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

[Posted: 9:30 AM EST] | PDF

We have several recent multimedia offerings.  First, we have a new chart book recapping the recent changes we made to our Asset Allocation portfolios.  As we noted last week, we’ve also posted a new Confluence of Ideas podcast. We also have a new Asset Allocation Weekly, chart book, and podcast.  You can find all this research and more on our website.

In today’s Comment, we open with coverage of the big winter storm pummeling most of the U.S., followed by various international news.  As always, we wrap up with the latest developments regarding the coronavirus pandemic.

Winter Storm:  The massive winter storm blanketing the U.S. has now left nearly 75% of the lower 48 states covered in snow and almost four million people without power.  Even with the storm moving off the Northeast coast late Tuesday, dangerously cold wind chills from Arctic air are expected to linger over the Great Plains and Mississippi Valley through midweek.  On top of that, a new winter storm is emerging in the Southern Plains and is heading toward the mid-South today.

• President Biden has declared a state of emergency in Texas, responding to a request from Governor Abbott.  Rolling blackouts in Texas have left approximately three million people without power and disrupted a wide range of businesses, including agriculture and energy production.
• Governor Abbott has also called for an investigation into what caused the power outages in Texas.
• At this point, it’s too early to gauge the impact of the storm and power outages on the overall economy.  However, even if the storm causes enough disruption to show up in the statistics, we do know that such weather-related impacts are often quickly reversed and usually only have fleeting effects on the financial markets.

United States-China:  Speaking at a town hall event in Wisconsin yesterday, President Biden signaled that part of his strategy to deal with Chinese aggression would be to bludgeon it over its human rights record.  According to Biden, “China is trying very hard to become the world leader, and to get that moniker and be able to do that they have to gain the confidence of other countries . . . As long as they’re engaged in activity that is contrary to basic human rights, it’s going to be hard for them to do that.”  We have already noticed that Biden’s approach to China is turning out tougher than many people expected, but this statement also illustrates that he’s likely to use a wider range of tools to counter China’s aggressive geopolitical moves.  Biden’s statement is an example of using the U.S. advantage in “soft power,” i.e., it has a much better reputation as a historical force for good in the world than China.  We discuss the U.S. advantage in diplomatic and political influence, including soft power, in Part IV of our recent WGR series on the U.S.-China balance of power.  Importantly, we would note that a tougher Biden policy on China that expands into new directions could mean continued risks for both Chinese and U.S. assets.

China:  Officials inside the Chinese government say President Xi’s move to block the IPO of Jack Ma’s Ant Group actually intended to hurt Xi’s internal political rivals as much as it aimed to protect the financial system from risks.  The insiders now say a previously secret government investigation ahead of the scheduled IPO revealed that many of Xi’s potential rivals could have pocketed billions of dollars from the transaction.  If true, the news would highlight that companies in China not only face general regulatory risk but, because of the increasingly authoritarian rule of President Xi, they also face political risk.  Chinese equities could eventually face headwinds as evidence of such risk accumulates, and the power pendulum continues to shift toward greater government control of the economy.

United States-Japan:  The U.S. and Japanese governments have reached an unusual one-year agreement on cost-sharing for the U.S. troops based in Japan.  The deal, in which Japan will shoulder about ¥200 billion ($1.9 billion) — roughly in line with the previous year — is widely seen as a temporary measure, freeing the Biden team to battle the raging pandemic inside its borders and sparing Japan a potentially contentious negotiation over the costs.

COVID-19:  Official data show confirmed cases have risen to 109,613,248 worldwide, with 2,421,481 deaths.  In the United States, confirmed cases rose to 27,757,609, with 488,103 deaths.  Vaccine doses delivered in the U.S. now total 71,657,975, while the number of people who have received at least their first shot totals 39,670,551.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections rebounded a bit to approximately 59,000 yesterday, but that was still much lower than the seven-day moving average of 85,296, and the 14-day moving average fell to 98,075.  Hospitalizations related to the virus fell to 64,533, but deaths climbed back above 1,000.
• After refusing to implement tough lockdowns in the early European stages of the pandemic, the Swedish government has warned that it might have to close businesses and shut down parts of society as unease grows in Stockholm regarding the possibility of a new wave of the pandemic.
  • The center-left government today put forward a proposal that, for the first time, would allow it to close shopping centers, gyms, and restaurants.
  • The proposal would also allow the government to fine those who fail to obey the rules SKr2,000 ($240).
• Meanwhile, the big winter storm and mass power outages mentioned earlier in this Comment have forced the closure of many U.S. vaccination centers.  That’s particularly important because the vaccines require special refrigeration, and concerns are growing that the facility closures and power outages could spoil many doses.
• The European Commission today will announce a deal for a further 150 million doses of the vaccine developed by Moderna (MRNA, 178.53), as well as an option for 150 million more next year.  The agreement is part of a wider effort to tackle criticism of the EU’s sluggish vaccine rollout and prepare for the possible evolution of the disease as mutant strains appear.
• The Taiwanese government has accused China of blocking its plan to buy vaccines from BioNTech (BNTX, 114.38) just as it was about to be announced.  It appears the German drug company had been using a Chinese pharmaceutical firm based in Shanghai as its agent for the greater China region, and that company is under pressure from Beijing not to service the Taiwanese.
• After halting the use of the vaccine from AstraZeneca (AZN, 50.89) because of efficacy concerns with new mutations of the virus, the South African government started inoculating healthcare workers with the vaccine from Johnson & Johnson (JNJ, 165.07), even though it hasn’t yet received official approval in any country.  In a large clinical trial, however, the J&J vaccine was found to be 57% effective at preventing moderate and severe COVID-19 symptoms, including from the B.1.351 variant, which has become the predominant version there.
• Many poor, less developed countries are running far behind on vaccinating their populations, which could keep infection rates high and pose an ongoing risk for unvaccinated people in the wealthier, developed countries.

 U.S. Policy Response

• Speaking in Wisconsin yesterday, President Biden promised vaccines would be available to all Americans who want one by the end of July, and the U.S. economy would “come roaring back” if Congress approves his $1.9 trillion pandemic relief proposal.
• Even though the question of reopening schools remains controversial, with many teachers wanting to delay openings but parents wanting to get their kids out of the house, recent polling suggests teachers who go back to work are actually happy to do so.

Foreign Policy Response

• In his first speech as Italian prime minister, Mario Draghi said he would accelerate the country’s vaccine rollout and outlined plans to invest €210 billion of EU recovery money, as well as plans for structural reforms of Italy’s legal system and public administration.  Outlining how Italy would spend the so-called Next Generation EU recovery program, Draghi said that his administration would follow the previous government in focusing on digitalization, ecological transition, research and training, and health, although he also signaled he will work to “strengthen” the plan over the coming weeks.
• Optimism over Draghi’s plan has taken some of the gloss off the Spanish government’s preliminary plan to spend the €140 billion or so it will receive from the Next Generation EU program.  The Spanish plan was initially seen as far better than Italy’s, but now officials must work hard to assure people that it will be a success.  For example, Deputy Prime Minister Calviño said in an interview with the Financial Times that the government will redouble its effort to transform the Spanish economy, revitalize the small business sector, and boost demand.

 View PDF