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

[Posted: 9:30 AM EDT]

Risk assets have wind in their sails today, in large part due to easing coronavirus lockdowns, signs of rapid economic recovery and continued policy support around the globe.  However, those positives are being offset to some extent by serious new geopolitical tensions between China and India, as well as a worrisome new outbreak in Beijing.  We review all the key news below.

China-India:  It now appears that yesterday’s China-India military clash along the countries’ border in the Himalayan mountains was substantially more lethal than first known.  The Indian government now says 20 of its soldiers died, including not just the three direct fatalities that we reported yesterday, but also 17 more who perished after falling into a deep ravine, or succumbing to the freezing temperatures.  To minimize the risk of a shooting war along the disputed border like the major 1962 confrontation, Chinese and Indian troops patrolling the area don’t carry firearms.  The current tensions have evolved from fistfights last month to attacks with rocks and clubs wrapped in barbed wire this week, resulting in the border troops’ first fatalities in decades.

• Ultimately, the confrontation can be traced back to the heightened nationalist disposition of Chinese President Xi Jinping and Indian Prime Minister Narendra Modi.  Both leaders want to assert their country’s sovereignty to the fullest extent possible, including in disputed areas like the Himalayan border.
  • Xi’s efforts to assert control in Hong Kong, Taiwan and the South China Sea are well known.
  • Modi has also been working to assert India’s control over the Kashmir region.  India’s warming ties with the U.S. and an ill-timed decision to postpone a major military exercise in the area probably also tempted Xi to take a tougher stance.
• According to Indian sources, several Chinese troops also died in the melee, so a key risk now is that if the Chinese losses were substantial, Xi may find it hard to back down.  On the Indian side, Prime Minister Modi warned today that his country would provide a “befitting reply” if China tried to worsen the situation.
• As a result of the initial fistfights last month, high-level Chinese and Indian military officers have been meeting to diffuse the situation, and they reportedly met again as recently as yesterday.  Calming tensions and averting a downward spiral in the conflict may require Xi and Modi to swallow some pride and pull back from the precipice.  If they don’t, any shooting conflict in the area would be a major risk to local and global financial markets.

COVID-19:  Official data show confirmed cases have risen to 8,199,838 worldwide, with 444,368 deaths and 3,978,358 recoveries.  In the United States, confirmed cases rose to 2,137,731, with 116,963 deaths and 583,503 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Arizona, Texas and North Carolina all reported record daily virus-related hospitalizations on Tuesday, suggesting those states may have lifted their pandemic restrictions too early and underlining the risk of a disruptive second wave of infections.  In fact, top infectious disease officer Dr. Anthony Fauci again warned that the nation risks a resurgence of infections should states fail to remain vigilant as they reopen their economies.  We suspect officials in many states and localities would be reluctant to reimpose the full range of restrictions they had in place earlier, but even bringing back just some of the measures or slowing their economic reopening could weigh on stocks.
  • In China, authorities working to contain a new outbreak in Beijing have imposed school closures and flight restrictions, but the number of new cases continues to rise.  An uncontrolled outbreak in the Chinese capital would be particularly embarrassing for the ruling Communist Party, so further tough measures may be forthcoming.
  • New infections, hospitalizations and deaths continue to surge in many large developing countries, including Brazil, Mexico and India.
• Six months into the coronavirus crisis, scientists are coalescing around a consensus that the main way people get infected is through close-up, person-to-person interactions for extended periods.
  • The maximum risk is in crowded events, poorly ventilated areas and places where people are talking, shouting or singing loudly.  In contrast, it’s uncommon to contract COVID-19 from a contaminated surface or fleeting encounters with people outdoors.
  • Firmer knowledge of how the disease is transmitted should help public health officials devise better ways to reduce infections without the costly, wide-scale lockdowns employed to date.
• Researchers at the University of Oxford said dexamethasone, a generic steroid, is the first drug to show in a clinical trial it could improve the survival of severely ill coronavirus patients. The 6,425 subject study found the drug reduced deaths by a third, compared with standard treatment in patients on ventilators.  In patients receiving supplemental oxygen, but not on ventilators, the steroid cut deaths by one fifth, according to the researchers.
  • Less sick patients not receiving oxygen support didn’t receive any survival benefit from the drug.
  • Oxford issued the study results in a press release, not yet in a peer-reviewed journal that provides the full data set that researchers, who weren’t involved in the trial, can review.
• Privately held CureVac has become the second German biotechnology company to be given permission to proceed with clinical trials of a COVID-19 vaccine, days after Berlin invested €300 million in the firm to keep it from falling into foreign hands.  The German regulator said the CureVac trial would be one of just 11 worldwide to be testing its vaccine on humans.

Economic Impact

• In Europe, plunging auto sales during the worst of the pandemic lockdowns have left huge inventories of unsold vehicles, which threaten to discourage more production and slow the economic recovery.

United States:  Congress will scrutinize the Trump administration’s aggressive international trade initiatives today, as U.S. Trade Representative Lighthizer, appears before House and Senate committees.  Lighthizer’s testimony will give lawmakers an opportunity to question how the administration’s recent trade deals are playing out.  We also expect them to probe how the administration sees the U.S. economic relationship with other trading partners, including the European Union and the United Kingdom.

United States-United Kingdom:  Even as the U.K. and the EU struggle to develop a post-Brexit trade agreement, with EU demands for a “level playing field” with lower-regulated Britain, it turns out that many British farmers are worried that the U.K.-U.S. trade deal now being negotiated will leave them unable to compete with even lower-regulated U.S. producers.  The result?  They’re also hoping for a “level playing field” with the U.S.

Hungary:  Parliament voted to end a controversial state of emergency that gave Prime Minister Viktor Orban the right to rule by decree, after leaders in the U.S. Congress and the European Union accused him of using the coronavirus pandemic to amass authoritarian-like powers.  However, the legislators left in place some of the measures the government took during the height of its outbreak to concentrate fiscal control over the country’s largely liberal cities.

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