05 March 2020 by jbchevrel
Over the past few sessions, credit synthetics consistently traded better during Asian time. As opposed to European and US time. The Main opened the past 3 sessions in low 60s after closing in high 60s. China CDS closed 44 while the peak was 52 two weeks ago. Most non-Asian EM single-name CDS closed pretty much at their YTD wide today. Here is an attempt of explanation: the COVID-19 crisis has been receding in the Hubei province, and has been stabilizing in China more broadly. So, if one considers that what happened in China is a worst-case template for what we can see in Europe and the US, there are grounds to be optimistic. The number of cases in China at a given point in time has peaked below 60k on Feb 20. It is now below 30k. Indeed, the National Health Commission said that further declines in new COVID-19 infections suggested that the outbreak was stabilizing in mainland China. Newly confirmed cases in Hubei fall and newly confirmed cases outside Hubei (in other provinces) continue to stabilize. Some 28 provinces and major cities (out of 31 provinces excluding Hong Kong, Macao and Taiwan) report zero newly confirmed cases. The number of cases reported as imported to China from other parts of the world (Italy Iran UK) is just 14 as of now. As the outbreak stabilises in China, emergency response levels are being lowered in more provinces. Activity is resuming as a consequence. The industrial sector shows some decent signs of life. More than 50% of highway and waterway infrastructure projects have resumed activity. Some high-frequency industry-activity-linked indicators show some reversal too. Daily coal consumption rose to 477 tons yesterday. This is ~2/3 of the pre-Chinese New Year levels. Daily coal consumption is up by +60% compared to last week. So, assuming that residential electricity consumption is unchanged this week vs last. Why would it not be unchanged? This most probably reflects rebounding industrial production. Real estate transactions are also picking up, recovering to ~1/2 of the pre- Chinese New Year levels. The Chinese stock market there, although it is known to attract flows from state funds, has closed today near the YTD high. As an example, the Shenzhen Composite index has closed 1929 today while it had reached 1550 intra-day after the Chinese new year. More importantly, some other Asian markets are showing signs of recovery thanks to renewed inflows from international investors. It has been the case for Indonesia in particular. Going forward, it is probably fair to expect infrastructure investment in China. Around $145B of local government special bonds have already been issued in JAN and FEB to finance local authorities' infrastructure investments in 2020. For reference, this is about up +200% vs the same period last year. Around 2/3 of that are meant to fund infrastructure projects, vs 1/3 same period last year.