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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Monday!  U.S. equity futures are higher again this morning on positive vaccine news (see below).  We start our coverage this morning with the new Asian trade agreement.  Political turmoil in Peru is up next.  There is a lot of news surrounding COVID-19 as infections rise across the country; rural areas have been hit especially hard.  China news follows.  We close with a look at grain prices, the election, and odds and ends.  Here are the details:

Trade:  Over the weekend, 15 Asia-Pacific nations signed a large trade deal covering one-third of the world’s population.  Conspicuous in their absence are India and the U.S.  The Regional Comprehensive Economic Partnership (RECP) is a combination of the Association of Southeast Asian Nations (ASEAN) along with Australia, China, Japan, and South Korea.  It took eight years of negotiations to build the pact.  Although it is large, it isn’t all that comprehensive.  It doesn’t include services or agriculture, and it only eliminates 90% of tariffs, unlike the TPP, which gets rid of 100%.  However, it does unify rules of origin, which will help facilitate trade.  The deal is likely to give China a stronger position to dominate regional trade, especially with India’s decision to opt out.  It also highlights the retreat of the U.S. from hegemony; there is little political support for a trade deal in the U.S., but without participation America is ceding ground to China.  At the same time, much of the retreat is visual.  In reality, the RECP isn’t strong enough to be a major tool for Chinese influence.

Peru:  Peru is in the midst of a major constitutional crisis.  Last week, on November 9, the legislature removed President Martin Vizcarra, using a 19^th-century law that allows the legislature to remove a president for “permanent moral incapacity.”  Vizcarra is accused of taking $630,000 in bribes when he was a provincial governor in 2011-14.  There have been no charges filed.  Manuel Merino, the head of Congress, was installed as interim president.  He didn’t last long—he resigned over the weekend as Peru was hit with massive civil unrest.  Peru has had three presidents in the past four years.  It is not obvious how the government will move forward.  Although the turmoil hasn’t affected Peru’s neighbors yet, the region is already dealing with a massive refugee problem caused by Venezuela, and without resolution, it isn’t inconceivable that another one could occur.

COVID-19:  The number of reported cases is 54,495,858 with 1,318,884 fatalities.  In the U.S., there are 11,038,998 confirmed cases with 246,224 deaths.  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.

Virology: 

• Let us start with the good news—Moderna (MNRA, USD, 89.39) announced its experimental vaccine had an effectiveness rate of 94.5%. This news triggered a rally in equities.  Both Moderna and Pfizer (PFE, USD, 38.62)/BioNTech’s vaccines have shown high effectiveness.  These vaccines use the novel mRNA method that has never been used before (here’s a primer); because mRNA is fragile and breaks down quickly in normal temperatures, distribution of this vaccine will require a super-cold supply chain that may mean this method will be the first, but probably not the last, in the vaccine saga.  Nevertheless, progress is really good news.
• Another bit of good news: in a weekend book review of Nicholas Christakis’s new book on the pandemic, near the end of the review, there is an analysis of how COVID-19 may evolve. Around 1890, there was a pandemic called the Russian flu.  Although history has treated it as an influenza, new research suggests it was likely a coronavirus that moved from cows to humans.  Influenza usually kills, as the “tails” of age, the old and the young.  However, COVID-19 is most deadly among the elderly, and so was the Russian flu.  There is a coronavirus called OC43; it accounts for 30% of all common colds.  There is some speculation that the Russian flu was, in fact, OC43, which started as a deadly coronavirus that mutated into a much less deadly form.  Although we are clearly not through this current pandemic yet, there is hope, even if an effective vaccine isn’t found, that COVID-19 may become a lesser issue over time.
• Now the bad news. Infection rates are rising rapidly, and this time around it’s hitting much of the country.  Unlike the event in the spring, rural areas, which have fewer resources to cope, are facing the brunt of infections.  Rural nursing homes are especially vulnerable.  States are issuing new orders for partial lockdowns and other measures.
• VP Biden’s campaign indicated that he doesn’t plan to issue national lockdown orders. The increase in infection rates will likely hurt Q4 growth.  Even after the pandemic ends, it looks like it will leave permanent changes in its wake.  At least some degree of work from home will stay in place, and that will undermine public transit systems.  It has also fostered digital commerce, which will probably continue as well.
• There are reports that North Korea and Russia are trying to hack COVID-19 research firms.
• Although PM Johnson did recover from an early bout of COVID-19, he is self-quarantining due to a recent exposure.

China:  China’s economy continues to outperform and will likely finish the year on an uptrend.  In a rather surprising development, vulture funds are buying up distressed debt from China’s SOEs on the assumption that state governments won’t allow the firms to default completely.  This is likely a heroic assumption.

U.S. agriculture:  Although the U.S. grain crops were large, prices have continued to rise.  Some of the strength is tied to Chinese imports.  China is buying crops as part of the Phase I deal with the U.S., and it is rebuilding its hog herd after the African Swine Fever led to mass culling.  At the same time, Americans stuck at home have been on a baking binge, which is boosting wheat demand.  Also, we are in a period of the year where South American stockpiles are dwindling, and the U.S. harvest isn’t quite complete.  In addition, weather in South America has been dry, and Argentina is considering export tariffs, leading farmers there to store rather than sell their grain.

The election:  Although this election won’t be resolved until early December at the earliest (December 8 is the key date—that is the “safe harbor” day that certifies electors to the Electoral College), we are watching to see who VP Biden is leaning toward for key spots.  We have been paying close attention to Jared Bernstein, who was an economic advisor to Biden when he was VP in the Obama administration.  He is apparently under consideration for leading the National Economic Council.  He has an op-ed in the WP that discusses how low interest rates make a high federal debt easier to manage.  Although he hasn’t been tied officially to MMT, policies from that theory would fit this position.  Bernstein has called for an end to the dollar’s reserve status, and we would view his official appointment as a potential signal of a bearish dollar policy from a Biden administration.

Odds and ends:  Brexit talks continue, and the deadline of year’s end is looming.  We expect a deal to be struck, but it may not be close to comprehensive.  In other news:

• Bulgaria is threatening to block North Macedonia’s entry into the EU. As is the case in this part of Europe, ethnic populations spill over state boundaries.  North Macedonia claims minorities in Bulgaria, which is making Sofia uncomfortable.
• In the Moldova runoff election, Maia Sandu, who is friendly to the EU, appears to be the winner.

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