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

[Posted: 9:30 AM EST] | PDF

We have published our latest Weekly Geopolitical Report, which is Part I of a two-part series on the Western Sahara.  We also have several other recent multimedia offerings.  There is a new chart book recapping the recent changes we made to our Asset Allocation portfolios.  Here is the latest Confluence of Ideas podcast.  A new Asset Allocation Weekly, chart book, and podcast are also available.  The Weekly Energy Update is available.  You can find all this research and more on our website.

Turning to today’s Comment, we open with various news on the policy front as the Biden administration and the Democratic Congress start to take on more substantive decisions.  We also note some additional evidence of the frictions between the Chinese government and its technology entrepreneurs.  We wrap up with the latest coronavirus news, including many items related to vaccine distribution and the impact of new mutations.  Even though yesterday’s surge in the equity markets appears to have stemmed in large part from reduced concern about rising bond yields in the U.S., we note that investors in European bonds think the ECB will likely move faster than the Fed to impose a cap on longer-term yields.

U.S. Trade Policy:  In its official trade policy, issued yesterday, the Biden administration promised to prioritize the interests of U.S. workers and use “all available tools” to respond to unfair Chinese practices, such as subsidies to favored industries, forced technology transfers, and the use of forced labor.  While it continues to conduct a comprehensive review of its trade policy with China, the administration also pledged to take a broader approach and work more closely with allies to put pressure on the Chinese.

U.S. Banking Policy:  Senior Democratic Senators Elizabeth Warren and Sherrod Brown have warned the Federal Reserve and other U.S. regulators that it would be a “grave error” to extend the looser bank capital requirements that were introduced at the start of the pandemic.  Those rules are due to expire at the end of the month.  Republicans, banks, and industry executives are pushing for an extension of the measures.

U.S. Energy Industry:  The American Petroleum Institute, the country’s top oil industry lobbying group, is reportedly poised to endorse setting a price on carbon emissions, in what would be the strongest signal yet that oil and gas producers are ready to accept government efforts to confront climate change.  According to a draft of the statement, “API supports economy-wide carbon pricing as the primary government climate policy instrument to reduce CO2 emissions while helping keep energy affordable, instead of mandates or prescriptive regulatory action.”  As if more evidence was necessary, the move would underline how green policies have become increasingly accepted and assumed, even in the energy industry.

China:  As President Xi continues trying to rein in China’s powerful technology entrepreneurs, giant fintech firm Ant Group remains one of his key targets, but the company and its founder, Jack Ma, seem to be resisting.  In the latest development, Ant has apparently been slow-walking the transfer of its customers’ credit data to the People’s Bank of China, as it promised to do when its IPO was pulled by the government late last year.  According to the PBOC, credit data collected by internet platforms is a “public good” that should be shared and regulated more closely.

• Ant has blamed privacy laws for the slow data transfers, as users must give their approval before the company can send their information to the central bank, and only a fraction have agreed to do so.  China’s data protection standards require companies to obtain consumers’ consent regarding how they use their data, including passing it on to third parties.
• But the PBOC is pushing companies to find ways to share data, such as requiring consumers to agree to data-sharing as a condition of using their services — a measure Ant is loath to implement for fear of scaring off customers.
• The dispute between the government and Ant reflects a key contradiction in China’s economic model under Xi.  The Communist Party and the government want to maintain strict control over the private sector and the rest of society.  However, clamping down could make those firms less dynamic and innovative, which ultimately would impede Chinese economic growth and the improvement of living standards.  In addition, the clampdown on the private sector feeds into foreigners’ concern that Chinese telecom equipment and other technology will ultimately be used to funnel Western data and secrets to Beijing, while foreign investment in China will be at risk of compromise by the government.  From just about every perspective, the rift between the government and Ant is at least a longer-term negative for Chinese assets.
• Separately, China’s top banking and insurance regulator, Guo Shuqing, warned that bubbles forming in foreign financial markets would pose a risk for the Chinese financial system, given its increased integration with world markets and the large inflow of capital over the last year.  His statement came just weeks after Ma Jun, an adviser to the PBOC, said the risk of “bubbles” would increase if the central bank did not adjust its policy.  The statements point to a risk of tightened monetary policy and reduced liquidity in China, which has pushed the country’s stock markets lower today.

China-India:  Cyber investigators in the state of Maharashtra, where Mumbai is located, said an initial investigation indicates a major electricity blackout in October may have been an attack by China.  The announcement came on Sunday after U.S. cybersecurity firm Recorded Future published a report outlining what it said were China-linked attacks targeting India’s power infrastructure.  The attacks occurred at the height of last year’s China-India tensions over territory in the Himalayan mountains.

COVID-19:  Official data show confirmed cases have risen to 114,499,553 worldwide, with 2,540,340 deaths.  In the United States, confirmed cases rose to 28,664,604, with 514,660 deaths.  Vaccine doses delivered in the U.S. now total 96,402,490, while the number of people who have received at least their first shot totals 50,732,997.  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 rose to approximately 57,000 yesterday, and deaths attributed to the virus rose to 1,400.  Both those figures were slightly higher than one week ago, probably reflecting the way that more contagious virus mutations have led to a stall in improvements.  On a more positive note, however, hospitalizations related to the virus fell to 46,700, near their level at the end of October.
• Trucks carrying the newly approved vaccine from Johnson & Johnson (JNJ, 159.32) began rolling out yesterday across the country. The shipments are expected to reach states and vaccination sites as early as today.
• In preliminary findings published yesterday, British researchers said a single dose of either of the first two Western vaccines reduced the risk of hospitalization among people over 70 years old by 80%, compared with those of a similar age who weren’t vaccinated.  The study adds to evidence from across the world that vaccines are broadly as effective in the real world as they were shown to be in clinical trials. This gives hope that mass rollouts can reduce the need for restrictive public-health measures and pave the way for economic reopening.
• The Biden administration said it wouldn’t consider sharing its vast vaccine supplies with Mexico until “every American is vaccinated,” despite a January request by the Mexican president for assistance.
• While Tokyo and three surrounding prefectures are due to have their pandemic states of emergency lifted on Sunday, officials in Tokyo now are warning that infection rates may not have come down enough for that to happen.  With that in mind, Prime Minister Suga said he won’t decide on the matter until the last possible moment.
• According to a new study, the P.1 variant of the virus that was identified in Brazil is about twice as transmissible as some other virus strains and more likely to evade the natural immunity usually conferred by prior infection.  In other words, people can still get infected with the variant, even if previously infected with a different variant of the coronavirus.

 Economic and Financial Market Impacts

• According to a joint study by the Chinese Academy of Sciences and the University of Kansas, the Chinese economy will continue to suffer significant damage from the pandemic in 2021.  The study shows sectors like coal, electricity, gas, and food producers will suffer lost sales equal to about 2.7% of GDP, even though overall GDP will likely grow more than 8%.

 Foreign Policy Response

Just as optimism over vaccines and economic reopening has driven longer-term bond yields higher in the U.S., it’s also driving yields higher in Europe.  However, with the European economic outlook still much more fragile than the U.S. outlook, investors are betting the ECB will move much more quickly to hike its asset purchases and put a lid on rates.  That expectation has reportedly already helped draw funds back into European bonds.

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