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

[Posted: 9:30 AM EDT] | PDF

Good morning.  Bank earnings reports are giving a bullish tone to the equity markets this morning.  Our coverage begins with the Federal Reserve; the FOMC released its minutes yesterday.  Economics and policy come next.  Inflation worries are rising.  Crypto news follows.  Our overseas coverage begins with a China update and the international roundup.  We close with pandemic news.

Federal Reserve:  The minutes of the September 22 FOMC meeting were released yesterday.  There were two critical points from the report.  First, the members agreed that tapering will begin before the year’s end and will likely end by mid-2022.  Second, the committee took great pains to note that balance sheet management and interest rate policy are separate.  There was a concern raised about inflation, and the members seemed to lean mostly toward price increases remaining elevated for a longer period.  The financial markets are well prepared for tapering, and the minutes had little effect on financial markets yesterday.

• Vice-Chair Quarles is no longer in charge of the Fed’s bank supervision committee, as his term ended yesterday. For now, no one has been selected to take the position.  Quarles has suggested he would like to stay on as a governor (his term ends 10 years from now), although tradition dictates he step down.  We would expect pressure to be brought on him to resign.
• Governor Bowman said yesterday that she sees risks of more persistent inflation. She is the governor representing community banks, and historically, this governor has been a reliable vote for the Chair.  Her comments may signal a shift in sentiment among the governors, which could lead to growing pressure to raise rates.
• The JOLTS report released earlier this week showed a couple of points worth noticing. First, even though openings fell, they remain well above the level of unemployed, meaning there are more jobs available than those currently out of work and looking to be hired.

Second, the quits rate suggests wage growth will be robust in the coming year.

This chart overlays the quits rate, advanced 12 months, to the yearly change in hourly earnings for non-supervisory workers.  The relationship would support wage growth in excess of 5% to 6% next year.

Economics and policy:  Inflation worries dominate.

• Yesterday, the White House held a meeting to address the bottlenecks at U.S. ports. There is a push to have the ports operate “24/7.”  Although we appreciate the sentiment, if the mere order to work longer hours was enough, it is likely it would have been done a long time ago.  The problems at U.S. ports are complicated; merely dictating hours won’t make truck drivers materialize.  The White House clearly wants Americans to know it is aware of the problem.  What it can do to get it fixed is unclear.  Earlier administrations have made similar proclamations with little effect.
  • The president is also asking the oil industry to take steps to lower energy prices. Of course, the irony is that the administration has not been supportive of the energy industry, so it isn’t obvious how much support the White House will get from companies.
• Labor tensions continue to rise, prompting former Labor Secretary Robert Reich to speculate that we are seeing something a bit like a general strike. And, with a hat tip to Johnny Paycheck, are some headlines:
  • Southwest Airlines (LUV, USD, 51.25) has suffered through what looks like a work stoppage. Although anger over vaccine mandates plays a role, understaffing and excessive overtime also appear to be contributing factors.
  • Hollywood crews are threatening to strike, which could shut down television and movie production.
  • Around 10 thousand unionized workers at John Deere (DE, USD, 329.00) went on strike this morning. A recent company proposal failed by 90%.
  • Kellogg’s (K, USD, 61.69) is facing strikes at four facilities affecting 1,400 workers.
• Shortages of truck drivers are not just an issue in the U.S. and U.K. Europe is also dealing with a lack of drivers.  Low pay and poor working conditions are making it difficult to attract people to the industry.
• For the past four decades, there has been a push to meet customer demands. However, as labor gains power, we are seeing a pushback against what is perceived to be unruly clients.  This is a social shift of potential significance.
• We are closely monitoring the path of tax policy in the current congressional negotiations. We noted recently that Ireland agreed to a minimum corporate tax of 15%, setting the stage for a global minimum corporate tax.  Tech firms have expressed support, most likely because in the negotiations, the digital services tax was tabled.
• So far, evictions haven’t jumped as feared when pandemic rules suspended them. It appears state and local governments are finally distributing the Federal support designed to make up for lost rent.
• There is some good news—shipping costs between the U.S. and China are finally starting to decline.

Crypto:  The long-awaited ETPs for cryptocurrencies may be coming soon.  The bad news is that they won’t be grantor trusts, like precious metals, but futures-based, similar to most of the commodity ETPs.  ETFs based on futures usually trigger a K-1 for tax accounting.  Anticipation of approval is lifting volume in crypto futures trading.

China news:  China’s PPI jumps.

• China’s September PPI hit a record on a yearly basis, rising 10.7%. It’s the fastest increase in prices since 1995.  Almost all the rise is due to higher coal prices.

Fortunately, CPI was quite tame, rising only 0.3% from last year.  Over the past decade, the correlation between CPI and PPI in China is a mere 19%; from 1997 to 2010, it was 76%.

• Home sales reported by China’s real estate firms are showing declines of 20% to 30% in what is usually a strong month for sales. Given the role that residential real estate plays in China’s economy, if these declines are sustained, it will probably lead to a sharp drop in growth.
• The crackdown on digital currencies in China continues.  Official media reports that law enforcement is expanding its crackdown on crypto trading.  Binance, a large crypto exchange, said yesterday that it would no longer trade crypto and CNY.  As China ousted bitcoin mining, miners have set up shop in the U.S.
• About half of the world’s distressed dollar bonds are now represented by China’s real estate sector. The issuance of dollar bonds from the Chinese real estate sector has essentially stopped.
• The Xi government is expanding its regulation of the media industry, including those who operate on social media.
• General Secretary Xi bid farewell to Chancellor Merkel, calling the German leader an “old friend,” a designation usually only offered to groundbreaking leaders like President Nixon. Germany has maintained close ties to Beijing, a position that is often at odds with Washington.
• Earlier this year, China arrested numerous actors and celebrities and, in some cases, tried to remove any trace of their social media existence. In what has to be one of the more unusual actions, China is supporting the creation of virtual entertainers.  Essentially, these are virtual bands whose “members” have fans who follow them. For Beijing, virtual celebrities are much easier to control than human ones.

International roundup:  Brexit returns to Northern Ireland.

• The EU is easing border restrictions on the Ireland/Northern Ireland frontier. The plan relaxes border controls significantly but still may not be enough for Westminster.  A major sticking point is that the EU insists that the European Court of Justice adjudicate claims, which is a problem for the Johnson administration. If these actions don’t lead to a satisfactory outcome, there is the potential for a hard border to return, likely ending the Good Friday Agreement.
• French officials say that the U.S. and France continue to have notable differences on several issues. Divisions between the U.S. and EU nations are a further indication of a fraying relationship.
• Although the most common image of migrants trying to cross into the U.S. is that of desperately poor people making the attempt, there are reports that better-off migrants from South America are flying to Mexico and attempting to cross the border. This news may suggest conditions in South America may be deteriorating.
• Poland is fortifying its border with Belarus, as the latter has become a conduit for refugees from the Middle East. Warsaw is worried that Belarus is weaponizing immigrant flows in a bid to force the EU to relax its sanctions on Minsk.
• Japan is considering a major increase in defense spending to levels that would suggest it is ending its pacifist stance. Threats from China, especially against Taiwan, are likely triggering the decision.
• Chile has declared a state of emergency in its southern regions due to civil unrest. Indigenous groups are pushing for greater autonomy.
• Reflecting George Steinbrenner’s management of the Yankees, President Erdogan of Turkey has fired two deputy governors of the Bank of Turkey; one was the only dissent of last month’s surprise rate cut. The lira is down 1% today.
• On October 1, Venezuela introduced a new currency, known as the “digital bolivar,” which was similar to the previous currency, except it has six fewer zeros in the denomination. It appears the new currency is struggling to hold its value as well, as the central bank has been injecting around $40 million per week to prop up its value.  The economy is unofficially dollarized, meaning that about the only things citizens use the bolivar for are gasoline (which is heavily subsidized) and public transportation.

COVID-19:  The number of reported cases is 239,258,937, with 4,876,197 fatalities.  In the U.S., there are 44,684,338 confirmed cases with 719,546 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 489,254,145 doses of the vaccine have been distributed with 404,371,247 doses injected.  The number receiving at least one dose is 217,627,490, while the number receiving second doses, which would grant the highest level of immunity, is 187,937,559.  For the population older than 18, 68.0% of the population has been vaccinated.  The FT has a page on global vaccine distribution.  The Axios map continues to show improvement in COVID-19 cases, especially in the south.  It appears that the real risk of infection is tied to being indoors.  If so, as the weather cools, we will likely see cases rise across the northern states.

• The WHO has created a new 26-member scientific panel to restart the study of the pandemic’s origins. We doubt this new panel will have any better reception from Beijing.
• New studies suggest that mixing the mRNA vaccines for boosters may be more effective. The FDA continues to consider guidelines on booster authorization.
• China has begun to administer boosters to high-risk patients and the elderly.

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

[Posted: 9:30 AM EDT] | PDF

Today’s Comment begins with several developments related to major global issues, including the current state of economic growth, supply chains, and energy supplies.  We then review various international and U.S. news items, including the Social Security Administration’s latest cost-of-living adjustments to retirement benefits.  We conclude with the latest on the coronavirus pandemic.

Global Economic Growth:  The IMF, in its latest World Economic Outlook, said supply-chain disruptions and health issues would weigh on gross domestic product enough to hold global economic growth to just 5.9% in 2021, versus a forecast of 6.0% in July.  The downward revision to the forecast stemmed entirely from weaker prospects for the developed countries; the organization slightly increased its forecast for growth in the emerging markets.  The group also raised its global inflation outlook and warned of the risks of higher prices.

Global Supply Chains:  The Biden administration has reportedly secured promises from Walmart (WMT, $139.38), UPS (UPS, $181.99), and FedEx (FDX, $221.32) to extend their working hours in a bid to ease supply chain bottlenecks that are weighing down the U.S. and global economic recoveries.  Later today, the firms will announce a move towards a 24/7 work schedule as part of a broader effort to help clear the mismatches between booming demand and lagging supply.  The Port of Los Angeles will launch a similar 24/7 work schedule.

• Separately, President Biden will meet business leaders, port and freight executives, and union officials to discuss the strained state of global supply chains.
• The moves by the administration are mostly political optics and are unlikely to have a major impact on the current supply disruptions.  Resolving the current shortages will require a broad range of firms worldwide to adjust their operations.  That will take time.  Underlining that point, top bank officials attending an Institute for International Finance conference this week agreed that the current challenges would be transitory, with Jamie Dimon, CEO of JPMorgan Chase (JPM, $165.36) insisting, “This will not be an issue next year at all.”

Global Energy Crisis:  In an interview with the Financial Times, International Energy Agency chief Fatih Birol warned that global energy markets would remain volatile unless investment in clean power can be tripled in the next decade.  According to Birol, projected investment in oil and gas is now aligned with the changes needed to reach net-zero emissions of greenhouse gases by 2050.  However, public spending on renewable power is only at a third of the future levels required.

• Birol made the statement while introducing the IEA’s latest World Energy Outlook, which forecasts an eventual decline in oil demand in all three of its scenarios—from the most status quo assumption to the most ambitiously green (net-zero emissions by 2050).
• Under its most conservative “stated policies scenario,” based on climate policies that are already in place and those that are under development, the IEA expects oil demand to peak in the mid-2030s at roughly 104 million barrels per day, compared with almost 100 million today, with a slow decline through 2050.

European Union-United Kingdom:  The EU today will unveil a package of measures intended to reduce the bureaucracy associated with the controversial post-Brexit trading arrangements for Northern Ireland.  The proposals, which come in response to U.K. demands for a radical rewriting of the so-called Northern Ireland protocol, could reduce the number of customs and regulatory checks on the new Irish Sea border by up to half.  The U.K. is taking a hard line on the issue, and the measures to be offered today are unlikely to end the current EU-U.K. tensions.

France:  Six months ahead of the country’s next presidential elections, President Macron proposed a five-year, €30 billion investment plan to boost the country’s high-tech industries and reduce dependence on imported raw materials and electronic components such as microchips.  The “France 2030” plan would direct government money to ten targets, including the development of small “modular” nuclear reactors, green hydrogen production, and the financing of start-ups.

U.S. Debt Limit:  The House of Representatives yesterday approved Senate-passed legislation raising the federal government’s borrowing limit into December, temporarily staving off default while lawmakers battle over setting a new ceiling for U.S. debt.  The bill will increase the debt ceiling by $480 billion, an amount the Treasury Department has said would allow the U.S. to pay its bills at least through December 3.  President Biden is expected to sign the legislation in the coming days.

• Separately, in an effort to end the cycle of debt-limit crises, House Speaker Pelosi yesterday floated the idea of giving the Treasury Secretary the power to raise the borrowing limit but giving Congress the power to reject the increase.  That is similar to an approach devised by Senate Minority Leader McConnell during the 2011 fiscal crisis, which ended with the 2011 Budget Control Act.  That law raised the debt ceiling in three stages, with the latter two increases subject to congressional disapproval.
• Of course, the passage of the latest debt limit increase only puts the issue off for a few weeks, and its expiration coincides with the end of a stopgap spending measure.  In other words, the markets could well face another round of angst and volatility over fiscal policy just after the Thanksgiving holiday.

U.S. Social Security:  The Social Security Administration today will release its cost-of-living adjustments for retirement and disability payments in 2022.  The adjustments are expected to provide a roughly 6% boost, equal to a nearly $93 increase in today’s average retirement benefit of $1,543 per month.

U.S. Monetary Policy:  Atlanta FRB President Bostic said in an interview that last month’s sharp slowdown in U.S. payroll growth should not stop the Fed from beginning to taper its pandemic-era asset purchases in November.  According to Bostic, “I’d be comfortable starting in November . . . I think that the progress has been made, and the sooner we get moving on that the better.”

COVID-19:  Official data show confirmed cases have risen to 238,836,409 worldwide, with 4,868,300 deaths.  In the United States, confirmed cases rose to 44,571,733, with 716,570 deaths.  Vaccine doses delivered in the U.S. now total 488,178,975, while the number of people who have received at least their first shot totals 217,403,897.  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, 65.5% of the U.S. population has now received at least one dose of a vaccine, and 56.5% of the population is fully vaccinated.
• More Americans are now getting a booster dose of the COVID-19 vaccine each day than are getting their first shot, despite health experts’ view that the priority should be convincing vaccine holdouts to get their initial round of shots.

Source: Axios

• Yesterday, the Labor Department submitted a draft “emergency temporary order” that would require businesses with 100 or more employees to have their workers vaccinated or regularly tested for COVID-19.  The proposed standard would also direct employers to provide paid time off to workers so they may receive the vaccine. Employers that don’t comply could face fines of up to roughly $13,600 a violation.
• In New York, a federal judge extended an order requiring the state government to allow religious exemptions from its vaccination mandate for healthcare workers.  According to the judge, the mandate conflicted with individuals’ federally protected right to seek religious accommodation from their employers.
• Today, the Department of Homeland Security is expected to ease pandemic restrictions on land crossings into the U.S. from Canada and Mexico.  For the first time in 20 months, travelers from Canada and Mexico will be permitted to enter the U.S. at its land-border crossings for purposes such as shopping or visiting family and friends so long as they are fully vaccinated.
  • Throughout the pandemic, Mexican and Canadian citizens have been only allowed to enter the U.S. for essential reasons, such as attending school or trucking goods across the border.
  • Unvaccinated travelers will still be prohibited from coming to the U.S. for nonessential travel.

 Economic and Financial Market Impacts

• The union representing pilots at Southwest Airlines (LUV, $52.18) said fatigue and frustration over frequent rerouting was a contributing factor to the carrier’s mass flight cancellations in recent days, rather than a “sickout” over vaccination requirements.  If so, the cancellations are another manifestation of the economy-wide worker shortages that have plagued the economy as demand recovers from the pandemic.

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

[Posted: 9:30 AM EDT] | PDF

Today’s Comment opens with several big and broad crises, including the global energy crunch, China’s clampdown on private firms, and Chinese debt issues.  We also cover other foreign and U.S. developments, and we wrap up with the latest on the coronavirus pandemic.

Global Energy Crisis:  As natural gas, crude oil, and other energy prices continue to rise in response to recovering demand and faltering supplies, we see many new examples of the negative economic and political impact.

• In Europe, President Putin’s government is using the crisis to bolster its image and argue for a less adversarial relationship.  Russia’s ambassador to the EU, Vladimir Chizhov, said, “Change ‘adversary’ to ‘partner’ and things get resolved easier . . . when the EU finds enough political will to do this, they will know where to find us.”
• Separately, Moldova is requesting emergency gas supplies from EU countries after Russian state-controlled exporter Gazprom slashed its shipments to the country.  Moldovan officials are unwilling to agree to new terms with Gazprom at the significantly higher price the company is demanding.
• In China, desperate factory owners facing blackouts from the state energy grid are increasingly turning to diesel generators to keep their businesses going, threatening both the country’s economic growth and its green ambitions.
• Smaller semiconductor firms in China say they’ve had to suspend production because of inadequate power supplies.
• Also in China, the government said it would allow the price of coal-fired power to rise more sharply, hoping that market forces can address the country’s power crunch.

Chinese Financial Industry:  In an exclusive report, the Wall Street Journal said President Xi launched a sweeping examination of major state-owned banks, investment funds, and financial regulators to determine whether they’ve become too chummy with private firms, such as the technology giants that Beijing has been working to rein in over the last year.  China’s top anticorruption agency leads the examination and focuses on 25 financial institutions at the heart of the Chinese economy.  It is part of his broad effort to steer China’s economic system away from Western-style capitalism in the run-up to a leadership transition late next year when Xi is expected to sidestep convention and continue his rule beyond the usual two five-year terms.

• By expanding his economic campaign, Xi risks unleashing dynamics that could severely cut into growth in the coming months.  Amid the uncertainty, many banks are already pulling back from lending to private developers and other businesses, according to analysts.
• With major crackdowns now being imposed on real estate developers, technology firms, and the companies that finance them, any substantial slowdown in economic activity could prompt the government to try to reinvigorate growth through its traditional playbook of debt-driven investment.  If so, Xi’s program could worsen some of the debt distortions that are already very concerning for the Chinese economy.
• For U.S. investors, Xi’s crackdowns, therefore, imply a wide range of risks, from heavier regulation of targeted industries to reduced lending activity and worsening debt dynamics.  That’s on top of the risks arising from U.S. policies, such as tighter regulations on U.S. investment in companies that support the Chinese military.  In sum, it’s looking riskier and riskier to invest in Chinese assets.

Chinese Debt Crisis:  Heavily indebted developer Evergrande (EGRNY, USD, 9.06) has apparently missed making three more offshore interest payments due to be paid at noon today in Hong Kong.  The interest payments total $148 million, on top of the $83.5 million in offshore interest payments the company missed last month, which set off a 30-day grace period before the company formally defaults.

• Separately, developer Sinic Holdings (2103, HK, 0.50) said yesterday evening that a default on its bonds coming due this month would “likely occur” because the company does not have enough “financial resources.”
• Also, developer Fantasia Holdings (1777, HK, 0.56) said two of its nonexecutive board members, including the chair of its audit committee, have resigned just days after the company unexpectedly missed a bond payment last week.
• Finally, many big developers in recent days have reported sharply lower sales in September, as curbs on property lending and worries about developers’ financial health start to sideline house buyers.  Slowing home sales will likely exacerbate the heavily indebted developers, who often rely on presales for their operations and debt service.
• The recent developments will certainly feed further fears about major Chinese bond defaults, slowing Chinese economic growth, and the potential for some financial contagion.

Japan:  Even though much has been made of new Prime Minister Kishida’s trial balloon regarding a hike in the country’s capital gains tax, which has weighed on Japanese equities despite the prime minister’s effort to walk back the idea, both the ruling Liberal Democratic Party and the opposition are arguing for greater income redistribution ahead of the October 31 parliamentary elections.  In a recent parliamentary debate, Constitutional Democratic Party leader Yukio Edano vowed to provide those with low incomes a yearly ¥120,000 cash handout along with other immediate financial benefits and effectively exempt from income tax individuals whose annual salary is about ¥10 million or less per year.

United Kingdom:  Prime Minister Johnson’s office confirmed that Chancellor of the Exchequer Sunak is considering a rescue plan to help the steel industry and other energy-intensive sectors through a winter of soaring gas prices.  Sunak is reportedly considering a proposal that will include loans and other support with a value in the low hundreds of millions of pounds.

U.S. Debt Limit:  The House of Representatives today is set to vote on last week’s Senate-passed legislation raising the federal government’s borrowing limit into December, temporarily staving off default while lawmakers battle over setting a new ceiling for U.S. debt.  The bill would increase the debt ceiling by $480 billion, an amount that the Treasury Department has said would allow the U.S. to pay its bills through December 3, assuming it had also exhausted all of its cash-conservation strategies.

U.S. Fiscal Policy:  As Congressional Democrats debate how to cut the size of their big antipoverty and climate change bill, House Speaker Pelosi last night wrote in a letter to her colleagues that they should focus on providing rich funding for a limited number of initiatives, instead of spreading the available funding too broadly or for too short of a period.

Green Investing:  Against rising popular demand to clamp down on fossil fuel emissions, a renewed appreciation for nuclear energy and a roughly 37% jump in uranium prices has prompted hedge funds back into the sector for the first time since the Great Financial Crisis.  As one example of renewed interest, President Macron has said France would invest €1 billion in nuclear power by the end of this decade as Europe’s energy crisis spurs renewed interest in the source of power.

• Separately, Oak Hill Advisors, which manages $52 billion and is best known as a big debt investor, is teaming up with a partner to buy roughly one million acres of North American woodlands and manage the properties to generate so-called forest offsets, i.e. tradable assets representing a metric ton of carbon that has been sequestered in standing trees.
• Companies that buy offsets use them to negate emissions on the internal carbon ledgers they keep to show investors their progress toward climate goals.

COVID-19:  Official data show confirmed cases have risen to 238,384,951 worldwide, with 4,859,881 deaths.  In the United States, confirmed cases rose to 44,456,936, with 714,064 deaths.  Vaccine doses delivered in the U.S. now total 487,277,035, while the number of people who have received at least their first shot totals 216,889,814.  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, 65.3% of the U.S. population has now received at least one dose of a vaccine, and 56.4% of the population is fully vaccinated.
• Against the background of rising vaccinations and the usual two-month cycle of infection waves, there are signs the latest Delta surge in the U.S. may be fizzling out.  The number of new COVID-19 cases reported has fallen approximately 22% in the past two weeks, while hospitalizations have fallen by a fifth. The pace of deaths has also slowed.

• AstraZeneca (AZN, USD, 60.80) said its antibody cocktail cuts the risk of severe disease or death in patients by half. The drug AZD7442 had previously shown a significant effect in preventing any symptoms of coronavirus.

 Economic and Financial Market Impacts

• As infection rates fall again, private high-frequency data suggests workers are trickling back to the office at the highest rate since the pandemic began. Data from security company Kastle Systems shows some 36% of office workers in ten major cities were back in the office in the week ended October 8, versus 35% in the week ended October 1 and just 31% in the week of Labor Day.
• In Europe, high vaccination rates and a budding recovery from the latest infection wave have allowed business travel to start snapping back even faster than in the U.S.

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  It’s Columbus Day and Indigenous People’s Day.  Being a commercial bank holiday, the Treasury market is closed, although Treasury futures are trading and would suggest interest rates will continue to rise.  It’s also a government holiday, meaning there are no government economic reports today.  U.S. equity futures are pointing to a lower open as oil prices continue to ratchet higher.  West Texas Intermediate prices are now above $80 per barrel.  Our coverage begins with the international roundup. Up next we have a China update and the latest on crypto.  Economic and policy news follows, and we close with the pandemic report.

International roundup:  There was an election surprise in the Czech Republic; Chancellor Kurz is out, and the IMF Managing Director remains under fire.

• In weekend elections in the Czech Republic, the center-left coalition led by PM Andrej Babiš suffered a surprise defeat by the center-right SPOLU coalition. This election featured the Pirate party, who had been polling strongly into the election but underperformed.  Babiš had been named in the Pandora Papers, and it is quite possible the revelation hurt his electoral performance.  The narrow loss by the center-left doesn’t necessarily mean the end of Babiš’s term as PM.  The vote was close enough that there may be a grand coalition with the center-right.  Still, Babiš may turn out to be the first political victim of the Pandora Papers.  As the election results came in, Czech President Miloš Zeman was hospitalized.
• Austrian Chancellor Sebastian Kurz resigned over the weekend as he faces corruption charges. According to reports, Kurz allegedly used public funds to generate favorable polling.  By resigning, Kurz’s coalition won’t necessarily face elections, and he will maintain some degree of influence within his party.
• IMF Managing Director Kristalina Georgieva remains under investigation on charges she, while working at the World Bank, participated in manipulating data to improve China’s standing in the “Doing Business” report. The bank has suspended the report for now.  IMF officials are continuing to review the charges.  Although the row is something of a tempest in a teapot, given the charges, we don’t see how she can maintain her position.  If she does leave office, look for the EU to push for a European replacement.
• Last week, we reported Polish courts ruled that Polish law overruled EU law, generating talks of “Polexit.” Over the weekend, there were widespread protests against the possibility of Poland leaving the EU.  Polls suggest overwhelming support for remaining in the union.  However, we don’t see an easy path to reconciling the issues over legal authority.
• There were elections in Iraq over the weekend. Reflecting the level of disenchantment with the government, turnout was historically low.  The election may determine U.S. troop strength in the country.
• Although we haven’t reported on the situation with India’s farmers for a while, it is far from resolved. To recap, the Modi government is trying to end price supports for various crops to allow market forces to determine production.  This policy will almost certainly improve productivity and efficiency.  These gains will almost certainly come from consolidation, meaning farmers will be forced from their small plots.  Facing this pressure, farmers continue to protest the policy, and the courts have suspended the new law for now.
• Moscow is urging the EU to become more cooperative with Russia; if it does, gas supplies might rise.
• The U.K. and EU are coming closer to a trade war over the Northern Ireland border. It appears to us that if Westminster continues on its current path, a hard border will be unavoidable.  If a hard border returns, the Good Friday Agreement will almost certainly rupture, and U.K. and EU relations will be in jeopardy.  We should also note, the U.S. won’t look favorably on PM Johnson if this occurs.
• A.Q. Khan, the founder of Pakistan’s nuclear weapons program and the likely source of Iran and North Korea’s nuclear program, died over the weekend.
• The U.S. arrested a Navy engineer and his wife for attempting to sell U.S. nuclear submarine secrets.

China news:  Taiwan tensions remain elevated, and real estate problems persist.

• Tensions over Taiwan continue. After a week where over 100 air sorties were conducted over Taiwan, General Secretary Xi says he wants a “peaceful” unification of the island.  President Tsai of Taiwan says her country won’t “bow to pressure” from Beijing.  We continue to monitor this situation closely, and what we see continues to suggest no reduction of tensions.  Recent polling in the U.S. indicated that, for the first time, the majority of Americans support the U.S. defending Taiwan if there is an invasion of China.

(Source:  Chicago Council on Global Affairs)

• There is growing evidence that the problems of Evergrande (EGRNF, USD, 0.36) are spreading to other property developers. Modern Land (1107, HKD, 0.465), another property developer, has asked to defer a bond payment.  China is trying to manage what looks like the end of a debt-fueled property boom.  On the one hand, the goal is to bring down debt levels and curb home prices.  However, property is a key pillar of household wealth, and if prices fall, the result could be social unrest and weakening consumption.  We are seeing stress in China’s high-yield dollar market.  Bondholders of China’s dollar bonds will likely be the “last in line” during liquidations.

(Source:  Bloomberg)

• U.S. companies want tariff relief from the Biden administration; it doesn’t look like they are going to get it. Overall, businesses are trying to manage the deteriorating geopolitical situation with China and the U.S. with some degree of decoupling and continuing to invest in China.
• As Beijing tries to improve air quality, restrictions on coal-fired factories and electricity are leading to widespread shortages. It appears that environmental rules will be relaxed.

 Crypto:  In trying to determine when the next financial crisis will emerge, our best guess is from the crypto space, specifically from stablecoins.  These coins purport to hold an equal amount of dollars to the stablecoin.  They are useful to crypto traders because if a trader wants to take profits on a position, they can liquidate, say bitcoin, and move it to a stablecoin, likely avoiding a taxable event.  Regulators have expressed concern that stablecoins are effectively unregulated money market funds, and without transparency on what is being held as assets to produce the stablecoin, runs are possible.  Recent reporting on Tethercoin suggests the holdings are a bit dodgy, which raises fears that if holders move to liquidate, there won’t be adequate assets to meet demand.

Economics and policy:  Global supply chains continue to weigh on growth and lift inflation.

• Global supply chains remain broken, and there is growing evidence the logistical problems are contributing to inflation and slowing economic growth. No one policy will resolve the logistics issues because there are multiple causes, including lack of workers, COVID-19 outbreaks, industry concentration, and consumer behavior.  Large retailers are reportedly chartering their own ships to secure goods.  However, even getting secure shipping doesn’t necessarily mean the ships can be unloaded easily, although the retailers are using much smaller vessels that can be unloaded at minor ports.  Even though the costs are higher, at least supplies can be secured.  This process could further pressure smaller retailers and result in additional industry concentration.
• As home prices rise, borrowers are finding their home appraisals are violating covenants and killing purchase agreements. In the past, eventually, appraisals rose, but in the aftermath of the 2005-08 housing bubble, that may not be the case going forward.  Meanwhile, younger homebuyers are pooling resources to buy homes; it remains to be seen how durable these arrangements will be as buyers’ lives change.
• Last week, Ireland agreed to a 15% minimum global corporate tax, ending one of the more notable holdouts to the OECD agreement. A minimum corporate tax is probably a necessary requirement for a rise in the U.S. corporate tax rate.  Even with this agreement, Congress may still not approve a tax hike.

COVID-19:  The number of reported cases is 237,956,055, with 4,853,764 fatalities.  In the U.S., there are 44,340,408 confirmed cases with 713,354 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 487,277,035 doses of the vaccine have been distributed, with 401,819,240 doses injected.  The number receiving at least one dose is 216,889,814, while the number receiving second doses, which would grant the highest level of immunity, is 187,215,471.  For the population older than 18, 67.8% have been vaccinated.  The FT has a page on global vaccine distribution.

• For fully vaccinated adults, or those who have been vaccinated and infected, the need for booster shots is low.
• Although western Europe has seen rising vaccination rates, they lag in Central and Eastern Europe, leading to higher levels of virus disruption.

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  U.S. equity futures are up this morning.  A potential deal on the debt ceiling and relief on oil and gas prices have improved sentiment.  Our coverage begins with an examination of these two factors.  Up next is crypto news and an update on China, followed by the international roundup.  We close with economics and policy and the pandemic update.

What’s behind the rally?  Two developments seem to be lifting equity sentiment this morning.

• The potential resolution of the debt ceiling. We will admit to being a little jaded about this issue, mostly because we have seen all this before.  Was there a chance of default?  Yes, but the odds were very small.  The debt ceiling is really a convenience for Congress.  Prior to 1917, Congress would assign a revenue source for each bill.  If a bill required funding, it was either assigned a tax revenue stream or borrowing was authorized.  When war spending ramped up during WWI, this arrangement became unwieldy, so Congress mandated a debt level and allowed the Treasury to manage the spending, using either tax revenue or borrowing.  The debt ceiling, then, is simply the accommodation for spending that has already occurred.  Although Congress likely never intended this convenience measure to turn into a political football, it has become one.
  • So, what about default? There are a couple of schools of thought about the debt ceiling issue.  The first is that the Constitution (14^th Amendment) says U.S. Treasury debt will not be questioned.  One school of thought that suggests the president facing the debt ceiling issue should simply ignore it and order the Treasury to continue issuing debt.  It would be a risky strategy, although some legal scholars suggest that the argument for ignoring the ceiling is pretty strong.  Essentially, the point is that the Constitution overrules Congressional rules.  The worry is that the fate of the world’s reserve asset could be in the hands of a judge.
  • The other popular idea is that instead of risking a Constitutional crisis, the Treasury, through its power to mint currency, should simply strike a large denomination coin, let’s say, $1.0 trillion, take the coin, walk it to the Eccles Building, and present it to the Fed for deposit in the Treasury’s account. How can they do this?  The Treasury has the power to mint money, and this act is within that power.  Is this a gimmick?    But if used, it reveals that Modern Monetary Theory is the correct way of looking at money; the government effectively creates money out of thin air and funds anything it so desires.  The fear of saying this out loud is that the temptation to oversupply fiat currency will be really hard to contain.  After all, why stop at a trillion?
  • Instead of testing a Constitutional theory or revealing that money is a pure construct, we engage in political Kabuki theater. Both political parties use it to score points but really don’t want to “die on this hill.”  There is some evidence that the Democratic leadership was going to use the debt ceiling issue to further erode the filibuster, something the minority doesn’t want to see occur.  So, Sen. McConnell (R-KY) made an offer that we expect the Democratic leadership to accept.
  • In conclusion, there was never going to be a default. The Democrats didn’t want the GOP to use the debt ceiling against them in the 2022 midterms.  They wanted the GOP to join them in lifting the ceiling.  The GOP correctly noted they could use budget reconciliation to raise the ceiling without GOP votes; that wasn’t acceptable to the Democrats.  In the end, it appears the ceiling agreement will pass because the GOP has agreed not to filibuster the ceiling increase.  However, it will probably be raised with Democratic votes alone.  The GOP gets its talking points (which, BTW, we expect that GOP won’t need the help next November; it should retake control of Congress with little effort), and the Democrats don’t have to use reconciliation.
• Aid on energy. So as not to bury the lede, Russian President Putin seemed to signal that Russia would lift oil and gas supplies to ease the current crisis.  Now, on to the backstory.  Globally, energy prices across the board—oil, natural gas, coal—have been on a tear.  Governments are facing a real crisis on energy costs, even before winter sets in.  Any politician knows that higher energy costs are a major negative factor.  No one likes paying high prices for gasoline or having to decide how much cold one can stand in the winter.  How did we get here?  Like any major trend, a combination of factors is in play.  Here are the biggest ones:
  • ESG has played a major role. Investing in hydrocarbon production has become, well, something that righteous people don’t do.  Energy firms have seen their ability to source capital constrained.  Perhaps even more important, energy producers are being sent clear signals that the balance of policy will be designed to reduce demand for their products.  Faced with a bleak future, they have reacted as any declining business would; they have reduced investment.

(Source:  FT, S&P)

This chart shows the capital expenditures of public energy firms.  Since 2014, there has been a clear reduction in investment.  For energy firms, the fear is stranded assets.  If a future investment could decline to zero value in a few years, there is little sense in making that investment.  And, since hydrocarbons are a depleting energy source, slowing investment means less supply.  Higher prices should not be a shock to anyone.  If the goal is to reduce hydrocarbon consumption, the increase in price aids in that goal.  In fact, it could be argued that ESG has effectively created a carbon tax, but the revenue from the tax is going to energy companies instead of governments.  The problem for politicians is that higher prices are unpopular.  Even with changes in governments, we suspect this trend is in place.

• The logical behavior of energy firms facing these constraints is to maximize revenue in the short run. Thus, OPEC’s recent decision to not increase production is part of that process.
• So why is Putin suddenly coming to the rescue? Yesterday, the Russian president offered to address the jump in prices.  It looks to us that this is a rather transparent ploy to open Nord Stream 2, which will isolate Eastern Europe and further increase EU dependence on Russian gas.  However, there may be other concerns.  The U.S. government should be making the same calculations on the future of oil regarding the Strategic Petroleum Reserve (SPR).  If the value of oil is going to zero at some point in the future, it should sell off this asset while it has value.  Putin realizes that his OPEC+ could be competing with the Department of Energy at some point and would likely prefer to stabilize oil prices to prevent aggressive selling of SPR oil to lower prices.

Crypto:  The SEC wrangles with Congress and the DOJ sets up a task force.

• SEC head Gary Gensler is an aggressive regulator. Given the slow progress in filling positions in the Biden administration, he has moved to expand the purview of this department into areas that perhaps are better regulated by the CFTC or other bodies.  Congress is starting to push back.  We don’t think this will reduce the drive to regulate crypto (stablecoins are a real risk), but arguably, the SEC isn’t the best venue for all that is being done.
• Criminals love crypto; ransomware and other activities are often done in bitcoin, taking advantage of the products’ pseudo-anonymity and ease of transfer. The DOJ is creating a team to push back against the use of the product in illicit activity.
• Bonds are being issued denominated in cryptocurrencies. So far, the market reaction has been rather poor.

China news:  Xi and Biden to talk, and trade relations remain tense.

• Presidents Biden and Xi will hold a virtual summit this year. The U.S. has been pressing for talks, but China has been reluctant to accept a meeting.  Although talking is usually a positive sign, there is little evidence that U.S./China policy is going to improve markedly.
• This week, USTR Tai gave a speech on China trade relations. The clear takeaway is that the foreign policy establishment has concluded that China will never accept a U.S.-led global system. Thus, trade relations will remain transactional and difficult.  This trend to isolate and contain China is becoming ever clear and will have profound effects on markets in the coming years.
• China’s dollar property bonds are getting hammered, sending yields to around 18%. For comparison, CCC bonds are currently yielding 7.48%.

International roundup: The German Greens/FDP have picked the SDP, and Putin faces a new internal threat.

• Although the news wasn’t a complete surprise, the “kingmaker” coalition of the Greens and the FDP have selected the SDP to try to form a government. It is still possible that these efforts fail, but we do expect they will form a government, ending CDU/CSU rule for now.
• Russia has been plagued with slow growth and high levels of corruption during the Putin era. Despite general unrest, Putin has managed to hold power without serious threat.  Interestingly, there is a rising movement among the communists, of all places, to Putin’s hold on power.
  • In related news, NATO has expelled eight members of the Russian mission for spying. Look for a similar retaliation in the near future.
• While the U.K. is facing a winter that some are comparing to the bleak period of the 1970s (high inflation, widespread shortages), PM Johnson described a future Britain that will be much better.
• Authorities in Austria raided the office of the chancellor on suspicion of illegal activity.
• Taiwan is pushing back against U.S. demands for supply chain information.

Economics and policy:  Powell looks safe, and there is new hope regarding malaria.

• The GOP members of the Senate banking committee are warning President Biden against replacing Jerome Powell at the Fed. This committee has been a brake on populism.  Unorthodox candidates in the last administration generally failed to get out of this committee, and it seems the trend continues.
• Even though the focus remains on COVID-19, for much of the world the real scourge is malaria, an old malady that has mostly defied a vaccine. It appears that, at long last, one is on the horizon, which could be a huge plus for frontier markets.
• As the Fed begins to prepare to taper, financial dealers warn there is a risk of market malfunction. This is something we will be monitoring closely.

COVID-19:  The number of reported cases is 236,612,988, with 4,830,359 fatalities.  In the U.S., there are 44,060,356 confirmed cases with 707,797 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 480,427,985 doses of the vaccine have been distributed with 398,675,414 doses injected.  The number receiving at least one dose is 216,012,495, while the number receiving second doses, which would grant the highest level of immunity, is 186,385,751.  For the population older than 18, 67.5% have been vaccinated.  The FT has a page on global vaccine distribution.  The Axios map shows definitive improvement in the spread of the disease.

• A recent study examines the issue of myocarditis (heart inflammation) in patients who received the mRNA vaccines. The highest occurrence is in men aged 16 to 29 years, who had about 0.01% incidence.  Most cases were mild to moderate; those infected with COVID-19 tended to have a higher frequency.

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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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