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

[Posted: 9:30 AM EDT]

Good morning!  The 13^th episode of the Confluence of Ideas podcast is available; the topic is the first in a series of episodes on the November elections.  U.S. equity futures are higher again this morning, with the rest of the world rising as well.  In other markets, gold is at a seven-month high, WTI is over $40 per barrel and the dollar is lower.  We did see some volatility overnight after Peter Navarro seemed to indicate that the trade agreement with China is “over.”  S&P futures quickly dropped about 50 points.  The White House moved in short order to clarify Navarro’s comments, confirming that the Phase One arrangement is still intact.  We update China and economic news.  We also cover domestic policy and foreign news.  Our usual commentary on COVID-19 is available.  Here are the details:

China news: 

• As we noted yesterday, the EU and China held a video meeting. Overall, it appears that both sides remain deeply divided; evidence of this division is the fact that no joint statement was released.  EU leaders pressed Beijing to treat European firms in China fairly.  Relations with China and the EU have been strained lately.  China has been accused of pressing officials to soften language criticizing Beijing’s handling of the pandemic and there are fears China is using its financial power to divide the EU.  EU Commission President von der Leyen criticized China for launching cyberattacks on European hospitals.  Overall, China is facing diplomatic pressure from Europe and the U.S.
• Beijing has revealed much of the new Hong Kong security law, but not all parts. The rest will be made public after it officially passes the Chinese legislature, which is expected on June 30.
• Fan Xinghai, a vice-chair of the China Securities Regulatory Commission, warned China’s leaders that it should be prepared to be cut off from the U.S. dollar system in a fashion similar to what occurred to Russia. Given China’s massive foreign reserves, such an action by the U.S. would have a significant impact on global financial markets.  Although the usual fear is that China would “dump” its Treasuries, such action would harm China more than others.  Instead, China would probably try to slowly reduce its Treasury holdings by funneling the sales through intermediaries and try to replace the Treasuries with other foreign bonds, e.g., European and Japanese.  A proposed Eurobond for funding the COVID-19 recovery in Europe could be a very attractive replacement for some of the Treasuries held by China.
• Meanwhile, China is seeing a jump in inflows as foreigners are buying Chinese sovereigns, likely to take advantage of their relatively higher yield.
• As we noted last week, the meeting between SoS Pompeo and Yang Jiechi didn’t seem to yield any immediate results. However, it appears one message did emerge; China has agreed to increase the pace of its grain purchases.  The current pace is woefully below target.  Corn and soybean prices are lower this morning despite this news, although yesterday’s rain across Iowa, Illinois and Missouri probably had more to do with the decline in prices.

Economic news:

• The WSJ notes that there has been a surge in household savings in the U.S. Much of this jump was due to the influx of fiscal support coupled with the lockdown that reduced spending.  If the savings persists, it will have an impact on economic growth.  However, it is quite possible that as the lockdowns ease, spending will accelerate, and the level of savings will decline.  What is unknown is if there will be higher levels of savings in the aftermath of the pandemic.  If there is, government dissaving, business dissaving or a smaller trade deficit will result.  Our expectation, if the change is permanent, is that the fiscal deficit will absorb most of the savings.

Policy news:

• President Trump clarified reports suggesting he was considering talking to Venezuelan President Maduro. The U.S. will only talk to Maduro about leaving office.
• The U.S., as expected, has restricted work visas; the tech industry opposes this move.
• New York state is nearing the end of its moratorium on evictions; there are worries about widespread evictions, although the mechanics of actually moving people out of apartments will probably prevent immediate actions.

Foreign news:

• Japan has given six weeks for the U.K. to make a trade agreement. The apparent “need for speed” seems to be driven by desires in Japan to be the first to strike a deal with the U.K. out of the EU.  It isn’t obvious how much can be accomplished in such a short time frame, but if it can be done, Westminster will be able to claim it has its first trade agreement after Brexit.
• The U.K. is increasing its takeover defenses from foreign buyers. Similar actions have been seen around Europe as the continent adapts to deglobalization.
• EU investors are threatening to reduce investments in Brazil if the country doesn’t address the deforestation of the Amazon region.

COVID-19:  The number of reported cases is 9,115,878 with 472,541 deaths and 4,544,196 recoveries.  In the U.S., there are 2,312,302 confirmed cases with 120,402 deaths and 640,198 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases across nations using similar scaling metrics.  We are seeing a surge in the R₀ data, suggesting a rising pace of infections in the U.S.  Here is the state-by-state data.

Virology:

• Saudi Arabia announced it will sharply reduce the number of foreign visitors to the haji, the annual visit to Mecca. Worries about infections prompted the decision.
• Gilead (GILD, 75.67) will begin human testing for an inhaled version of Remdesivir; currently, the drug requires an IV, so going to an inhaled version would allow for greater distribution of the treatment.

Finally, some good news—honeybee populations saw a lower than normal winter die-off this year, after suffering a larger loss last year.  Honeybees are critical to numerous U.S. crops, so the recovery is positive.

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