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

[Posted: 9:30 AM EDT] | PDF

The big news this morning is that President Trump and the First Lady have contracted COVID-19.  U.S. equity markets are in full retreat on the news.  We address some of the potential ramifications.  It’s also employment Friday; we cover the data in detail below, but the quick take is that the data is mixed.  Payrolls came in a bit below forecast, although with revisions the data is close to expectations, while the unemployment rate fell.  The market reaction was modest. Comments on the economy and policy follow.  Brexit news is next.  The EU summit is underway; there is an update on what has transpired.  China news is next.  Our regular update on the pandemic follows, and we close with odds and ends.  And, being Friday, there is a new Asset Allocation Weekly, along with the related podcast and chart book.  Let’s get after it:

The President and COVID-19:  Around midnight, President Trump announced that both he and his wife tested positive for COVID-19.  Hope Hicks, a member of his staff, began exhibiting symptoms while traveling with the president to this week’s debate.  Here are some potential ramifications:

• The president joins other world leaders who have been infected, including U.K. PM Johnson and Brazilian President Bolsonaro. Johnson was incapacitated for a period of time, although formal power does not appear to have been transferred.  Bolsonaro’s case appears to have been milder.  We expect President Trump to remain in full control of the government, but his movements will be restricted to the White House.
• Given the president’s advanced age (74) and his weight, he would be considered part of the vulnerable class of patients. There are some anti-viral treatments, including steroids, that could aid his recovery.  We will monitor reports in the coming days on the severity of his illness; most people survive a bout of the disease, but he is in a high-risk category.
• This news upends the campaign. The election is about a month away.  Campaign travel will be impossible for the next couple of weeks at a minimum.  The next two debates will be postponed and very likely canceled.  The next one used a “town hall” format which would be difficult to manage in a pandemic.  In addition, VP Biden, who is also in a high-risk category, would be reluctant to be on the same stage with the president even after recovery because of the uncertainty surrounding the period of “virus shedding.”
• In the period before announcing he had contracted the disease, the president was circulating widely among his staff and others, including his nominee for the Supreme Court. Depending on when he was actually infected, it is possible many of his staff members could have been exposed.  This development could affect the executive function of the government.  We do note that VP Pence has tested negative for the virus.
• If powers opposed to the U.S. are so inclined, the distraction caused by this election and now the news of the disease in the White House could convince them that now is a good time to cause trouble. We will be watching for Chinese, Russian, Turkish, and Iranian aggression.
• Financial markets are treating this as a risk-off event. Equities are down, Treasury prices are up, gold is modestly higher but other metals are down, and the dollar is up, but only modestly.  We are in a period where equities are vulnerable.  In a contest between an incumbent Republican president and a Democratic challenger, a win by the latter usually brings a correction in stocks before the election, and equities tend to be depressed into Q2 of the first year of the new president.  This news increases the likelihood of additional weakness going into the election.

Economic and Policy news: 

• House Democrats, on a mostly party-line vote, approved the $2.2 trillion stimulus package. This signals that negotiations with the White House are probably over, and we won’t see a new stimulus bill before the election.  A few Democratic representatives voted against the bill, arguing it was too soon to end negotiations.  The Senate leadership has already indicated it won’t take up the bill; the White House seems opposed too, and with the president dealing with COVID-19, it seems unlikely there will be any movement on this measure.
• Moody’s (MCO, USD 293.50) has downgraded New York State and New York City credit ratings. General obligation bonds were downgraded to Aa2 from Aa1.  The rating agency cited the impact of the pandemic for its decision.  Both remain investment grade.
• The lack of aid may lead to massive utility suspensions for millions of Americans. There were widespread forbearance measures implemented during the pandemic, but as these actions end, months of unpaid utility bills are causing utilities to begin shutting off power, gas, and water.  The electric and gas utilities estimate $24.3 billion of unpaid bills.  Essentially, this is an incidence problem; or, put another way, “who pays?”  Do we allow thousands of homes to go dark?  In Indiana, for example, 112,000 households are 120+ delinquent.  Or, do capital owners bear the burden when governments force utilities to keep the power on?

 Brexit:  Yesterday there were reports from the U.K. side that negotiators had reached a breakthrough, but EU negotiators were much more cautious about progress.  Although talks continue, the four areas of contention—fisheries, state aid, justice cooperation, and governance—remain unresolved.  Additionally, the EU is suing Britain for withdrawing from the earlier agreement.  Meanwhile, U.S. financial firms are continuing to pull assets out of London in anticipation of a hard Brexit.

The EU Summit:  The EU has wanted to signal its unity against the Lukashenko government but Cyprus, wanting to punish Turkey for drilling in the waters off Cyprus, blocked any sanctions without its goal being met.  In the end, the EU managed to placate Cyprus with language pushing for talks between the EU and Turkey.  The tortured negotiations are evidence of the unwieldy nature of the European Union.  The EU is warning Turkey about sanctions, but we tend to view the threat as toothless because Turkey can, at any time, unleash a wave of refugees into Europe.  One element of optimism; NATO has established ground rules with the Turkish military to reduce the odds of a mistaken conflict.

• In other European news, the ECB tripled its purchases of European corporate debt last week compared to the end of August as part of its QE program.

China:  One of the critical issues with decoupling from China is who will bear the cost?  Businesses whose supply chains are dependent on China would suffer greatly from decoupling and have, so far, resisted this trend.  In some respects, China is counting on this resistance to thwart Washington’s move to change policies toward Beijing.

• China is working on developing massive iron ore deposits in Guinea. The involvement of China is forcing Western miners to decide if they want to participate in the project and gain access to the resources, or stay away and risk seeing China, the world’s largest consumer of iron ore, reduce its demand from these miners.  A complicating factor is that cooperating with China may not necessarily be positive; terms could be changed on the fly.

COVID-19:  The number of reported cases is 34,345,342 with 1,023,817 deaths and 23,890,360 recoveries.  In the U.S., there are 7,279,109 confirmed cases with 207,816 deaths and 2,860,650 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.  The R_t state data show increasing infection rates, with 36 states showing rising infections and 15 falling (Washington, D.C. is included in the count).  South Carolina has the lowest rate and Wyoming has the highest.

Virology: 

• Wisconsin is seeing a sharp rise in infections, which is starting to strain the medical infrastructure. The governor is relaxing regulations to allow retired medical personnel and out-of-state workers easier access.
• There is growing evidence that infection rates in Latin America are starting to decline. This is probably due to the onset of herd immunity.
• Turkey is admitting its infection numbers are undercounted; asymptomatic cases have been excluded.

Odds and ends:  Freedom House’s annual report was published yesterday, and it paints a disappointing picture of the loss of democratic freedoms due to the pandemic.  Regulators have charged principals at BitMEX, a major bitcoin exchange, with money laundering.  We have been expecting, for some time, that independent crypto-currencies would eventually be extinguished by governments.  Belgium is a deeply divided nation; long-time divisions between the Flemish and the Walloons have led to long periods where the political class fails to form governments.  But, take heart…after two years, a new government has been formed.

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