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

[Posted: 9:30 AM EDT] | PDF

Good morning and Happy Friday!  Equity markets are mostly steady this morning.  Although it isn’t definitive, news out of the U.K. suggests a hard Brexit may be coming.  We start with the latest on this topic.  Stimulus news follows.  China news comes next along with an update on the pandemic.  We finish with odds and ends from around the world.  Being Friday, a new Asset Allocation Weekly, along with its podcast and chart book, is available.  And, as promised, the Weekly Energy Update is also available.  Here are the details:

Brexit:  For starters, the situation does remain fluid.  We note that the EU is reportedly sending a team of negotiators to London in the wake of comments from PM Johnson that suggest he intends to enforce today’s deadline and is preparing for a hard Brexit.  EU negotiators were mostly ignoring the deadline declared by Johnson.  We still think the U.K. is trying to force a conclusion of negotiations that the EU would rather extend.  So, this doesn’t necessarily mean a hard Brexit is unavoidable, but the risks are elevated at this point.  The best market indicator of the talks, the GBP exchange rate, did fall on the reports.

Fiscal talks:  There was some positive movement on a fiscal deal.  The White House has signed off on funding a national COVID-19 testing program, which had been one of the sticking points of the negotiations.  The White House’s position on stimulus has been different than the Senate; the former wants to “go big or go home,” while the latter is mostly for a very small spending package.  Majority Leader McConnell has already scotched the idea that he would support that which is currently under negotiation, so it isn’t likely any of this will happen before the election.

• Yesterday we cited a NY FRB report that coincided with other studies we have seen indicating much of the stimulus money transferred to households was saved or used to reduce debt. However, there is new evidence that suggests households have drawn down much of that saving since the additional stimulus programs ended last summer.  If true, it would portend slower future spending.
• The CFTC has implemented new position limits for various commodities. The exchanges have traditionally imposed position limits to prevent “cornering” of a market.  Exceptions are often made because the limits do “limit” trading by large participants.  The Dodd-Frank Act, passed in the wake of the Great Financial Crisis, had a provision to have the government install limits that would override the exchanges.  Although it is impossible to determine at this juncture what effect these will have, it is important to remember that regulatory changes can have unintended consequences.  Given the complications that are part of the shadow banking system dominating the financial system, these limits might have an unanticipated impact.
  • In other policy related news, Governor Qualls seems to have a better handle on the shadow, or non-bank financial system. At least he has become aware of it.  Yesterday, we note he thinks the Fed may need to have permanent QE to stabilize the Treasury market in the face of higher borrowing.  Today, he has expressed ‘disappointment’ that money market funds are runnable.  Although he hasn’t offered a solution to that problem (here’s a hint—MMK needs an FDIC body to prevent runs or it must be forced to break the buck under stress), the fact he’s talking about it is noteworthy.

China: 

• Chinese intelligence services have discovered Taiwan has a deep spy network on the mainland. This should not be a shock; the more important consideration to this news is why has China decided to talk about this now?  We suspect there is growing concern over the U.S. using Taiwan as a weapon against China.  According to reports, China is attempted to turn these agents.
• New polls of Americans highlight deteriorating perceptions of China. It is becoming a bipartisan issue.
• The White House has issued a new National Strategy paper on technology. Although a bit light on specifics, it does appear aimed at China.
• Daryl Morey has resigned as the Houston Rockets GM. His open support of Hong Kong last year led to China to restrict NBA broadcasts into China.  His exit is likely part of an effort by the NBA to repair relations, and it highlights business resistance to breaking relations with China.

COVID-19:  The number of reported cases is 38,998,580 with 1,099,380 deaths and 26,930,074 recoveries.  In the U.S., there are 7,980,934 confirmed cases with 217,717 deaths and 3,177,397 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 numbers continue to deteriorate; now only ten states have a reading less than one, which means an accelerating spread of the virus.  Mississippi has the lowest data, while New Mexico has the highest.

Virology: 

• The U.S. and Europe are facing a rise in infections as it gets colder. U.S. infections rose by 60 thousand for the first time in two months.  Europe is facing even faster infection rates; areas that were not as affected before, such as central Europe, are now being affected by this wave.  Hospital capacity is starting to become strained in some areas.  Current estimates for the U.S. indicate that resources use will be at April levels by December.
• Although vaccine distribution is not widely discussed, it does appear that authorities intend to start with older Americans who are more vulnerable to the disease. There are estimates that suggest younger Americans may not be vaccinated until 2022.
• A WHO study of remdesivir suggests that it probably doesn’t have a significant impact on improving survival.
• As shoppers adjust to the pandemic, shopping habits have changed. This report discusses some of them.  A couple of interesting notes—households are doing more cooking and are becoming more sophisticated about it.  This may be bad news for restaurants.  One of the pre-pandemic characteristics was a remarkable lack of kitchen and cooking skills among many households.  The popularity of delivered boxes with single recipes (e.g., Hello Fresh, Home Chef, etc.) and instructions was a clear sign that many households were intimidated by the prospect of cooking.  The pandemic has apparently encouraged households to learn to cook, and that trend will likely be lasting.  Another trend we have noticed is that brand selection is beginning to shrink.  For example, Tab looks like it will be no more.
• An additional factor we have been watching is the sudden surge of household formation and home buying. New York City is seeing an exodus of young families, and we suspect other cities are too.

Odds and ends:  Argentina, a nation in perennial financial stress, is facing yet another USD shortage.  The government is starting to restrict imports.  Bolivia is holding presidential elections, and polls suggest the socialist MAS party candidate Luis Arce should win a plurality.  But, he will not likely win a majority as he faces strong competition from former president Carlos Mesa.  We would expect a runoff election after this one.  Kyrgyzstan’s president has resigned; the country has been dealing with unrest for weeks.

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