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

[Posted: 9:30 AM EDT] | PDF

Good morning! Today’s report begins with our thoughts on China-U.S. trade relations. We then review various international news items followed by U.S. economics and policy. China news is next, and we end with our pandemic coverage.

China-U.S.: Tensions between the U.S. and China continue to escalate after several reports showed that Washington has made a concerted effort to refocus its attention on protecting the South China Sea and Taiwan. On Thursday, the Wall Street Journal reported that as early as last year the Pentagon sent a U.S. special operations unit and a contingent of Marines to Taiwan to train military forces. Additionally, it was widely reported that the Central Intelligence Agency announced the formation of a new mission center that will focus its attention on China. The maneuvers by the U.S. highlight its growing concern with China’s assertiveness in the Pacific. Over the last five years, China has increased its presence throughout the South China Sea and has become more hostile toward Taiwan.

In reaction to the news that the U.S. has sent troops into Taiwan, China has called on the U.S. to adhere to the One China Principle. The principle states that the U.S. would recognize there is only one Chinese government and not get involved in the dispute over Taiwan. During the time of the agreement, both Beijing and Taipei each believed they were the rightful leader of China, which is why the U.S. agreed to abide by the principle. However, the agreement was made under the guise that the dispute between China and Taiwan would resolve itself peacefully. Hence, the U.S. decision to send troops as well as military weapons to Taiwan suggests that the Pentagon believes the chances of possible conflict are elevated.

Although we do not believe war in the Pacific is imminent, there does seem to be an increase in provocation by both the U.S. and China. In our view, wars aren’t generally planned but are rather triggered by miscalculations of the response of the opposing side. For example, the assassination of the Austrian Archduke Franz Ferdinand triggered a series of events that led to World War I. So far, China’s reactions to developments in Taiwan have been more for demonstration purposes rather than seizing territory. Recent overflights clearly gain attention but really don’t support taking control of Taiwan. What has occurred to date suggests posturing rather than invasion. However, there is a clear escalation in tensions and no obvious off-ramp to de-escalation. And so, we remain deeply concerned about Taiwan and continue to monitor events closely.

International news: 

• Ireland has joined the global agreement that would set a 15% minimum tax rate for corporations. Being a low-tax country, Ireland was one of the last holdouts of the 140 governments and jurisdictions looking to overhaul the international tax system. The laws still need to make it through each government’s legislature, but it is expected to be implemented by 2023.
• Mexican President Andres Manuel Lopez Obrador (AMLO) may have enough support to push through his controversial bill to nationalize Mexico’s electricity sector. Although the bill is expected to pass the house, it is expected to fail in the senate.
• The head of the International Energy Agency has stated that Russia has the ability to supply Europe with more natural gas and has urged Moscow to ramp up production in order to assure the world that it can be trusted as a reliable partner.
• Poland may be on course for a possible exit out of the European Union after its Supreme Court ruled that EU laws are not compatible with the Polish constitution. The ruling comes in response to a controversial bill that gave politicians more power over the Polish judiciary. Brussels has argued that the bill undermines the rule of law and therefore runs afoul of EU governing rules. So far, Brussels has responded to the Polish government’s refusal to drop the bill by issuing fines and threatening to withdraw aid. However, if this trend continues, Brussels may be forced to kick Poland out of the EU. In light of the dispute, Polish Prime Minister Mateusz Morawiecki has stated that Poland would like to remain in the European Union.
• South Korea has expressed interest in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). South Korea’s interest in joining the partnership appears to be in response to China and Taiwan submitting a formal request last week.
• The primary election contest in Hungary was upended when one of the frontrunners, Budapest Mayor Gergely Karacsony, quit the race. His exit has forced a run-off election between Hódmezővásárhely Mayor Peter Marki-Zay and European Parliament Vice President Klara Dobrev. Both candidates have vowed that if elected they would roll back the executive powers accumulated under current President Viktor Orban.

Economics and policy:

• The Senate voted to raise the debt ceiling on Thursday. Earlier in the day, Senate Majority Leader Chuck Schumer announced that Senate Democrats and Republicans have reached a deal to raise the debt ceiling through early December. The agreement raises the limit to $480 billion and would allow the government to be funded up until December 3.
• Fed Governor Lael Brainard suggested that the Federal Reserve should conduct analysis on how climate change can impact the economy.
• Retailers have started to charter their own cargo ships in order to ensure shipments arrive on time. This move comes after logjams at ports in Asia have forced retailers to seek alternative ways to receive their shipments.

China:

• In the battle to dominate the electric vehicle market, the U.S. appears to be gaining ground in the race to secure lithium batteries. The U.S. is now second in BloombergNEF’s global lithium-ion battery supply chain The U.S. has made significant investments in building out the supply chains for electric vehicles as it attempts to phase out cars with internal combustion engines.
• Following a seven-day break due to China’s Golden Week, Chinese markets opened with more angst regarding real estate development firm Evergrande (EGRNF, $0.38). There have been rumors of a possible takeover, but so far nothing has materialized.
• Chinese food delivery order service Meituan (MPNGF, $32.56) was fined $533 million for violating anti-monopoly regulations on Friday. The fine is seen as a slap on the wrist.
• The People’s Bank of China has reduced liquidity support as markets open following the week-long holiday. Additionally, the bank stated it will continue to take steps to make the benchmark loan and deposit rates more market-based. The moves suggest that China may be less worried about the contagion effect from Evergrande.

COVID-19:  The number of reported cases is 236,854,356 with 4,836,281 fatalities.  In the U.S., there are 44,159,120 confirmed cases with 710,180 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 482,326,275 doses of the vaccine have been distributed with 399,552,444 doses injected.  The number receiving at least one dose is 216,268,034, while the number receiving second doses, which would grant the highest level of immunity, is 186,618,184.  The FT has a page on global vaccine distribution.

• Pfizer (PFE, $42.74) and BioNTech (BNTX, $246.57) have requested that the U.S. Food and Drug Administration authorize the use of their COVID-19 vaccine for children ages 5-11. If approved, the shots could be available for younger kids by November.

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