the summit ‘ego-friendly’, not eco-friendly.
Thunberg later commented:
“Before we came here, we had a few demands for this WEF [World Economic Forum] and of course those demands have been completely ignored, but we expected nothing less”.
The European Central Bank committed to joining the climate change effort as it launched its first monetary policy review in 16 years on Thursday. President Christine Lagarde said the review will debate some of the most contentious issues in central banking, while looking at its €200 billion bond holdings from the perspective of their environmental and societal impact. Policymakers left ‘ultra-loose’ interest rates unchanged, despite the Bank missing its inflation target for the 14th month in a row.
Brexit deadline quietly approaches
Chancellor Sajid Javid met with the US Treasury Secretary at Davos to discuss a UK-US trade deal – but things turned bitter after the Chancellor admitted that a deal with the EU was a priority, and that the UK plans to press ahead with a ‘tech-tax’ that will predominantly affect US companies. The US responded by threatening arbitrary tariffs on UK car imports – it wants a trade deal with the UK to be in place in time for the presidential elections in November.
But, with the Brexit bill passing quietly through the European Parliament last week, the clock is ticking for the two sides to strike a trade deal before the UK formally leaves the bloc at the end of December. Even though the UK and EU will be aiming for a ‘Canada plus plus’ arrangement, there is a lot to do in the next 11 months. Formal negotiations begin on 1st March – the leaders’ summit in June will be an indication of how things are going.
Whilst ruffling American feathers, Javid did manage to pacify business leaders at Davos. Softening his tone on EU regulation, he clarified the government’s view that there would be ‘no alignment’ with EU rules in a post-Brexit trade deal. After saying last week that business leaders should stop pushing for Britain to stay in ‘lock-step’ with Brussels after Brexit, he said that divergence from EU legislation would only occur if it was in the corporate interest.
Despite the uncertainty of the UK’s future trading relationship with the EU, confidence in the UK economy is rising. Flash PMI data released on Friday – which tracks activity across the economy – shot up to a 16-month high. The data – the most comprehensive measure of the economy since the general election – showed an upturn in sentiment filtering through to stronger activity. Economists predict the better-than-expected figures will reduce the chances of the Bank of England’s Monetary Policy Committee cutting interest rates when they meet on Thursday.