Friday, January 24, 2020

UK Researcher Predicts Over 250,000 Chinese Will Have Coronavirus In Ten Days

When it comes to estimating the human capital and potential fallout from a highly contagious epidemic, arguably the most important variable is the R0 ("R-naught") value of the disease, which represents the average number of secondary cases arising from an average primary case in a entirely susceptible population. That's the technical definition, a simpler one is that the R0, or basic reproductive number, of a contagious disease is the number of cases that a case of the disease generates over the course of its infectious period in a susceptible population. The higher this number, the more dangerous the disease, the more lethal the outcome.
Some indicative R0s are 0.9 – 2.1 for the common flu while the 1918-1919 pandemic-causing Spanish flu was estimated to have ranged from 1.4 – 2.8, with a mean of 2. Some other notable R0s are shown below, and note that SARS was between 2 and 5:
So what about the R0 of 2019-nCoV, also known as the coronavirus that has claimed over three dozen lives in China and infected (at least) 1,000 people? Naturally, since the disease is most active in China which is notoriously opaque especially when it comes to matters that can cause a mass panic, the best one can do is guess, and that's what the World Health Organization did yesterday when it issued a statement on the coronavirus epidemic with the following projection:
Human-to-human transmission is occurring and a preliminary R0 estimate of 1.4-2.5 was presented. Amplification has occurred in one health care facility. Of confirmed cases, 25% are reported to be severe. The source is still unknown (most likely an animal reservoir) and the extent of human-to-human transmission is still not clear.
Needless to say, while 2.5 is quite high, and in line with that of the Spanish flu epidemic  which infected about half a billion people back in 1918, killing as many as 100 million before it eventually fizzled out, the real coronavirus R0 number may end up being far higher. That is the working hypothesis of Jonathan Read, a UK expert on the transmission and evolutionary dynamics of infectious diseases, who has published a paper with four colleagues that estimates transmission parameters for the Wuhan coronavirus, calculates that the R0 of 2019-nCoV to be between 3.6-4.0 or roughly the same as SARS, and reaches a conclusion about spread of the coronavirus epidemic that is frankly terrifying.
In "Novel coronavirus 2019-nCoV: early estimation of epidemiological parameters and epidemic predictions", Reed et al, write that with an R0 of between 3.6 and 4.0, roughly 72-75% of transmissions "must be prevented by control measures for infections to stop increasing."
This is a major problem because Reed estimates that only 5.1% of infections in Wuhan are identified (as of Jan 24), "indicating a large number of infections in the community, and also reflecting the difficulty in detecting cases of this new disease." Furthermore, since all of this is happening in China which is not known for making the most socially-beneficial decisions under pressure, there is an ominous possibility that Reed is actually overly optimistic.
Huge public hygiene crisis seems to have erupted in . This video clip was once posted on Weibo but now deleted. The lady in the clip says dead bodies were left at hospital aisles untreated whereas doctors are taking care of other patients alongside them.
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Reed wastes no time to get to his terrifying conclusion which is that if no change in control or transmission happens, then further outbreaks will occur in other Chinese cities, "and that infections will continue to be exported to international destinations at an increasing rate."
As a result, in 10 days time, or by February 4, 2020, Reed's model predicts the number of infected people in Wuhan to be greater than 250 thousand (with an prediction interval, 164,602 to 351,396);
Epidemic predictions for (A) Wuhan, (B) selected Chinese cities and (C) selected countries. Estimated detected cases are also plotted for Wuhan.
After Wuhan, the cities with the largest outbreaks elsewhere in China are expected to be Shanghai, Beijing, Guangzhou, Chongqing and Chengdu.
Predicted epidemic sizes (number of currently infected individuals) in selected cities on 4 February 2020 assuming no change in transmissibility from current time to 4 February.
Reed also predicts that by 4 Feb 2020, the countries at greatest risk of importing infections through air travel are Thailand, Japan, Taiwan, Hong Kong, South Korea, USA, Malaysia, Singapore, Australia and Vietnam. In short: much of Asia will infected, and from there, the rest of the world awaits.
Connectivity of Wuhan to other cities and provinces in mainland China, based on total commercial airline traffic from Wuhan in January 2017.
Critically, Reed's model alleges that Beijing was woefully late in its response and that recently imposed "travel restrictions from and to Wuhan city are unlikely to be effective in halting transmission across China; with a 99% effective reduction in travel, the size of the epidemic outside of Wuhan may only be reduced by 24.9% on 4 February."
Effect of imposing travel restrictions from/to Wuhan on 23 Jan 2020 onwards on the number of infections in other Chinese cities
Reed's prediction is in line with other modelling studies of travel restrictions, which find that reducing travel only serves to delay the epidemic reaching other locations, rather than suppressing the spread entirely. Still, it is important to note that his model only considered air travel, and did not consider the potential impact of travel restrictions relating to land transportation.
That said, Reed admits there is a chance that he is wrong, largely due to using flawed assumptions:
Our findings are critically dependent on the assumptions underpinning our model, and the timing and reporting of confirmed cases, and there is considerable uncertainty associated with the outbreak at this early stage.
Yet even with these caveats in mind, Reed's work suggests that a basic reproductive number for this 2019-nCoV outbreak is materially, perhaps catastrophically higher compared to other emergent coronaviruses, "suggesting that containment or control of this pathogen may be substantially more difficult."
Even assuming that most of Reed's assumptions are overly harsh and pessimistic, his summary leaves little hope that the Coronavirus epidemic will be contained any time soon:
"We are still in the early days of this outbreak and there is much uncertainty in both the scale of the outbreak, as well as key epidemiological information regarding transmission. However, the rapidity of the growth of cases since the recognition of the outbreak is much greater than that observed in outbreaks of either SARS or MERS-CoV. This is consistent with our higher estimates of the reproductive number for this outbreak compared to these other emergent coronaviruses, suggesting that containment or control of this pathogen may be substantially more difficult."
Finally, while Reed makes no observations on the potential mortality associated with nCoV, one can make a broad observation: late on Friday, China's Hubei province reported 15 additional coronavirus deaths, which added to the previously reported 26 casualties, bringing the total to 41. And with roughly 1,100 confirmed cases, this means that the mortality rate of the diseases has just jumped from roughly 2.5% to 4%. Which means that if Reed is correct, and if 250,000 people in Hubei alone will be infected by February 4, no less than 10,000 Chinese people will be dead in the next 2-3 weeks.

What happens after that - with China effectively paralyzed by fear and the economy grinding to a halt as nobody leave their home - is anyone's guess.

World's Richest Are Stashing 'Large Sums' Of Cash In Vaults As Swiss Bankers Rage Against Negative Rates

Finally, somebody at Davos is talking about something other than the weather...
Davos's wealthiest denizens have reportedly been laser-focused on the issue of climate change and it's potential impact on the global economy and markets this year - and the Trump vs. Greta drama has only stoked interest - but apparently at least one of the hundreds of reports combing the town's ritzy resorts has found a couple of bankers willing to discuss what's really bothering the industry.
And to our complete lack of surprise, that boogeyman is negative interest rate.
Now that the Fed has finished with its 'midterm adjustment', no other central bank in the developed world is going to have the courage to lift rates off the zero bound, particularly as the Continental economy careens toward a recession.
But as the rate compression continues to punish European banks, placing them at a significant disadvantage to their American peers (just look at what's going on with Deutsche Bank), some of the wealthy customers whom the banks have leaned on to try and make up for their lost revenues are deciding to pull their money and stash it under the mattress instead.
Because at least then they won't need to pay points on their deposits.
According to CNN, several Swiss private bankers roaming the halls of Davos have said that clients have asked to withdraw large sums of cash so they can store it themselves, in a vault or in some other type of secure facility. The trend is beginning to wear on Switzerland's reputation as a safe and amenable locale for the world's wealthy to stash their cash.
"A lot of people [are] thinking about what they should do, and alternatives to this," said Adriel Jost, head of economics at Wellershoff & Partners, a consultancy based in Zurich.
Davos denizen Norman Villamin, chief investment officer for private banking at Switzerland's UBP, said a limited number of clients have moved their cash into private storage. Some may have sold their business or a home recently, and "can't deploy the cash all in one go," he explained.
Private banker Rahn+Bodmer also said some clients had asked for at least some of their money back in cash.
"We tell the client, watch out - it's your money," said R+B partner Martin Bidermann. Many have chosen to move their money anyway.
According to CNN, Swiss banks generally try to avoid passing costs on to customers like this, and will only charge such outrageous fees when net interest margin no longer exists. For five years, Swiss banks have struggled with some of the steepest negative rates in Europe, a monetary framework designed to keep the Swiss franc from appreciating (remember the explosion of volatility that ensued when the Swiss de-pegged the franc from the euro five years ago?).
But banks are being charged an outrageous rate to store excess reserves at the central bank. The SNB has maintained a policy rate of -0.75% at its December meeting, while signaling that rates will likely remain on hold at least through next year. This has forced many large Swiss banks, including Credit Suisse and UBS, to charge a negative interest rate on some of their largest customer deposits.
Of course, for clients who insist on holding their money in physical cash, devising a storage plan will take some work. Clients will  need to figure out the logistics of safely storing the money. It would also be wise to ensure the cash, which will eat into the profit margin of keeping it in a vault instead of a bank.
Interestingly, CNN noted that according to SNB data, the amount of cash in circulation hasn't climbed in recent years. That could mean one of two things: either this 'trend piece' is based on conversations with one or two boastful individuals, or the SNB is being deliberately obfuscating.
Either way, if large cash deposits are flowing out of the banking system, at some point, the franc should depreciate, which in turn might put the SNB in the uncomfortable position of trying to justify for continuing with its negative rates even as the currency sinks.

Wednesday, January 22, 2020

"It Just Keeps Getting Crazier" - Options Speculation Reaches Record High

From Zero Hedge:


Despite the fact that the bond market refuses to sell-off (as it should in a well-behaved market sending stocks to record-er and record-er highs each and every day), the levered long crowd has never been more "all-in" than they are right now.
While stocks are at record highs, bond yields are plumbing 2 month lows...
Source: Bloomberg
However, there are some notable anomalies in the VIX term structure that could become problematic in the next few days. As contracts expire, so the very steep term structure (fueling lots of short-vol-tilted carry trades) will flatten...
Source: Bloomberg
“This January VIX settlement is looking similar to January 2018 in that the new front month VIX spread between February and March is going to dramatically shrink the level of contango,” said Dave Roberts, independent trader of volatility and volatility products, using the trader term for an upward curve.
“Combining this mechanical condition with potential risk-off factors of Sanders winning Iowa and poor earnings reports from the tech heavyweights has the ability to turn a regular pullback in something more meaningful.”
And as Nomura's Charlie McElligott notes, in risk-asset bellwether US Equities, the current 96th %ile aggregate Dealer “Long $Gamma” position (~$31B between 3290 / 3300 / 3310 alone!) continues to act as a “gravitational force” for the S&P.
Source: Nomura
But, McElligott points out, there is a potential “UN-CLENCHING” in the SPX price-action IF (and that’s a BIG “if”) we don't see these options rolled up-and-out - because per our estimates, nearly 36% of the total $Gamma across strikes is set to drop-off following Friday’s expiry, which should then allow us greater freedom to move in either direction.
Source: Nomura
However, that hasn't stopped the momentum chasers adding more and more leverage.
Speculative excess has hit a fresh record among U.S. options traders - and that’s a negative for stocks over the medium term, according to Sundial Capital Research Inc.
Bloomberg reports that traders established fresh bullish positions last week by buying 22.8 million new call options, according to Sundial founder Jason Goepfert. That represented 12.5% of New York Stock Exchange volume, a record high for the second week in a row, he wrote in a note to clients Tuesday.
“Among everything we follow, this kind of behavior is by far the most troublesome and should be a major worry for anyone buying with a medium-term time frame,” he wrote.
“It just keeps getting crazier.”
In the options market, there is little sign of any hedging activity, according to Sundial.
“The number of contracts being open versus sold (potentially capping gains) is skyrocketing, and it’s not being offset by hedging activity,” Goepfert wrote.
“We’ve never seen anything like this before.”
It's all call buying!!
What happens next?