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

[Posted: 9:30 AM EDT]

Risk assets are under pressure this morning in part because of multiple reports pointing to the reimposition of coronavirus lockdowns in some locales and the risk of halting, prolonged economic recovery.  On top of that, geopolitical tensions between the Western democracies and China and Russia remain high.  We outline all the key news below.

COVID-19:  Official data show confirmed cases have risen to 11,648,268 worldwide, with 538,828 deaths and 6,328,930 recoveries.  In the United States, confirmed cases rose to 2,938,750, with 130,310 deaths and 924,128 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• S. medical centers have reported more than 5,000 cases of patients likely catching the coronavirus once admitted for other conditions between May 14 and June 21 alone, on top of any staff members who may have caught the disease while working in the facilities. The spread of the disease within health facilities illustrates how health workers have struggled to learn the best way to deal with the novel virus.  The continuing spread of the disease to staff members is particularly concerning as it effectively reduces the facility’s capacity to treat victims and could hasten the point when the facility becomes overwhelmed.
• New York City entered its third phase of reopening its economy yesterday, allowing some personal care services such as nail salons and tattoo parlors to open at limited capacity. Indoor dining at restaurants was also supposed to be part of phase three, but city and state officials have indefinitely postponed those plans because of rising cases of the new coronavirus in other states and a lack of social distancing in the city.
• Illustrating how some localities have been forced to backtrack on their reopening while others loosen restrictions, Miami-Dade County Mayor Giménez rolled back his area’s reopening and ordered gyms to close and restaurants to limit service to takeout and delivery, although office buildings, retailers and grooming services will remain open.
• In Australia, which had been seen as a leader in managing the pandemic, a rebound in infections in the Melbourne area has prompted authorities to reimpose a lockdown in that area. For the next six weeks, people will be allowed to leave their homes only for essential shopping, exercise, medical care or work. Restaurants and cafés, which had begun to reopen with social distancing measures in place, will now only be allowed to service takeaway food and drinks.
• In Brazil, President Bolsonaro said he has been tested for the virus after showing symptoms consistent with the disease, including fever. Bolsonaro said his test results will be made public Tuesday.
• Regeneron Pharmaceuticals (REGN, 627.25) said the small Phase I safety study of its experimental coronavirus drug received a positive review from the company’s independent data-monitoring committee, so it now plans to launch a much larger, combined Phase II and III study to delve deeper into the drug’s safety and effectiveness. The drug, REGN-COV2, is among the most advanced in a class of medicines known as monoclonal antibodies being developed to treat the disease.

Economic Impact

• The OECD issued a new employment outlook calling for the overall jobless rate in advanced countries to decline to 9.4% at the end of 2020 and 7.7% at the end of 2021, assuming there is no major second wave of the pandemic. That would leave the unemployment rate at the end of this year at its highest level since the 1930s.  As if that isn’t bad enough, the organization said unemployment in the advanced countries will rise to 12.6% at the end of 2020 and only fall to 8.6% in 2021, if there is a second wave and countries reimpose some of their lockdown measures.
  • For the U.S. alone, the OECD forecasts unemployment of 11.3% at year-end 2020 and 8.5% in 2021, if there is no sustained second wave.
  • The organization sees U.S. unemployment at 12.9% at year-end 2020 and 11.5% in 2021 in a scenario where it does experience a second wave.
• Separately, the European Commission issued an updated economic forecast showing the EU’s gross domestic product will shrink a record 8.3% this year, even worse than its earlier forecast for a drop of 7.4%.
  • The officials ascribed the downgrade mostly to a slower-than-expected economic reopening after virus resurgences led to lockdowns being tightened again in some localities.
  • The commission also lowered its forecast for a potential economic rebound in 2021, estimating a growth of 5.8%, compared with their previous forecast of 6.1%.
• In an interview with the Financial Times, Atlanta FRB President Bostic warned that the rebound in U.S. economic activity is in danger of stalling as a result of the recent spike in coronavirus infections in the South and West. Bostic said he was most concerned by high-frequency data showing a “levelling off” of business openings and mobility.  Echoing Fed Chair Powell, he also called on Congress to pass another significant round of fiscal support for the economy to help prevent permanent business closures and job losses.
• In China, an upmarket Chinese real estate developer failed to repay yuan bonds worth about $214 million that were due Monday, saying it had been hit by a property downturn that was worsened by the coronavirus pandemic, which exacerbated its large debts, high financing costs and the concentrated maturity of its debts. The news highlights the risks inherent in China’s heavy debt ratios.
• Despite the U.S. economic rebound to date and the associated rise in commodity demand, there’s still too much natural gas for the market to absorb.

Foreign Policy Response

• British chancellor of the Exchequer Rishi Sunak will face MPs in the Commons this morning as he prepares to announce a long list of coronavirus-fueled spending items in tomorrow’s “Summer Economic Update.” The expected measures include bringing forward an immediate stamp duty holiday and providing £3 billion to make homes and public buildings more energy efficient, with homeowners to receive cash grants of up to £5,000 each to fund insulation and heating systems.

China-India-Bhutan:  Chinese and Indian troops started to withdraw from disputed areas along the two countries’ Himalayan border, following talks between senior diplomats and military commanders to calm tensions.  The moves should help end the fistfights between the two sides, which caused at least 20 deaths among Indian troops last month.  However, Indian media reports say China has now begun designating part of the border with Bhutan as disputed.  The new pressure may be a way to keep pressure on New Delhi, which is a key Bhutanese ally.  In any case, Chinese territorial aggressiveness appears alive and well, which will keep up geopolitical tensions in the region.

China-Germany:  Chancellor Merkel is facing criticism in Germany for failing to take a tough line on China over the new national security law it has imposed on Hong Kong, with politicians from both opposition and government parties accusing her of being too soft on Beijing.

China-United States:  The U.S. Chamber of Commerce, the Business Roundtable and other business groups issued a public letter urging the U.S. and China to fully implement their January “Phase I” trade deal.  The letter reflects growing concern that Chinese purchases of U.S. goods are running far short of the pace required under the deal.  China has made decent progress with its ramp-up of U.S. agricultural goods, but that probably just reflects President Xi’s belief that President Trump would be so satisfied with increased farm exports that he would overlook China’s failure to implement other parts of the deal.  That could be a miscalculation, as China’s failure to meet its obligations could generate enough anger among U.S. conservatives that Trump would walk away from the deal.  A formal breakdown of the deal would signal even worse U.S.-China tensions and more trade conflict, which would likely be very negative for global risk assets.

United Kingdom-Russia:  Britain has imposed sanctions on more than two dozen Russian individuals in connection with the 2009 death of lawyer Sergei Magnitsky, signaling it may become more active in imposing U.S.-style economic sanctions against authoritarian regimes for their destabilizing acts.  The Kremlin said it would hit the U.K. with “reciprocal measures” in response.

Russia:  An adviser to the chief of Russia’s Roskosmos state space agency, Ivan Safronov Jr., has been detained on a charge of high treason for passing classified military information to an unspecified NATO country.

France:  As part of his cabinet reshuffle, President Macron has promoted a young lieutenant, Gérald Darmanin, to replace Interior Minister Christopher Castaner, who was criticized for his handling of the anti-government gilets jaunes protests last year.  More recently, the police also lost faith in Castaner for not doing enough to protect them from criticism by Black Lives Matters protesters.  In other aspects of the reshuffle, Finance Minister Le Maire kept his job, as did the foreign, defense and health ministers.  However, with the post-coronavirus economic recovery central to Macron’s re-election hopes, the president named new labor and environment chiefs.

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