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

[Posted: 9:30 AM EDT] | PDF

Happy Monday.  Equity markets are higher this morning as the S&P 500 slowly trends toward a new high.  Foreign news leads off our comments this morning, with a special focus on Belarus.  China news is next, followed by market and economic news.  We close with the pandemic update.  Here are the details.

Foreign news:

• The turmoil in Belarus continued over the weekend. Here is what we are following:
  • There were massive protests over the weekend. After last week’s elections, protesters were dealt with harshly, prompting the weekend’s gatherings.  In a worrisome development for Lukashenko, it appears he is losing the state-owned company workers.  They have joined the protesters and are threatening a general strike.  He may be losing support within his government as well; Igor Leshchenya, Belarus’s ambassador to Slovakia, announced he was supporting the protesters.  And, there are rumors that security forces are seeing defections to the protesters as well.  Historically, when the security services turn, a leader is in serious trouble.
  • Lukashenko has requested support from Putin. The two nations have a mutual defense pact, which means they will defend each other against a foreign invader.  Russia has indicated it was prepared to protect Belarus from outside influence, but Russia is not obligated to protect Lukashenko from his own people.  There are reports of military exercises on the Russian/Belarus frontier, but we doubt that Putin wants to directly intervene.  Unlike Ukraine, which was showing clear signs of leaning to the West, Lukashenko was constantly trying to extract resources from both sides.  In addition, there is little evidence in the protests that there is anger at Russia.  From Putin’s perspective, it is unlikely that Belarus will leave Russia’s orbit with or without Lukashenko.  If a reasonable replacement is found, we suspect Putin will be fine with Lukashenko heading to retirement.
  • Meanwhile, NATO, the EU and the U.S. have been mostly quiet. The EU is threatening sanctions, but we doubt the West will directly intervene.
• Although U.S./Russian relations remain fraught, one thing remains the same. Wealthy Russians still like being in assets other than rubles; so far this year, capital flight is up 53%.
• In the Middle East, the U.S. is preparing a new round of sanctions on Syria to prevent a return to normal relations between Syria and neighboring states.
• Although the UN Security Council rejected a U.S. proposal to extend the five-year ban on the sale of conventional weapons to Iran, Washington is preparing to take unilateral action against Tehran. The current weapons sale ban ends in October.
• Thailand is seeing widespread protests against both the government and the king. Protests against the royal family are rare.  The former sovereign, King Bhumibol Adulyadej, was generally revered and was careful about his intervention into politics.  He died in 2016.  His son, Maha Vajiralongkorn, is not well liked.  Thailand has unusually strict lèse-majesté laws, which make it illegal to publicly criticize the king.  The protesters could be imprisoned under these laws.  There has been political tension between the city dwellers and rural voters for the past two decades.  The latter have supported the Shinawatra family, who were prime ministers in 2001-06 and 2011-14 and have been ousted by the royal family and the military.  The Shinawatra governments supported redistribution to the countryside.  They have been opposed by the established political power, which resides in the cities, the military and the royal family.

China news:

• The U.S. and its allies are conducting massive military exercises in the South China Sea this week. Unfortunately, the Philippines won’t be participating; President Duterte is attempting to straddle the U.S. and China and wants to avoid a confrontation with Beijing.  Losing the Philippines makes containing China within the first island chain difficult.
• Scheduled meetings to monitor the Phase One trade deal were postponed. Although an official reason wasn’t proffered, it is “Beidaihe season” in China.  Beidaihe is a seaside resort in China where CPC leaders meet quietly every August to discuss policy matters.  The resort was a favorite of Mao’s, and the tradition continues.  It does appear that Chinese leaders were preoccupied with these meetings, which is probably why there were delayed.  No new dates have been set.
• President Trump indicated that additional Chinese companies could be subject to U.S. sanctions. The focus continues to be on tech companies; the break between U.S. and China on technology continues to widen.
• China’s bank regulator is warning that easy U.S. monetary policy could undermine global financial stability. It isn’t clear what he would have Chair Powell do exactly (raising rates would certainly have a negative effect on the global economy), but he is correct that given the dollar’s widespread usage, low interest rates will tend to trigger a rise in world borrowing.

Market and Economic news:

• We have noted our concerns about state and local government spending. Another area that could hurt the recovery is the continued problems of child care.  Providers are struggling to make day care safe.  Elementary and secondary schools are trying to decide if they can open to in-class participation or remain online.  In the middle are families trying to juggle taking care of children and the responsibilities of work.  If this problem can’t be resolved, it will reduce the number of available workers and undermine the recovery.
• The economy continues to show signs of uneven growth. On the one hand, for those who have remained employed and have benefited from stimulus spending, there has been a bump in savings that has started to translate into consumer durables spending.  Thus, car sales have been good, and home improvement is doing very well too.  Some of this spending is occurring because other areas, such as tourism, have been reduced.  At the same time, there is growing evidence that lower income households are struggling as food banks report strong demand, and there has been a rise in government food assistance.
• China and Russia are increasingly using currencies other than the dollar to settle trade. The use of the dollar is now under 50%.  The EUR is now up to 30%, while national currencies represent 24%.  Both nations are facing U.S. sanctions.  Although this diversion could weaken dollar demand, it could also increase Moscow’s dependence on Beijing, something that history would suggest is a problem for Russia.
• German anti-trust authorities are investigating the activities of Amazon (AMZN, 3148.02).
• It has been noted that gold prices have been rising. Gold miners are doing well, but report that the costs of new mines are rising.  This increase in cost is leading companies to be cautious about projects, worried that future prices won’t support a high cost mine.  Of course, this reluctance is bullish as it means less new gold will be on the markets even at historically high prices.
• Worries about a disruptive election will likely lead to a higher VIX as we head into November.

COVID-19:  The number of reported cases is 21,707,773 with 775,926 deaths and 13,690,055 recoveries.  In the U.S., there are 5,404,115 confirmed cases with 170,052 deaths and 1,833,067 recoveries.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high frequency data on various factors.

• Novavax (NVAX 146.51) announced that its vaccine is beginning Phase 2 trials and could begin Phase 3 trials by late September. The company will be conducting its trials in South Africa due to the surge of cases in that country.  In fact, for trials, a high rate of infection makes a country attractive.  Brazil, with high infection rates and a strong public health system, is increasingly looking like a good country for experimental treatments.
• There is growing evidence that containing the virus once doesn’t mean the problem is resolved. Both South Korea and New Zealand are reporting new outbreaks.
• The FDA is reporting that surgical gowns, testing supplies and masks are in short supply.

View PDF