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

[Posted: 9:30 AM EST] | PDF

In today’s Comment, we open with a few important international developments, including last night’s U.S.-China virtual summit and a potential worsening of Europe’s energy crisis.  We also cover several other U.S. and foreign economic and political developments.  We wrap things up with the latest news related to the coronavirus pandemic.

United States-China:  In their three-and-a-half-hour virtual summit last night, Presidents Biden and Xi reportedly talked extensively about China’s threatening stance toward Taiwan, with Biden calling for “guardrails” that could keep the situation from veering into outright conflict.  However, the two leaders were unable to agree on any such measures.  Indeed, on the Chinese side, Xi warned Biden that advocates of Taiwan independence and anyone supporting them were “playing with fire” and would “burn themselves,” according to state news agency Xinhua.

• Importantly, the initial statements by Biden and Xi were conciliatory, and press reporting so far suggests the meeting may have helped stabilize the U.S.-China relationship.  All the same, it achieved little else beyond mutually vague pledges to improve cooperation.  As signaled before the meeting, the two sides didn’t even try to agree on a joint communique after at summit’s end.
• In addition to Taiwan, the U.S., the White House said Biden had raised concerns about Chinese policy in Xinjiang, Hong Kong, and Tibet, and more broadly, on human rights.  He also brought up longstanding concerns about unfair Chinese trade tactics and technology theft.  There was also apparently some discussion of strategic nuclear weapons held by the two sides.  However, as mentioned above, there were apparently few, if any, breakthroughs.  The main benefit of the meeting was simply for Biden and Xi to improve their understanding of each other.
• U.S.-China relations will likely remain competitive and tense, with some risk of an accidental crisis at some point.  On the other hand, the summit serves as a reminder that the U.S.-China competition will probably involve periods of both intense friction and détente.  Risk markets could be swayed by the ebb and flow of tensions, making it difficult for investors to know how to respond.  It will put a high premium on closely watching and analyzing the evolving relationship over time.

United States-Russia:  The U.S. government has slammed Russia for conducting a missile test that blew up a Russian satellite, creating a debris cloud that endangered the seven-member crew, including two cosmonauts, aboard the International Space Station (ISS).  According to the State Department, the test generated over 1,500 pieces of trackable orbital debris and hundreds of thousands of pieces of smaller orbital debris that now threaten all manner of satellites and spacecraft.

U.S. Fiscal Policy:  As expected, President Biden signed into law his centerpiece “hard” infrastructure bill, which will spend some $1 trillion in the coming years to repair, expand, and modernize multiple types of physical public works facilities, from roads and bridges to mass transit systems and broadband communications networks.

• Notably, Biden signed the legislation shortly before his virtual summit with President Xi, underscoring how the administration sees the bipartisan political victory as strengthening the U.S.’s hand in its geopolitical rivalry with China.
• One impact of the legislation has been to boost prices for municipal bonds, given that provisions that would have expanded the supply of such bonds were ultimately dropped from the bill.

U.S. Labor Market:  The International Alliance of Theatrical Stage Employees, which represents more than 150,000 film-studio workers, narrowly approved two key contracts with Hollywood studios yesterday.  Although pay rates weren’t a major issue in the negotiations, the contracts did involve a number of improvements to working conditions, illustrating the increase in workers’ market power at present.

European Energy Crisis:  Speaking at a commodities conference, the chief executive of one of the world’s top commodity traders warned that a lack of natural gas in storage means that Europe risks rolling power outages if there is a prolonged period of cold weather this winter.

• Last month, President Putin ordered Russia’s state gas giant Gazprom (OZGPY, $9.32) to begin filling the storage facilities it controls in Germany and Austria, boosting hopes that exports to Europe would rise.  However, there have been only limited increases in supply from Russia over the past week, and on Monday, Gazprom booked lower pipeline capacity for December.
• Russia’s shipments have been widely seen as a way to pressure Germany to speed up certification of the newly completed Nord Stream 2 gas pipeline between the two countries.
  • However, Germany’s energy regulator today said it could not yet approve the project because its owners had not yet properly set up an operating subsidiary according to German law.
  • In response to the delayed certification, U.K. gas contracts for December delivery jumped almost 10% to £2.24 per therm, while the European benchmark gained 8% to €87.80 per megawatt-hour.  Both contracts are now trading near their highest level in the past month.
• The delayed certification could be the result of behind-the-scenes political maneuvering by countries or politicians wary about Russia’s stranglehold on Europe’s energy supply.  In any case, the key message here is that Europe’s overall energy supply situation remains fragile going into the winter.  A long cold snap or intensifying energy politics could present a substantial risk of economic disruptions that would be negative for European risk assets.
• On a more positive note, the International Energy Agency said in its monthly report today the tight supply and demand balance in the global crude oil market could be about to ease.  This could result from rising production and moderation in fuel demand as prices rise and winter coronavirus waves cause some economic lockdowns.

United Kingdom:  The British government raised the country’s nationwide terrorist threat level to severe yesterday after a would-be attacker in Liverpool killed himself when he detonated an explosive device in the back of a taxi on Sunday.

Armenia-Azerbaijan-Russia:  Armenia has asked Moscow for assistance in defending against Azerbaijan amid renewed clashes along the border, a year after a cease-fire stopped an intense war over the breakaway region of Nagorno-Karabakh.

Cuba:  The government deployed large numbers of police and plainclothes security forces to thwart a mass pro-democracy protest planned for yesterday.  However, despite the government’s success in short-circuiting the protests, anti-government sentiment has been percolating and poses the risk of instability if it grows further.

Global Financial Markets:  In an interview with the Financial Times, former PIMCO bond guru Bill Gross warned that ultra-low interest rates and massive bond-buying by the world’s major central banks have created a “dangerous” bout of financial euphoria in everything from stocks to digital assets.  According to Gross, “It’s all dreamland that’s been supported by interest rates that aren’t where they should be.”

• At the same time, ultra-low interest rates and high asset prices continue to make it harder for public pension funds to hit their return targets and cover their obligations.
• In response, the board of the California Public Employees’ Retirement System (CalPERS) has voted to let the fund use borrowed money and alternative assets to meet its investment-return target of 6.8%, even after lowering that target just a few months ago.

COVID-19:  Official data show confirmed cases have risen to 254,017,862 worldwide, with 5,110,909 deaths.  In the United States, confirmed cases rose to 47,222,900, with 764,427 deaths.  Vaccine doses delivered in the U.S. now total 553,705,305, while the number of people who have received at least their first shot totals 227,133,617.  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, 68.4% of the U.S. population has now received at least one dose of a vaccine, and 58.8% of the population is fully vaccinated.
• Several cities and states have begun to offer boosters to all adults, moving beyond federal guidelines in a bid to prevent another wave of cases as people head inside during the cold weather.
• Pfizer (PFE, 49.65) has agreed to a royalty-free licensing deal with the UN-backed Medicines Patent Pool to expand low-cost access to its COVID-19 antiviral pill (not its vaccine) throughout the developing world.
• In Japan, the government reportedly will relax its restrictions on vaccine booster shots, allowing them as soon as six months after the last initial shot if local authorities deem it necessary.

 Economic and Financial Market Impacts

• Businesses suing insurers for billions in losses from COVID-19 shutdowns are entering a new phase: jury trials.
  • Over the past year, judges have ruled in favor of insurers in hundreds of cases, backing up the carriers’ rejections of “business interruption” insurance claims.
  • Many of those rulings have involved policies with virus-specific exclusions, which can make the cases more open-and-shut for judges.
  • Now, however, more cases are moving to jury trials, which could expose insurers to many more large payouts.

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