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

[Posted: 9:30 AM EDT] | PDF

We open today’s Comment with the latest developments in U.S. fiscal policy and other issues.  We then turn to several international issues, many of which are playing into the weak financial markets we’re seeing across the globe today.  Those items touch on everything from Chinese debt defaults to Europe’s energy crisis and higher interest rates in New Zealand.  We close with an update on the coronavirus pandemic.

U.S. Fiscal Policy:  Much has been made of President Biden’s decision to support Democratic progressives’ demand that their large antipoverty and climate change package be passed ahead of the $1 trillion bipartisan “hard” infrastructure proposal.  However, what is lost in much of the discussion is that he has also given the progressives the tough message that their proposal will need to be whittled down to much less than the proposed price tag of $3.5 trillion. Therefore, Democrats yesterday continued to struggle with how much narrower—and which of—their proposed childcare, education, or health programs would have to get trimmed or culled.

• Democrats must now contend with the central question of whether to try to squeeze in funding for a broader array of programs by shortening their duration or spending on fewer programs for a longer period.
• Beyond adjusting the duration of the programs, Democrats are also looking at narrowing the eligibility for the programs to lower-income Americans. Some of the programs Democrats are proposing, such as universal pre-kindergarten, are currently set to be available to Americans regardless of income level.
• Last night, President Biden said Democrats might rely on a temporary or limited “carve-out” from normal filibuster rules to help get the legislation passed.

U.S. Monetary Policy:  In the face of mounting criticism of Federal Reserve Chair Powell from progressive Democratic Senator Elizabeth Warren, President Biden said he still has confidence in Powell “thus far.”

• Biden gave no indication whether he has decided to offer Powell a second term when his current one expires in February, but members of Biden’s economic team have supported keeping Powell.
• Several members of both parties have also voiced support in recent weeks for Powell’s renomination, giving him high marks for his response to the pandemic.

United States-China:  U.S. National Security Advisor Sullivan will meet in Switzerland today with China’s top foreign policy official, Yang Jiechi, in an effort to arrange a virtual summit between Presidents Biden and Xi.  However, President Xi has been playing hard to get, so it’s not entirely clear that any summit will be set up, despite Biden’s recent efforts to engage in dialogue and better manage the U.S.-China rivalry.

China-Taiwan:  In testimony before parliament, Taiwanese Defense Minister Chiu Kuo-cheng warned that China will be fully capable of invading the island by 2025.  The statement appears to mark the government’s first clear message to the public that the country faces a threat of war.  Speaking of China, the defense minister said, “If they want to attack now, they are already capable. But they have to calculate at what cost it would come and what results it would have . . . From 2025, they will already have lowered the cost and the losses to the lowest possible level,” meaning they would be completely unrestrained from seizing the island.

• The defense minister’s warning came just a day after President Tsai Ing-wen appealed to the international community for support against China’s growing aggression against Taiwan.
• Although China is probably some ways off from having a full, unrestrained capability to launch an outright invasion of Taiwan, it is certainly moving in that direction.  The statements by Taiwan’s leaders reflect a certain level of panic about China’s growing power and the slow pace at which the world’s liberal democracies are coalescing to counter the threat.  In reality, however, tensions between China and the U.S.-led democracies are rising as the democracies start to stand up their defenses, not only regarding Taiwanese security but any number of Chinese challenges in the spheres of economics, finance, politics, technology, culture, and global security.  As we have noted frequently, those increasing tensions create significant risks for investors.

Chinese Debt Crisis:  Dollar bonds issued by Chinese real estate developers are in a steep market rout today as investors react to news of weak apartment sales last month and the unexpected default of developer Fantasia Holdings (1777 HK, HKD, 0.56) yesterday.  The market retreat is likely to increase concerns about further Chinese debt defaults and a slowdown in the Chinese economy as the government tries to rein in the sector.

European Energy Crisis:  British and European natural gas prices shot higher again today, trading at close to ten times their level at the start of the year.  U.K. gas contracts for November delivery surged almost 40% to reach more than £4 per therm, having started the week at £2.40 per therm.

• Record natural gas prices are one symptom of a deepening energy crunch that has rippled across the globe.  Countries are battling to secure fuel supplies after demand rebounded rapidly from the depths of the pandemic, even as a range of issues has curbed supplies.
• Other energy sources are also becoming more expensive, including electricity and coal.
• The jump in energy prices threatens to curb industrial activity and sharply raise inflation in Europe and globally.  The jump in energy prices is likely a key reason for the sharp drop in global financial markets that we’ve seen so far today.

Germany:  The Social Democratic, Green, and Free Democratic parties have agreed to launch talks today on a three-way coalition after the libertarian Free Democrats appeared to sour on a coalition with their natural allies, the center-right Christian Democrats governing Germany for the last 16 years.  The momentum appears to be building for a left-of-center alliance that includes an element of free-market orthodoxy.  Overall, that result would be generally centrist, but with a tilt toward looser fiscal policy and tighter regulation, especially regarding climate policies.

New Zealand:  The Reserve Bank of New Zealand hiked its benchmark interest rate for the first time in seven years, making it only the third developed-country central bank to tighten monetary policy since the beginning of the coronavirus pandemic.  Not only did the bank boost its benchmark lending rate to 0.50% from 0.25% previously, but it also signaled that more hikes are in the offing as it looks to control surging property prices and tamp down inflation.  The move is likely to underline investor concerns about tighter policy in the U.S. and other major developed markets as well, so it has probably contributed to the selloff in global markets that we’ve seen so far today.

Global Cryptocurrency Regulation:  A joint report from two global regulatory groups recommended that operators of stablecoins, which act as a bridge between national currencies and the cryptocurrency market, should be regulated as financial market infrastructure alongside payment systems and clearinghouses. The rules would apply to stablecoins that regulators have decided are systemically important and have the potential to disrupt payments.

COVID-19:  Official data show confirmed cases have risen to 235,947,679 worldwide, with 4,819,788 deaths.  In the United States, confirmed cases rose to 43,952,159, with 705,374 deaths.  Vaccine doses delivered in the U.S. now total 479,356,915, while the number of people who have received at least their first shot totals 215,737,487.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• According to the latest CDC data, 65.0% of the U.S. population has now received at least one dose of a vaccine, and 56.0% of the population is fully vaccinated.
• Johnson & Johnson (JNJ, $159.58) asked U.S. health regulators to authorize a booster dose for its vaccine, citing studies showing it improved protection among adults who previously received a single shot.
• Even though the latest wave of the pandemic driven by the Delta variant is on the wane in much of the world, it is still in full force in Russia.  The government today reported 929 new COVID-19 deaths, marking the country’s highest single-day death toll since the pandemic began.

 Economic and Financial Market Impacts

• Amid the hot U.S. housing market touched off by the pandemic, shortages of key construction materials are forcing some builders and contractors to turn to substitutes and hunt for alternative suppliers as they rush to meet high demand.

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