Markets are pocketing a global recovery that does not yet exist

Arizona says it is close to the limit already, three weeks after lifting its stay-at-home order. Los Angeles County in California says the R rate is back above 1 and has been climbing for several days.

My working assumption is that social and political Covid fatigue will make it impossible for governments to lock us up a second time. But at the same time they do not have their “test-trace-isolate” regimes up and running, and they cannot endure the reproach of a soaring death toll. They are stymied. Even if they try to tough it out in Trumpian fashion, large numbers of people will retreat into hibernation and the economic recovery will founder.

Nor is that recovery is securely underway in any case. China’s import contraction deepened to -16.7pc in May. A full four months after the country suppressed the virus, a tenth of its migrant workers have yet to return from their villages and the economy has hit a plateau at around 90pc of pre-Covid output.

Nomura’s weekly tracking index shows that shop visits are still down 20pc; passenger trips by road, rail, and air are down 48pc; restaurant revenues (they are open but with social distancing) are down 38pc; the NO2 pollution index (an industrial proxy) is down 12.3pc; and home sales are down 8pc.

Some of these figures have weakened slightly since late May rather than strengthening. Beijing is rolling out fiscal stimulus and pushing the (augmented) budget deficit to 15pc of GDP but it is also having to grapple with a deflating credit bubble.

Patrick Perret-Green from AdMacro said China is hemorrhaging $40bn a month in capital outflows and is having to tighten liquidity to defend the currency. Hence the dramatic surge in Chinese short-term repo rates.

Yields on three-year bonds have jumped by 100 basis points to 2.33pc over the last month. The rate spike is raising eyebrows in trading circles.

“We all know that China, with its mammoth debt level, cannot sustain higher rates,” said Perret-Green. “It will have no choice but to ease significantly and move to some sort of QE.”

That means letting the currency go and unleashing deflation on the world. Have your tin helmet to hand if that happens.

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