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

[Posted: 9:30 AM EDT] | PDF

Good morning, all! U.S. equities are expected to open higher this morning as investor optimism has been bolstered by strong economic data and positive earnings reports. Today’s report starts off with a brief update of the conflict between Israel and Hamas. International news follows, with an overview of what motivated the EU to stall its investment agreement with China along with South Korean President Moon Jae-in’s trip to the White House. Economics and policy news are up next, including a discussion about the housing market and proposals from the Treasury to boost tax revenue. China news follows, and we close with our pandemic coverage.

Ceasefire between Israel and Hamas: On Friday morning, the ceasefire agreement between Israel and Hamas went into effect, ending 11 days of fighting that claimed the lives of more than 200 people. The Egypt-mediated truce came following U.S. pressure on Israel to end its aerial campaign against Gaza. Despite the truce, tensions remain between the two sides as they still disagree over land rights in Jerusalem and the West Bank.

Now that the fighting has ended, there has been a post-mortem as to what was achieved following the conflict. So far, it appears that despite the destruction and deaths in Palestine, Hamas feels it may have gotten the better of Israel in this exchange. By landing a rocket in Tel Aviv, Hamas was able to demonstrate that it has improved its weaponry. In addition, its ability to maintain rocket launches amid Israeli airstrikes suggests an improvement in its military capabilities. The growing confidence of Hamas is a concern for Israel as it was unable to decisively stop the rocket launches from Hamas, something critics of Netanyahu have been quick to point out. That being said, the ceasefire appears to be holding as of this writing but could be tested following planned protests later today.

International news: The EU stalls investment agreement with China and South Korean President Moon Jae-in goes to Washington.

• The European Parliament voted to end efforts to ratify its investment agreement with China until sanctions imposed by Beijing are lifted. The agreement would have opened up both markets to investment and would have likely drawn the two sides closer, but the timing may have scuttled the deal. The deal was being finalized as reports of China’s mistreatment of Uighurs gained international attention. In response to these reports, the U.S., U.K., and EU imposed sanctions on several Chinese officials, leading Beijing to retaliate with its own sanctions. It is unlikely that the two sides will mend differences anytime soon, especially as China has insisted that it will not submit to pressure from outside countries and the EU has built closer ties with the U.S. and Taiwan.
• On Friday, South Korean President Moon Jae-in is expected to visit the White House. The visit will include a discussion about North Korea’s growing nuclear arsenal and fuel, which has doubled over the last four years. Although officials within the Biden administration have conceded that little can be done to force North Korea to give up its weapons, they are reluctant to acknowledge the pariah country as a nuclear power.
• After a military takeover, the African Union has given Chad an 18-month deadline to restore democracy. The unexpected death of President Idriss Deby last month caused a lot of uncertainty throughout the oil-producing nation. His son, who is now the interim president, has been asked not to participate in the upcoming election. Chad is an important military ally to the West and has played a crucial role in the fight against Islamist extremists throughout West Africa.

Economics and policy: The housing market is too hot to handle, the Treasury wants crypto reported on taxes, and a global minimum tax of 15%.

• The housing market has gotten so hot that homebuilders, in some cases, have stopped taking new orders. Rising demand and costs have made it difficult to build homes quickly enough to keep pace.
• Following the 25th anniversary of the Arctic Council, the U.S. opposed Russia’s plan to set maritime rules in the Northern Sea Route. On Thursday, Russia succeeded Iceland as the chairman of the eight-member council. Tensions between the U.S. and Russia regarding the Arctic have escalated in recent months as each side suspects the other of wanting to increase its military presence in the region. Interest over the Arctic has risen over the last few years as climate change has made it easier to navigate the surrounding seas.
• The U.S. Treasury’s proposal to strengthen tax compliance includes a requirement for transfers of $10,000 or more of cryptocurrency to be reported.
• The Federal Reserve is launching a research project examining how digital currency can fit into the U.S. banking system. The Fed believes that digital currency can increase competition within the banking system to the advantage of low-income individuals who are often excluded.
• The Biden administration is attempting to ease the chip shortage by improving the way firms share supply chain information.
• The Treasury Department has proposed a global minimum corporate tax of at least 15%. The new proposal is designed to get an agreement for a global minimum corporate tax accomplished by the summer. The proposal received a warm reception from Europe.

 China:  Fears of conflict over Taiwan grow.

• A Beijing-backed think tank has published a report suggesting that the risks of armed conflict between mainland China and Taiwan are at an all-time high. The report was based on a risk index that tracks military strength, trade relations, public opinion, political events, and support from allies. The current reading is 70, which is above the level of 65.1 in 1950 when anti-Nationalist forces fled mainland China to Taiwan.
  • The growing tensions between the U.S. and China have put a lot of Asian countries on edge due to fears that they could be caught in the middle. On Thursday, Singapore Prime Minister Lee Hsien Loong warned the two sides that conflict could be detrimental for the world and urged the nations to find ways to cooperate even if there is not full trust between them.
• Chinese government offices have told staff not to park their Teslas (TSLA,$586.78) inside government compounds. The ban on the cars is due to Beijing’s growing wariness of U.S. carmakers and concerns over how the vehicle stores and tracks its data, including data from its cameras.

COVID-19:  The number of reported cases is 165,160,530 with 3,422,723 fatalities.  In the U.S., there are 33,055,614 confirmed cases with 588,528 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 351,955,515 doses of the vaccine have been distributed with 279,397,250 doses injected.  The number receiving at least one dose is 160,177,820, while the number of second doses, which would grant the highest level of immunity, is 126,605,166.  The FT has a page on global vaccine distribution.

• The Pfizer (PFE, $40.12) vaccine has shown a 75% effectiveness against the Indian variant of the COVID-19 virus.
• On Thursday, Chief Medical Advisor to the President Anthony Fauci announced that if 70% of adults receive at least one dose of the vaccine by July 4, it could reduce the chances of another surge later in the year. Right now, 60.5% of adults have received at least one dose of the vaccine.
• Over the past month, COVID-19 cases have dropped 60% in Europe, but the World Health Organization warns that the “progress is fragile.”
• Seychelles, the world’s most vaccinated nation, has seen a spike in tourism. Although tourism arrivals are still well below pre-pandemic levels, the rise is a welcome improvement for the tourism-dependent nation.
• Asian countries that were able to successfully contain the virus early on during the pandemic have seen a steep rise in cases over the last month. The Indian variant of COVID-19 has made its way to Southeast Asia and has forced many of these countries to reimpose restrictions. The surge in COVID-19 cases has hit Thailand, Taiwan, Malaysia, and other countries.

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