by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

World equity markets have mostly shrugged off yesterday’s weakness and continue to focus on the post COVID-19 world; doses of additional stimulus aren’t hurting either.  The Fed releases its minutes from the last meeting today.  Here are the details:

COVID-19:  The number of reported cases are 75,317 with 2,012 fatalities.  Although there is growing evidence of economic disruption, so far, this has been met with additional stimulus.  Due to expectations that the virus will be a one quarter event, the stimulus is enough to support risk markets.  On that note, we do find it interesting that gold prices are higher this morning despite the recovery in equity markets.  On the negative side of the ledger, there are reports of shortages and Chinese companies are warning that they are struggling to meet payrolls.  If the payroll problem spreads, the impact on the Chinese economy will be much more serious.  The Chinese real estate market is a special concern due to high leverage.  The drop in air traffic to China is also starting to have an impact.  On the positive side, Chinese policymakers are moving quickly to aid the economy.  To reiterate, the most likely outcome is a one to two quarter slump in growth that will be partly offset by stimulus and that same stimulus will set the stage for a stronger economy by H2.  That doesn’t mean that tail risks don’t exist and could make this event much worse.  But, for now, financial markets are assuming the worst won’t occur.

China:  There were a number of cross currents in the news.  First, President Trump personally took steps to cool trade tensions with China.  Hawks in Congress and the administration were pushing to prevent the sale of jet engines to China and have been pushing for other restrictions as well.  The president rebuked these officials, suggesting that he does not want to close off China but only wants them to change their behavior.  The president does not want to put U.S. businesses at a disadvantage and thus is trying to find a middle ground between no restrictions and isolation.  However, the U.S. has also designated five Chinese media firms as “foreign government functionaries” which will reduce the abilities of these firms’ reporters to operate in the U.S.  Meanwhile, China has expelled three journalists from the WSJ.  But China has also taken steps to reduce tariffs on U.S. products, preparing to meet its obligations in the Phase One part of the recent trade agreement.   We see these crosscurrents as evidence both nations are trying to figure out what relations are going to look like in the coming years.  What existed before, where China was given great latitude to exploit U.S. hegemonic public goods, is over.  What replaces it isn’t clear.

U.S. sanctions:  The U.S. is imposing sanctions on Rosneft (RNFTF, 7.15) for breaking restrictions on trading in Venezuelan crude oil.  The U.S. estimates that the company handles half of Venezuela’s oil exports.  The move will likely reduce Venezuela’s oil sales, or, at a minimum, reduce the price it can get to offset the costs of sanctions.

MMT rises:  In response to a February survey, global investors stated that fiscal policy was likely better positioned to solve the persistently low inflation than monetary policy.   The sentiment reflects growing clout of modern monetary theory in economic circles. That said, there are critics who believe that increased fiscal spending could be detrimental to price stability, which in turn could be harmful to equities.  Furthermore, it appears that the Federal Reserve may also welcome fiscal stimulus in the economy. In a testimony to Congress, Federal Reserve Chairman Jerome Powell hinted that the Federal Reserve may not have the tools needed to combat the next recession.

Odds and ends:  We reported yesterday that the Dutch were close to scuttling the EU/Canadian trade deal.  It was close but, in the end, the Dutch Parliament passed the measure by a mere three votes.  Britain is considering bringing in China to build its proposed high-speed rail project.  France is restricting foreign financing of mosques and a number of other measures to discourage Islamic teaching that is managed abroad.  As planned, the Fed is set to reduce the amount of liquidity it is offering the financial system.  Following the reelection of Ashraf Ghani a President of Afghanistan, the rival party has threatened to form its own government.

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