Another Damn Export from China
The wall of worry is back. The emergence of the Wuhan coronavirus puts China back into recession risk, which it had just avoided by signing a trade deal with the US. In the Ebola and SARS scares, equities and Treasuries made tradeable corrections at the worst of the panic, and that’s the likely outcome here. But a potential pandemic is always a “black swan.” The immediate risk is the slowdown in economic activity as China locks down to nip it in the bud. A draconian lock-down is most likely to be successful, and would be short-lived and recoverable, but we can’t rule out a tipping point. A lockdown puts a dent in China’s petroleum demand growth, which had finally begun to recover after almost two years of trade war. Global oil markets were in a fragile glut anyway, and are highly levered, so they face their own possible tipping point. If oil prices fall further, inflation will fall, and the Fed will have to cut rates again. An economic slowdown now could be a vicious cycle. It puts Trump’s re-election at risk, which further weakens the economy because of the prospect of corporate tax rates reverting to 35% under a Democratic president.