Bonds boom as China doom crushes bulls

Bonds boom as China doom crushes bulls

While the chances of a February rate cut by the Reserve Bank of Australia remain marginal, which is expected to be confirmed by fourth-quarter consumer price index data, the pricing in of a full 0.25 per cent cut has crept forward.

After pushing out to August last week, pricing is now back at June.

Investors have drawn comparisons with the obvious corollary to the latest in a long line of public health scares in China: the outbreak of Severe Acute Respiratory Syndrome in 2002-2003.

But the comparison risks underplaying the potential impact if – and that’s a big if – the situation really turns pear-shaped.

China only made up 4.2 per cent of the global economy in 2002 and contributed 18 per cent to global GDP growth, according to Schroders. By 2018, its share of global GDP had risen to 15.8 per cent, with China accounting for 35 per cent of global growth.

‘Contain, convince, and correct’

China matters – a lot.

Vital to the market refinding its footing is China’s ability to deliver on three Cs: contain, convince, and correct.

Beijing needs to contain the spread of the outbreak, convince the watching world that it’s on top of the situation in a transparent manner, and finally, move to correct any hit to economic growth through a combination of monetary and fiscal stimulus.


The People’s Bank of China’s tweaking of the policy levers helped stabilise growth amid the fallout from the trade war with the US, and it may be called into action again to prop up growth.

The options include more cuts to bank capital ratio and a lowering of the loan prime rate when it is next announced on February 20.

The epidemic will also be a significant test of Zhongnanhai’s commitment to rein in leverage across the economy.

China’s leadership appeared to walk back from their focus on the large debt burden, loosening the lending spigot late in the year and fast-tracking local government bond issuance for infrastructure investment.

Helping to focus the minds of China’s leadership will be the 100th anniversary of the founding of the Communist Party of China in 2021.

A weakened economy may somewhat take the gloss off the promised “moderately well-off” society targeted for 2021.

Important week

The whiplash-inducing reversal in market sentiment comes in an important week for global markets.

The Federal Reserve, which sits down for its first meeting of the year on Wednesday and Thursday, was expected to deliver an upbeat assessment of the outlook for the trajectory of the world’s largest economy after three rate cuts in 2019.


A killer, globetrotting virus sweeping out from the world’s second-largest economy probably didn’t figure in their war-gaming for 2020.

Now instead of zeroing in on the success of the Federal Reserve in steering a “mid-cycle adjustment”, the focus will be on signs of nervousness about what’s happening across the Pacific.

US rates traders are clearly a little nervous. At the start of the year there was not a full 0.25 per cent rate cut priced in. Now, they have priced in a full rate cut by November.

If central bankers expected an easier year thanks to the waning of trade war tensions, they were sadly mistaken.

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