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

[Posted: 9:30 AM EST] | PDF

We have a plethora of recent multimedia offerings.  First, our new chart book, which recaps the changes we made to our Asset Allocation portfolios, is available.  As we noted Wednesday, a new Confluence of Ideas podcast was posted. Being Friday, there is a new Asset Allocation Weekly, chart book, and podcast.  You can find all this research and more on our website.  Due to Monday being President’s Day, we will not be publishing a report.

Good morning!  Equity futures are slightly lower this morning.  Our coverage begins with European news, particularly regarding EU and Russia relations.  We then discuss the policy and economic news.  An update on China comes next, followed by pandemic coverage.  We conclude the report with a roundup of international items.

Russia and Europe divorce? Following the detainment of Putin foe and Kremlin critic Alexei Navalny, the West and Russia have been at loggerheads.  The arrest has been viewed by the West as anti-democratic, while Russia views the issue as an internal matter.  Tensions were on display following a contentious exchange during a joint news conference that included European Foreign Minister Josep Borell and Russian Foreign Minister Sergei Lavrov.  During the exchange, Borell was blindsided with questions about the EU human rights record and baited into condemning the U.S.’s embargo on Cuba.  Afterward, Borell’s abysmal performance at the press conference led to calls for his resignation.  Angered by Russia’s blatant attempt to embarrass one of its officials, Paris and Berlin have hardened their stance at imposing new sanctions.  Russia has responded to the sanction threat by warning the EU that any sanction that hurts the Russian economy will result in a severance of ties.

The rise in tensions between Russia and the EU will likely bode well for the U.S. but could be divisive within the bloc.  The U.S. has long chided EU countries for not doing enough to unwind themselves from Russia following its invasion of Crimea.  A particular bone of contention is the Nord Stream 2 pipeline, which the U.S. believes will expand Russia’s influence in Europe. Although we do not believe that the construction of this pipeline is in jeopardy, we suspect the EU could seek to form closer ties with the U.S.  There are countries within the EU that could hamper EU retaliation efforts.  Italy, which has forged a close relationship with Russia in recent years, will likely push back against anything that might put those ties in jeopardy.  Greece could possibly be another country to express reluctance.

Although the severance of ties would hurt the EU, the chances of it backfiring on Russia are very high.  The EU is the country’s largest importer, so Russia will likely hurt itself with that decision.  Given the economic struggles, which began before the pandemic, we don’t see breaking ties as a tenable solution.  It could possibly try to make up for the loss by forming a closer bond with China, but given the history between the two countries, it wouldn’t be an attractive alternative.  As a result, we wouldn’t be surprised to learn that the threat was likely an effort to further divide the EU.

European news:  A new Italian president, London losing business to rivals, and more.

• In the latest evidence of the blow dealt by Brexit to the U.K. financial center, trading in a key euro-denominated derivatives market flooded out of London last month, rivaling financial centers in New York, Amsterdam, and Paris.
• As the result of an overwhelming parliamentary majority, Mario Draghi will become Italy’s prime minister. Supporters of the Five-Star Movement voted in favor of joining his forthcoming national unity government.
• Under new legislation agreed to on Friday by Chancellor Angela Merkel’s government, companies will have to ensure their partners don’t engage in harmful practices and exploitation. In addition to penalties, German firms can also be excluded from public contracts.
• Russian Foreign Minister Sergei Lavrov warned that his country is ready for a break in ties with the European Union if the bloc imposes sanctions that damage Russia’s economy.

Policy and Economics:  More action against China and progress with the stimulus package.

• President Biden warned that China is making advancements in transportation that give it an advantage over the U.S.  He urged Congress to invest in more infrastructure.
• America’s federal debt is expected to exceed the size of the entire U.S. economy this year for only the second time since the end of World War II.  The nonpartisan Congressional Budget Office said Thursday that this reflects the extraordinary emergency measures approved by Congress in response to the coronavirus pandemic.
• The Biden administration is treading lightly with governors who are relaxing coronavirus restrictions — even as top federal health officials urge the public to keep wearing masks and social distancing to limit the spread of highly contagious virus variants.
• The Biden administration has said it is reviewing former President Trump’s proposed ban of Chinese messaging app WeChat in the U.S., a day after announcing a similar pause to consider the fate of video app TikTok.
• Yesterday, the House Ways and Means Committee advanced a key portion of the Democrats’ coronavirus relief package that includes stimulus payments of up to $1,400 per person and an expansion of the child tax credit.
• Federal prosecutors are investigating whether market manipulation or other types of criminal misconduct fueled the rapid rise last month in prices of stocks such as GameStop Corp. (GME, $51.10) and AMC Entertainment Holdings Inc. (AMC, $5.61), according to people familiar with the matter.
• President Biden plans to sign an executive order to address the shortage of semiconductors, or chips, an issue that industry has begged him to take action on recently.
• The Biden administration on Friday rolled out its plans for addressing tens of thousands of migrants camped out at the southern border, as it seeks to replace the Trump administration’s “remain in Mexico” policy.
• Agriculture land values rose 6% last year, the biggest gain since 2012, across the Seventh Federal Reserve District, a five-state region including all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin.  Bankers say more gains are expected this quarter, according to the Chicago Fed’s latest AgLetter.
• U.S. home prices, fueled by the lowest mortgage rates in history, rose at the fastest pace on record, surpassing the peak from the last property boom in 2005.
• The Federal Reserve Bank of San Francisco leader Mary Daly said the U.S. central bank is unlikely to pull back on its bond-buying stimulus this year and that another round of government aid shouldn’t overheat the economy.

 China: China bans the BBC, the U.S. is maintaining contact with Taiwan, and China and India ease tensions.

• Chinese authorities banned BBC World News on Thursday, accusing the British broadcaster of not being “factual and fair,” according to a government statement.
• Taiwan’s top envoy to the U.S., Hsiao Bi-khim, has met U.S. acting Assistant Secretary Sung Kim at the State Department, signaling that high-level official contact between Taiwanese and American officials has not stopped despite the change of government in the United States and a stern warning from Beijing.
• China and India have been pulling back frontline troops along disputed portions of their mountain border where they have been in a standoff for months, officials in both countries said.

 COVID-19:  The number of reported cases is 107,648,109 with 2,363,449 fatalities.  In the U.S., there are 27,366,838 confirmed cases with 474,554 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.  The CDC reports that 68,285,575 doses of the vaccine have been distributed with 46,390,270 doses injected.  The number receiving a first dose is 34,723,964, while the number of second doses, which would grant the highest level of immunity, is 11,188,782.  The Axios map shows marked declines in infection rates.

Virology

 The Biden administration on Thursday purchased another 200 million doses of the two coronavirus vaccines authorized for emergency use in the United States.

• Anthony Fauci, President Biden’s chief medical adviser for COVID-19, said Thursday that most members of the general public could become eligible to receive the coronavirus vaccine as soon as April.
• Officials in Michigan have confirmed the presence of a highly contagious coronavirus variant in one of its state prisons, the first such case documented in an American correctional facility, and a potential harbinger of even wider dispersion of the virus in prisons, public health officials said.
• Facing a shortage of coronavirus vaccine doses, Los Angeles will temporarily close five of its inoculation sites, including one of the country’s largest at Dodger Stadium, raising new questions about the federal government’s handling of supplies and distribution.
• A new study shows blood-thinning drugs reduced the risk of death from COVID-19, pointing to one more promising tool as physicians scour their medicine cabinets for treatments to blunt the pandemic.
• U. S. hospitalizations for the coronavirus plunged about 16% so far in February, dropping to the lowest since mid-November, data from the Department of Health and Human Services show.
• Japan’s health ministry panel is expected to approve the use of Pfizer’s COVID-19 vaccine on Friday, public broadcaster NHK reported, citing an unidentified person.
• New data from the U.S. Centers for Disease Control and Prevention shows allergic reactions to COVID-19 vaccines are rare, and anaphylaxis, one type of severe reaction, occurs in two to five people for every million vaccinated in the U.S.
• Countries with cases of the COVID-19 variant that was first identified in South Africa are receiving conflicting advice about whether to roll out the Oxford/AstraZeneca vaccine, a sign of the complex challenge facing public health officials.

 International news:  More developments in Myanmar and Benjamin Netanyahu appeals to Israeli Arabs and other news.

• Despite an uptick in inflation, Mexico’s central bank board unanimously cut rates by a quarter point to 4% amid weak demand and a tough economic outlook, after pausing at both of its last two meetings.
• Myanmar’s military government is detaining election commission officials in night-time raids and asking them to provide evidence that November’s election was rigged, according to a senior member of the organization and a human rights watchdog.
  • Yesterday, Myanmar’s new junta leader called on civil servants to return to work and urged people to stop mass gatherings to avoid spreading the coronavirus as a sixth day of protests against him and his coup rocked the country.
• After years of alienating Israel’s Arab voters, Prime Minister Netanyahu is now courting them, hoping they hold the key to staying in power.
• Alexei Navalny, the leading opposition figure whose jailing this month sparked protests across Russia, has been back in court to face charges of slandering a war veteran in a separate case.
• Australia’s Parliament will debate making Google and Facebook pay for news, after a Senate committee on Friday recommended no changes to drafts of the world’s first such laws.

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