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

[Posted: 9:30 AM EDT] | PDF

We open today’s Comment with the state of play on President Biden’s proposed spending program on infrastructure and other economic initiatives.  We follow with several items related to technology, cybersecurity, cryptocurrencies, and tech regulation.  We then address miscellaneous international news items before turning to the latest developments on the coronavirus pandemic.  And finally, on a historic note, today is the 125^th anniversary of the launch of the Dow Jones Industrial Average.  In case you’re wondering, the DJIA has risen by an average of 7.69% each year since it began on May 26, 1896.

U.S. Fiscal Policy:  Republicans in the Senate met yesterday to discuss a nearly $1 trillion counteroffer on infrastructure spending to present to the White House later this week.  The new proposal would represent a significant increase from their original $568 billion plan and a reduction of President Biden’s offer of $1.7 trillion.  While the path to an agreement that can pass Congress remains thin, the significant narrowing in the two sides’ differences will probably help increase the odds of a deal.

• Even a deal in the range of $1 trillion or so would likely provide a noticeable additional jolt to the economy and keep alive fears of rising inflation.  Such a spending deal would also help provide additional support to stocks and other risk assets.
• As the negotiations between the six Republicans and the White House progress, other lawmakers are exploring their own bipartisan agreement on infrastructure. Sen. Mitt Romney and a group of Republicans and Democrats have been holding recent discussions on a possible infrastructure plan that Romney said they could release soon.
• As a reminder, however, the administration will still face longer odds on hiking taxes on corporations or wealthy individuals to help pay for the infrastructure spending.

U.S. Cybersecurity:  Responding to the ransomware attack against Colonial Pipeline, officials at the Department of Homeland Security said the Transportation Security Administration will soon require notification from pipeline operators when they become targets or victims of cyberattacks.  The directive also will require each company to designate a point person for cybersecurity.  According to the officials, the action is merely the prelude to a more muscular set of rules that will require pipeline owners to take concrete steps to secure their assets against attacks.

• Other important infrastructure industries, such as electric utilities, have had mandatory cybersecurity requirements for years.  Nevertheless, the petroleum industry has already pushed back against any potential new cybersecurity regulations.
• Any new rules could presage even broader cybersecurity regulations across critical industries, potentially increasing compliance costs.

Cryptocurrencies:  In their annual oversight testimony before the Senate Banking Committee today, the chief executives of several major U.S. banks plan to express caution regarding the use of cryptocurrencies like Bitcoin.  For example, the chief of Bank of America (BAC, $42.01) offered assurances that “Currently, we do not lend against cryptocurrencies and do not bank companies whose primary business is cryptocurrency or the facilitation of cryptocurrency trading and investment.”

• The testimony could further dampen cryptocurrency enthusiasm after other recent indications of a regulatory clampdown.  Despite the Bank of America assurances, we have learned of suggestions that some market participants are allowing leverage on cryptocurrencies, with all the volatility and risk to the financial market that implies.
• Meanwhile, in South Korea, many crypto exchanges are facing an existential crisis as they struggle to meet conditions for regulatory approval in a shake-up concerning one of the world’s biggest cryptocurrency markets.  To be licensed as a legal trading platform, Korean exchanges are required to partner with local banks and open real-name bank accounts for customers. However, banks are reluctant to participate out of a fear of being held liable for any money laundering in digital currencies.

United States-Canada:  The Biden administration yesterday initiated a formal trade complaint against the Canadian dairy industry, triggering for the first time the dispute mechanism contained in the new U.S.-Mexico-Canada Agreement (USMCA).  In the complaint, the U.S. alleges that Canada used a complex system of tariff-rate quotas that sets aside a share of its dairy market exclusively for Canadian dairy processors, and that the system violates what Canada agreed to in the USMCA.

• The new trade complaint actually is just one of several that the Biden administration has launched over the USMCA.
• The continued use of the trade agreement’s dispute provisions is another example of how the Biden administration has been happy to continue many of the populist and protectionist policies launched by former President Trump.

European Union:  Officials at the EU said the European Commission will soon launch a formal probe into alleged anti-competitive practices by Facebook (FB, $327,79).  Specifically, the commission will examine whether the social network is distorting the classified ads business by promoting its Marketplace services for free to its two billion users.  Facebook is the only major U.S. technology firm that hasn’t faced a formal antitrust probe by the EU.  The new examination shows that the technology sector continues to face regulatory risks.

Iran:  The head of the International Atomic Energy Agency, Rafael Grossi, has warned that Iran is enriching uranium at purity levels that “only countries making bombs are reaching,” even as it continues to talk with Western leaders in Vienna about rejoining its 2015 nuclear limitation deal.

Brazil:  Finance Minister Guedes, Senate President Pacheco, and House Speaker Lira have agreed to scrap the sweeping tax reform proposed by President Bolsonaro last year because it wouldn’t receive enough support in Congress.  Instead, the leaders agreed to simply rework the country’s byzantine fiscal regime through a series of piecemeal changes.  Economists have long argued that increasing Brazil’s competitiveness would require a major tax reform and simplification, so the agreement is likely to be taken as a negative for Brazilian stocks.

COVID-19:  Official data show confirmed cases have risen to 167,898,407 worldwide, with 3,487,458 deaths.  In the United States, confirmed cases rose to 33,166,902 with 590,994 deaths.  Vaccine doses delivered in the U.S. now total 359,004,955, while the number of people who have received at least their first shot totals 164,378,258.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

 Newly confirmed U.S infections totaled just 22,756 yesterday, remaining below both the seven-day moving average and the 14-day moving average.  New deaths related to the virus totaled 543 and continue to trend lower.  Meanwhile, data from the CDC shows 49.5% of the U.S. population has now received at least one dose of a vaccine, and 39.5% of the population is fully vaccinated.

• French counterintelligence agents are reportedly investigating an apparent effort by Russia to discredit the vaccine from Pfizer (PFE, $39.33) by paying high-profile health and science bloggers to publish articles or videos discrediting it.  If true, the project would mirror efforts by the developers of Russia’s Sputnik V vaccine.
• In Japan, regional governors in Tokyo, Osaka, and other localities requested that the government extend its pandemic state of emergency and social distancing measures beyond the scheduled end date of May 31, as anticipated.  The government is expected to approve the extension into mid-June, which would be just one month before the scheduled start of the Summer Olympic Games in Tokyo.
• In some better news out of India, newly confirmed infections are steadily declining in response to regional lockdowns and increased levels of antibodies among the population, according to public health experts.
  • The country’s seven-day moving average of new daily infections has fallen to 237,000 from a peak of 392,000 in early May.
  • The country’s test positivity rate has dropped to 9.4% from a high of about 23% earlier this month, although that’s still above the World Health Organization’s benchmark of 5% for having a pandemic under control.
• Meanwhile, the WHO is seeking more data on the CoronaVac vaccine from China’s Sinovac Biotech.  According to sources, the WHO has recently asked for more details regarding the safety of the shot.  It has requested data about Sinovac’s manufacturing process to assess whether it is compliant with WHO standards. One senior WHO official now expects a decision on authorizing the vaccine to be delayed into June.
• As the WHO’s governing board met yesterday, the Biden administration called for a deeper investigation into China’s role in the pandemic under rules that “give international experts the independence to fully assess the origins of the virus.”  As might be expected, however, China pushed back with a strong statement that it considered the investigation in its country to be complete and said attention should now turn to other countries.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we open with the latest details on the Belarusian “state hijacking” and its impact on geopolitical relations between the U.S., Europe, and Russia.  We then continue with other international news ranging from China and Russia to Turkey and Ecuador.  We end with the latest developments on the coronavirus pandemic.

European Union-Belarus:  EU leaders imposed new sanctions on Belarus and banned Belarusian airlines from entering EU airspace to punish the Lukashenko government for an incident over the weekend.  A jet fighter was ordered to force a civilian airliner flying over Belarusian territory to land and then arrested an opposition journalist on the plane.  Separately, British Foreign Secretary Raab said the U.K. was suspending the Belarusian national airline’s permit to operate in British airspace and would advise British airlines to avoid the former Soviet Republic’s airspace.  President Biden said his administration was also considering punishments.

• In response, President Lukashenko signed a series of laws that gave authorities the power to suspend telecom networks, block media outlets, and ban unauthorized opinion polls. In addition, all mass events in Belarus now have to be authorized.
• Since Belarus and its authoritarian government are already very isolated politically, with few friends besides Russia, it’s not clear that any new Western sanctions will have much impact on the country, its economy, or Europe in general.
• However, we do note that the weekend incident continues a trend in recent years in which authoritarian governments have shown an increased willingness to strike out at their enemies beyond their own territory.  Other notable examples include Russia’s poisoning of dissidents living in the U.K. and China’s new security law for Hong Kong, which criminalizes anti-Chinese agitation anywhere in the world.

United States-China:  Goldman Sachs (GS, $368.29) won approval from Chinese regulators to launch a joint-venture asset management company in China with the Industrial and Commercial Bank of China (IDCBY, $12.70).  That follows an announcement earlier this month that BlackRock (BLK, $872.36) won approval for a joint venture with the China Construction Bank (CICHY, $15.86).

• The decisions demonstrate that China continues to implement economic reforms in select areas, opening up opportunities for U.S. investors.
• However, by giving major U.S. financial firms a greater interest in good U.S.-China relations, Beijing probably hopes the firms will lobby Washington to cool bilateral tensions.

United States-Russia:  The U.S. and Russia may be ready to announce a date for the first summit meeting between Presidents Biden and Putin.  In a news conference today, Kremlin spokesman Dmitry Peskov told reporters an announcement related to a summit would be coming “soon.”  Based on its sources, a Swiss newspaper yesterday said the summit will be held in Switzerland.

Global Commodity Sector:  Even though the post-pandemic commodity boom is boosting profits for miners, they aren’t throwing cash at new projects, raising concerns about future shortages and higher prices for some metals.

• So-called technology metals, such as cobalt, copper, and lithium, are set for particularly large deficits amid rising demand for batteries, electric cars, and wind turbines.
• As we’ve noted before, the dearth of new oil and gas projects is also likely to buoy energy prices into the future, despite the long-term trend toward renewables.

Turkey:  In the latest sign of political interference in Turkish monetary policy, President Erdogan has dismissed Oguzhan Ozbas, one of the central bank’s deputy governors and a member of its monetary policy committee.  He replaced him with Semih Tumen, a presidential adviser and a professor of economics at TED University in Ankara.  Erdogan has now replaced three senior central bank officials in just the last two months, on top of numerous other personnel changes in recent years.  He makes these moves as he pushes his unconventional view that high interest rates are a cause, rather than a cure, for Turkey’s high inflation and financial problems.  In response, the lira has plunged some 14% since March, although the currency has reacted little to today’s news.

Ecuador:  Conservative businessman Guillermo Lasso was sworn in as the country’s new president yesterday.  In his inauguration speech, Lasso decried corruption and authoritarianism and vowed to address the country’s massive economic and social challenges.

COVID-19:  Official data show confirmed cases have risen to 167,367,952 worldwide, with 3,475,611 deaths.  In the United States, confirmed cases rose to 33,144,178 with 590,697 deaths.  Vaccine doses delivered in the U.S. now total 357,250,475, while the number of people who have received at least their first shot totals 163,907,827.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections totaled just 25,925 yesterday, essentially in line with the seven-day moving average of 24,794 and a bit lower than the 14-day moving average.  The nation’s mass vaccination program is now proceeding somewhat slower than it was early in the spring, largely due to the highest-priority and most-avid vaccine seekers already having their shots, but it continues to inoculate almost two million people per day.  Data from the CDC indicates 49.4% of all U.S. residents have received at least one injection, and 39.3% are fully vaccinated.
• Citing a new study, Moderna (MRNA, $164.17) said its vaccine has similar effectiveness in adolescents aged 12 to 17 as it has in adults and would apply in early June for regulatory approval to give the vaccine to that age group.  The news should be positive for risk assets because approval of the shot for adolescents would further broaden and accelerate the global vaccination drive.
• A new Axios/Ipsos poll indicates that among those people who have been vaccinated, only 47% say they’re still wearing a mask at all times outside the home, a steep drop from 65% two weeks ago.  The poll also indicates people are very skeptical about strangers’ honesty regarding their vaccination status.
• Despite the continued positive progress against the pandemic at home, the State Department yesterday warned U.S. citizens against all travel to Japan because of the risk posed by that country’s high infection rate.
  • The move puts the U.S. travel advisory at its highest level just two months ahead of the Tokyo Olympics.
  • Tokyo reported 542 new cases of COVID-19 on Tuesday as momentum grows for the extension of a coronavirus state of emergency covering Tokyo, Osaka, and other areas beyond the current deadline of May 31.
• In Australia, the government has reintroduced social-distancing restrictions in Melbourne following the discovery of a COVID-19 cluster that experts warn could derail one of the world’s most successful efforts to suppress the virus.  Nine cases of the variant first identified in India have been detected in the city’s northern suburbs, breaking an 86-day run without a locally transmitted infection outside of hotel quarantines.
• A long article in the Wall Street Journal provides new revelations regarding virus-driven illnesses linked to bats and the Wuhan Institute of Virology (WIV) in Southwest China prior to the pandemic.  The article also highlights various inconsistencies and corrections in statements by Chinese officials and a potential conflict of interest for a U.S. researcher who has supported China’s insistence that there is no need for a further investigation of the WIV.  The new revelations may put additional pressure on the Chinese government to be more forthcoming about the origins of the pandemic.

 Economic and Financial Market Impacts

• As more evidence of the big economic rebound expected when economies open up again, non-official, real-time data showed that Britons quickly returned to their favorite pubs and restaurants after the country lifted restrictions on May 17.  In fact, bank transaction tracker Fable Data said U.K. consumer spending between Monday and Wednesday last week was 10% higher than the levels recorded for the same days in 2019, before the pandemic hit.
• As the Chinese economy continues to perform well, benefiting from its first-in, first-out experience with the pandemic, the renminbi hit a three-year high against the dollar today.  The onshore-traded renminbi gained 0.2% to trade at 6.4052/$, its highest point since June 2018.  With a gain of approximately 10% over the last year, the currency is now creating a quandary for monetary policy officials who fear that the appreciation will slow growth or exacerbate the risk of asset bubbles.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

Good morning, and happy Monday!  U.S. equity futures are higher this morning.  The Northern Hemisphere’s hurricane season runs from June 1 to November 1, but recently it has become common for storms to form early.  NOAA has named Ana the first tropical storm of 2021, but it has already become subtropical.  Our coverage starts with the Belarus situation. Cryptocurrency news is followed by the international roundup.  Next up is economics and policy, and we close with pandemic news.

Belarus:  In a bold action, Belarus forced a Ryanair (RYAAY, USD, 115.64) flight to make an emergency landing in Minsk, using the pretext of a bomb threat.  The flight originated in Athens on its way to Vilnius.  Belarusian security agents on the plane claimed that there was a bomb on board and then sent a MIG-19 to force the civilian airliner to land at the Minsk airport.  Once the plane landed, Roman Protasevich, a Belarusian journalist, was detained.  He is wanted by the regime for disclosing state secrets and for fomenting unrest.  Protasevich faces a 12-year sentence and perhaps worse if convicted (and it is highly likely he will be).  After a “search” for a bomb showed that no such device was on board, the plane was allowed to fly to its original destination; however, Protasevich, his girlfriend, and four security agents did not complete the last part of the flight.

It remains to be seen what actions the West will take.  The common refrain is that this event was ”state hijacking.”  Eastern European Nations are incensed, but getting Western European Nations to take any significant actions will be difficult.  EU leaders are discussing the situation today.  But, if the reaction of the European Commissioner for Transportation is any guide, we wouldn’t expect much beyond strong statements.  The U.S. issued a statement condemning the act.  America already sanctions Belarus, so we would not expect much more to come from Washington.  We would, however, expect the EU to ban commercial flights originating in the region from entering Belarusian airspace.  Nonetheless, fears that further measures may lead to Russia absorbing the former Soviet state will likely limit action.

Cryptocurrencies:  After selling off most of the night, bitcoin is moving higher at present.  Prices have been under strong pressure recently.  As we warned last week, it appears the crypto assets are beginning to have an impact on broader financial markets.  Although recent behavior between markets could be a coincidence, we suspect that the rising use of leverage in crypto trading will end up linking this market to the broader financial system.  We are noting a more hostile stance from central bankers concerning crypto; perhaps the most substantial risk to that market comes from the government.

International roundup:  Japan is signaling a more aggressive military stance, tensions remain high in Myanmar, and election violence in Mexico is elevated.

• Japan Defense Minister Nobuo Kishi indicated that his country must radically increase defense spending to counter the threat from China. He also noted that the threat to Taiwan is a direct threat to Japan as well.
• In Myanmar, the current government plans to dissolve the National League of Democracy, the party of Aung San Suu Kyi. The EU has denounced the action.  Fighting continues against the junta, and the government has suspended 125,000 teachers for opposing the coup.
• Mexico will hold midterm elections on June 6. Over the weekend, a mayoral candidate for Ciudad Obregon was shot while campaigning.  This is the 83^rd candidate killed in Mexico since September.
• In Peru, Pedro Castillo, the leftist candidate for president, is gaining ground in the polls.
• The Nyiragongo volcano in Congo has erupted, killing at least 15 people and displacing thousands. Over one million people live within the vicinity of the volcano, which had a large eruption in 2002.
• Although expectations are high that the Iran nuclear deal will be resurrected, SoS Blinken noted that Tehran has not taken the actions required to lift sanctions. Oil prices have come under pressure recently on fears that Iranian oil will return to markets soon.  It should be noted that oil has been evading sanctions for some time, although a return to the agreement will likely lift Iranian sales by 1.0 mbpd to 1.5 mbpd over time.
• Russia, seeing the rapid ice melt in the Arctic, is quickly building its defense forces in the region. Russia has traditionally expected the cold and ice to make its long Arctic border safe from invasion but now realizes this border will need to be defended.
• Ukraine is asking Congress to maintain sanctions on Nord Stream 2 as the administration moves to ease them.

Economics and policy:  A bipartisan infrastructure bill isn’t likely, a deal on corporate taxes is more likely, and economic expectations have caught up with the data, meaning that positive surprises will probably decline.

• It is looking increasingly like a bipartisan deal on infrastructure isn’t going to happen. Although there has been some movement, the two sides remain far apart.  It remains to be seen whether the president’s full bill can make it through the Senate.  In the end, we may see something, but momentum is slowing, and, as often happens, the White House has to deal with surprises that distract it from moving forward (e.g., Israel, Belarus, Nord Stream 2, etc.).
• We may be getting close to a deal on corporate taxes; the U.S. is supporting a 15% minimum rate within the G-7. That won’t prevent firms from moving business to traditional tax havens, but a deal within the G-7 will likely raise revenue from corporations.
• The Citi economic surprise index measures the difference between economist expectations and the actual data. The index is adjusted for its impact on the forex markets, but it is a handy way of seeing how much of the economic trends are discounted in markets.  Recent data is approaching zero, suggesting that much of the economy’s good news is in market prices.

If so, this means that even strong economic data will have fewer positive effects on prices, and it increases the likelihood of negative surprises.

• This is one to watch—Atlanta FRB President Bostic’s name is being circulated as a candidate for the next Fed Chair. He has made very clear statements suggesting that he would push hard to move the Fed’s priority to full employment and has suggested less emphasis on financial markets.  Although Chair Powell is well-liked and could get another term, his term as chair ends next February.[1]  A Bostic Fed would send an unmistakable signal that the Volcker era is over (although we think that signal has already been sent) and likely be taken as negative by financial markets.
• One of the problems tied to the exodus of households to smaller cities is that these new buyers bid up the price of existing homes, putting them out of reach for local buyers. Investor groups buying single-family homes have exacerbated the problem.  There are several resolutions to this problem, but the one that is most socially viable is an expansion of homebuilding.
• The pandemic has brought havoc to supply systems. A telling development is that hand sanitizer, which was in very short supply last year, is now so abundant that retailers can’t get rid of it fast enough.
• Recently, the Biden administration offered to suspend intellectual property (IP) rules on vaccine patents. South Africa and India have proposed new rules on IP that are so broad that they will almost certainly be rejected by the WTO.
• The FTC leadership looks to take a more aggressive posture on antitrust.

COVID-19:  The number of reported cases is 167,229,205 with 3,464,997 fatalities.  In the U.S., there are 33,117,923 confirmed cases with 589,893 deaths.  U.S. cases and deaths are at their lowest levels in a year.  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 357,250,375 doses of the vaccine have been distributed with 285,720,586 doses injected.  The number receiving at least one dose is 163,309,414, while the number of second doses, which would grant the highest level of immunity, is 130,014,175.  The FT has a page on global vaccine distribution.

• Today’s big story is that there is evidence that three researchers at the Wuhan virology lab became sick enough to see hospitalization in November 2019. This facility has come under scrutiny as perhaps being the origin of COVID-19.  Although the dominant origin story is that the virus crossed over from bats to humans, this lab, which works on coronaviruses, may have leaked SARS-CoV-2 through inadequate security measures.  Beijing strongly rejects this theory and pushed WTO researchers from this idea.  The Wuhan institute has not shared its data, raising concerns that it may have inadvertently released the virus.  The theory that the virus originated in this lab has become politicized; however, we note that a growing chorus of scientists have suggested that further investigation is warranted.
• The death rate has been on a long-term downtrend, but the pandemic has led to the highest death rate in 17 years. It’s not just the disease itself.  Shutdowns delayed preventive health care measures, and social distancing likely facilitated a surge in drug overdose deaths.  Life expectancy fell from 78.8 years in 2019 to 77.8 years in 2020; a decline in life expectancy is common with pandemics.
• China, which has lagged the rest of the world, has stepped up its distribution of vaccines.
• Taiwan is experiencing a jump in cases, although some of the increase may be due to lags in reporting.
• Indonesia is reporting a cluster of new cases after treating merchant sailors who were infected.
• Latin America has suffered one million fatalities from COVID-19.

 View PDF

---

[1] For reference, Vice-Chair Clarida’s term ends September 2022 and Vice-Chair Quarles’s term ends in October.

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

[Posted: 9:30 AM EDT] | PDF

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

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

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

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

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

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

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

 China:  Fears of conflict over Taiwan grow.

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

COVID-19:  The number of reported cases is 165,160,530 with 3,422,723 fatalities.  In the U.S., there are 33,055,614 confirmed cases with 588,528 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors.  The CDC reports that 351,955,515 doses of the vaccine have been distributed with 279,397,250 doses injected.  The number receiving at least one dose is 160,177,820, while the number of second doses, which would grant the highest level of immunity, is 126,605,166.  The FT has a page on global vaccine distribution.

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

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  U.S. equity futures are lower, although off the worst levels of the session.  Other assets, like commodities and crypto, have also come under pressure.  Our coverage kicks off with the Fed minutes, which roiled financial markets.  We follow with a discussion of the cryptocurrency market.  An update on Israel/Hamas is up next.  Economics and policy follow.  China news is up next, with the international news roundup on its heels.  We close our notes with a pandemic update.

Fed minutes:  A reading of the minutes of late April’s meeting of the FOMC reveals a central bank remaining committed to accommodative monetary policy.  The market’s reaction to the release of the report shows how sensitive investors are to any of the withdrawal of support.

A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.

The bulk of the report showed that most members did not think the economy had recovered enough to remove accommodation.  Although some members did express worries that inflation might become a bit more troublesome than public statements from FOMC members would suggest, there wasn’t a lot in the report to suggest that a reversal is imminent.  We view the above comment as a “thinking about thinking about” removing accommodation.

However, reading between the lines does suggest that some members are getting a bit worried about staying easy for too long.  We have been rather surprised by how unified the FOMC has been on policy.  We think we are seeing is a return to normal, which is some degree of dissension.  Hawks are starting to emerge, and the financial sensitives, who are worried about financial market dislocation, may also be raising concerns.  If Powell intends to keep policy steady into 2023, he is going to have to manage the pressure to raise rates.

It is natural for financial markets to anticipate, so the focus on what may have been a minor phrase is not a surprise.  We are taking Powell at his word, which is that we are seeing an end to the Volcker doctrine of stressing inflation control to one that focuses on maximum employment.  It should be noted that Volcker also faced strong opposition to his policies within the FOMC.  It would not be a surprise that the reversal of Volcker’s doctrine would face opposition.  The key point is how he manages the dissent.

Finally, market action yesterday (and into this morning to some extent) highlights just how important monetary policy has been to asset prices for the past 14 months.  Historical metrics of asset prices in various markets all look extended.  They are mostly justified by the low level of interest rates and high levels of liquidity generally centered in affluent households.  For most of the past 13 years, the Fed has undermined cash as an asset class; if cash becomes a desired asset again, it will undoubtedly be bearish for overall financial asset prices.  What remains to be seen is how tolerant the Fed will be to falling asset values.  To some extent, ignoring financial markets would be an end to Greenspan’s mark on the Fed.  Greenspan, from 1987 on, made it clear the Fed would come to the rescue when, during periods of financial turmoil, creating the “Greenspan put.”  Ending that policy (if it does end) would be perhaps a bigger deal than focusing on the labor markets over inflation.

Bitcoin:  Although the Fed minutes did raise concerns yesterday afternoon, the morning was dominated by bitcoin volatility.  A number of factors affected the price of bitcoin.  First, the chart has been deteriorating for several weeks.

(Source:  Bloomberg)

Although the price rose sharply into March, momentum has clearly been slowing.  Falling momentum will tend to encourage some participants to exit.  Second, China is cracking down on bitcoin use, essentially making it illegal for firms to price their goods in cryptocurrency.  Third, the Colonial Pipeline hack has made it clear that cryptocurrencies have become the payment of choice for criminals; a crackdown on its use seems unavoidable.  It may be too late to eliminate them, but forcing exchanges to identify participants may be coming, which would, of course, reduce the attractiveness of the currency to organized crime.  Regulation may be the most bearish factor regarding cryptocurrencies.  Interestingly enough, it’s not just China that is increasing regulatory scrutiny.  The Office of the Comptroller of the Currency is also reviewing its crypto guidance.  And fourth, although crypto is marketed as a way to avoid the “middlemen” in the financial system, most institutional buyers use coin exchanges, and, lo and behold, yesterday some of these exchanges didn’t allow holders to liquidate positions, which may have exacerbated the selling.

Until recently, we haven’t been overly concerned about what is happening in crypto assets.  Recent reports suggest the Fed isn’t either.  After all, price volatility in baseball cards or Beanie Babies didn’t trigger systemic risk.  This may be a serious mistake. A recent Odd Lots podcast with Viktor Shvets as guest detailed the systemic risk bitcoin could be creating.  He made the point that traders are buying bitcoin with leverage, meaning that as prices fall, margin calls are occurring as well.  So far, we haven’t seen any strong evidence of systemic risk.  However, as numerous events over the past 25 years have shown, leverage coupled with price volatility can lead to unwelcome outcomes.  Yesterday’s price action in bitcoin closely mirrored equities, perhaps signaling that cryptocurrencies are becoming a systemic risk.

 Israel and Hamas:  President Biden is pressuring PM Netanyahu to end the current campaign against Hamas.  So far, the Israeli leader is ignoring the U.S., but we don’t think this defiance will last much longer, simply because it looks like this current situation has about run its course.  What we have learned from this event is that the Arab world has mostly abandoned the Palestinian cause.  As the U.S. moves out of the region, the Arab states are banding with Israel to oppose Iran.  This development was part of the Abraham Accords.  It appears that with each flareup of hostilities, Palestinians in Gaza are put in a worse position.  We would expect hostilities to wane by the weekend.

 Economics and policy:  Tariffs are being eased, and rents are rising.

• The EU has suspended its plans to raise tariffs on numerous goods. This was part of the retaliation for the U.S. implementing steel tariffs.  So far, the U.S. is maintaining the steel tariffs, at least for now, but there is pressure building to rescind those as well.
• Apartment rents are starting to recover in most markets. Single-family home rents are rising rapidly too.  This development could exacerbate current inflation worries.
• As housing prices rise, there is renewed interest in modular homebuilding. Currently, most homes are built on-site.  Modular homes are factory build, allowing for assembly line production in a controlled environment.  Although most communities have a bias towards site-built homes, cheaper modular homes could become an alternative.  At least Warren Buffett thinks so.
• Argentina is banning the export of beef in an attempt to quell domestic inflation. Ranchers are not happy and are planning to strike.
• Taiwan has been hit by a series of maladies. One of them is drought.  Semiconductor production uses a lot of water, and the fabs are having to deal with water restrictions.  These restrictions will exacerbate semiconductor shortages.
• Russia now holds more gold in its foreign reserves than it holds in U.S. dollars.
• We note that a number of large firms are announcing their own minimum wage hikes. This development will pressure smaller firms to either match the increases or make other arrangements (e.g., work current employees longer hours, add capital to reduce labor, leave vacancies open).
• This is one to watch; the ECB may end or reduce its emergency bond-buying in June. If it does, look for the EUR to rise.
• And finally, here’s a curious situation—bank branches in Japan have been “swamped” by pensioners bringing in U.S. stimulus checks to be cashed. Apparently, some Japanese citizens who worked in the U.S. are getting the checks in error.  This situation occurred with the first stimulus last year and has apparently not been fixed.

China:  U.S. tech in China is in an uncomfortable position, and cross-border investment is down.

• Apple (APPL, USD, 124.69) is coming under unwelcome scrutiny as the NY Times reports that the firm is sharing its customer data with the Chinese government, a practice it doesn’t do in the U.S. or Europe. It has also taken actions to placate CPC officials, including removing apps from Chinese users.  The company is not pleased with the reports.  But the reality is that firms operating in China are required to adhere to CPC rules.  Globalization encouraged firms to adjust their practices to the local community.  That behavior is becoming difficult to justify, and at some point, firms will be forced to choose.  We recommend care in that choice.
  • A further warning: acting against China is one of the few areas of bipartisanship. The Senate advanced a bill to “counter China’s economic and global ambitions” by a vote of 86-11.
• Cross-border investment between the U.S. and China has declined to its lowest level since 2009. Some of this drop is tied to the pandemic.
• China continues to ramp up steel production, exacerbating supply issues. Its aluminum production is at record levels as well.  The U.S. and Europe are attempting to manage the steel supply, but if China continues to lift output, it will be difficult to work out a deal.  The U.S. is facing internal pressure to ease tariffs on steel from manufacturing firms.
  • The rise in steel production is increasing iron ore purchases from Australia. The two countries have had frosty relations recently, and Chinese officials have warned Canberra that it intends to “diversify” its sources for iron ore.
• The Biden administration continues to grapple with the Trump era restrictions regarding investment in China and Chinese listed stocks. It has recently delayed a decision on this matter.
• China has bought 37% of next year’s U.S. corn crop. This is aggressive buying and may signal that Beijing is stockpiling corn to protect against supply disruptions.  Beijing is apparently worried about rising commodity prices and is considering export controls.
• The U.S. is accusing Beijing of ducking nuclear arms talks.
• China is increasing its efforts to join the Comprehensive and Progressive Trans-Pacific Partnership. This multilateral free-trade zone is the predecessor of the Transpacific Partnership from which the U.S. withdrew.  The irony is that the original TPP excluded China, and if China joins the successor, it will have excluded the U.S.
• Huarong, the “bad bank” that grew into a financial conglomerate, may be hampering efforts by Chinese regulators to bring borrowing under control. It has issued $40 billion of debt that is in trouble.  Given its size, it will be difficult for the government to allow it to default, but if it bails the company out, it creates a moral hazard problem.
  • China’s mutual funds have languished this year, leading to a backlash on social media. Given Beijing’s discomfort with anything that smacks of organized trouble, it will be interesting to see if (a) this gets worse and (b) what China does about it, e.g., prop up equity prices or squelch the complaints.
• China is making it illegal for foreigners to own private elementary schools or for any Chinese school to have a foreign curriculum.
• It looks like the European Parliament is shelving the China investment deal.

International roundup:  A rebel leader in Colombia has been killed, and PM Johnson is facing farmer pressure.

• Jesus Santrich has reportedly been killed. He was the leader of a breakaway faction of the FARC, the rebel group that was at war with the Colombian government for years.  There are conflicting reports regarding who was responsible for this death.
• The U.K. is engaged in trade talks with Australia. Farmers in the U.K. are worried that they won’t be able to compete with Australia’s agriculture and are pressing against the deal.
• U.K. businesses are being required to adhere to EU VAT rules, which reportedly will cost them 180 million GBP per year.

COVID-19:  The number of reported cases is 164,966,830 with 3,419,446 fatalities.  In the U.S., there are 33,027,220 confirmed cases with 587,875 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 349,210,095 doses of the vaccine have been distributed with 277,209,173 doses injected.  The number receiving at least one dose is 159,174,963, while the number of second doses, which would grant the highest level of immunity, is 125,453,423.  The FT has a page on global vaccine distribution.  The Axios map shows unmistakable good news.  Forty-nine states are showing steady to declining infection rates.

• Many parts of Asia have performed remarkably well during the early stages of the pandemic. That is no longer the case.
  • As we have noted in recent weeks, India has faced a surge in cases. Its recent death count was the world’s highest.  As the virus spreads to rural India, the lack of health care in these areas is becoming a problem.
  • The problem has spread to one of its neighbors, Nepal.
  • Taiwan, which appeared to have the virus under control, is facing a surge of infections and a lack of vaccine supply. As cases rise, the government has raised the alert level.
• The pandemic tended to more adversely affect the less affluent. It has also led to workers taking on new careers and locating to different areas of the country.
• Meanwhile, as cases fall in the U.S., Mexico is reporting a similar decline.
• Major vaccine companies are preparing for booster shots scheduled for autumn. The U.K. is conducting booster trials.  We suspect that COVID will become, like influenza, a regular vaccination event.
• New York is reopening; the EU will allow foreign travelers who have been vaccinated to visit this summer.
• China is rolling out a single-dose vaccine.
• The U.S. is sending vaccines to Honduras after the country considered ending its recognition of Taiwan for China in order to acquire vaccines.
• Your next COVID tester could have four legs.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

Today’s Comment opens with another broadside from Larry Summers against the current stance of U.S. monetary and fiscal policy.  Inflation hawks will likely be quite satisfied with his latest criticisms.  We next examine a new threat to private cryptocurrencies out of China in addition to various other international news developments.  We end with the latest news related to the coronavirus pandemic (spoiler: it looks like you could make that trip to Europe this summer after all!).

U.S. Monetary Policy:  In comments before a conference sponsored by the Federal Reserve Bank of Atlanta, Former Treasury Secretary and Harvard President Larry Summers said the Fed is seriously underestimating the risk that continued loose monetary policy could drive inflation higher and destabilize the financial markets.  According to Summers, the problem is that the Fed could be forced into a knee-jerk tightening of monetary policy that would spook markets and even hurt the real economy.

• The comments build on Summer’s earlier criticism of the massive fiscal stimulus proposals submitted by President Biden.
• Taken together, the comments by Summers could exacerbate recent investor concerns about a prolonged rise in inflation or the formation of asset bubbles.  If so, there would be the potential for further volatility in the stock and bond markets, along with a potential further rise in inflation-hedging assets such as precious metals.

Global Cryptocurrency Market:  In a joint statement issued in conjunction with the central bank, Chinese banking and internet industry associations said financial and payment institutions should not accept cryptocurrencies as payment or offer services and products related to them.  According to the statement, virtual currency “is not a real currency,” and its recent price surge represents nothing but speculation.

• The statement indicates Chinese regulators are intensifying their crackdown on the use of cryptocurrencies by financial institutions as the People’s Bank of China prepares to launch its own digital money.
• The statement, therefore, marks a shot over the bow of the rapidly developing market, reminding participants that sovereign countries will probably want to monopolize the space with their own virtual money (discussed in our recent WGRs on the issue).  In response to the statement, the price of Bitcoin dropped 14% to approximately $38,500, reaching its lowest level since early February.

United States-China:  Speaker of the House Pelosi has become the highest-ranking U.S. politician to call for a diplomatic boycott of the 2022 Beijing Winter Olympic Games over China’s human rights abuses in Xinjiang.  Pelosi urged the U.S. and other nations not to send high-level delegations, in a bid to boost pressure on the Chinese government over its persecution of the Uyghur ethnic minority in the region.

China-Taiwan-Honduras:  The head of the Honduran government warned that his country may switch diplomatic ties from Taipei to Beijing to gain access to Chinese coronavirus vaccines.  Honduras hasn’t been able to buy sufficient stocks of any coronavirus vaccine, and it has suffered delays in receiving those it did order, leaving less than 1% of its population vaccinated.  Honduras could well be bluffing in order to procure vaccines, but the statement is likely to be taken seriously in Taipei.  Since Taiwan has diplomatic relations with only about 15 countries, losing Honduras would be a major blow to its geopolitical position and likely further encourage Beijing in its quest to reunify the island with the mainland.

Israel-Hamas:  Israeli warplanes continued to strike Hamas tunnels and other targets in the Gaza Strip overnight, despite growing international concern and UN accusations that Israel is using disproportionate force.

• As the Israeli warplanes target Hamas tunnels, they are reportedly bombing roads and streets, destroying infrastructure such as sewage and water pipes, electricity cables, and telephone lines.
• Meanwhile, France, Egypt, and Jordan have been pushing a UN Security Council resolution for a ceasefire to end the bloodshed, and EU foreign ministers urged an end to the hostilities at an informal meeting on Tuesday.
• Early this morning, a senior official said Israel’s military is now to the point where it is assessing whether it has made enough progress to begin exploring a ceasefire with Hamas.  The official said Israel wants to see an agreement to end fighting which includes international pressure on Hamas to address its ability to build up its forces and the return of the bodies of two soldiers who went missing in the 2014 war.

COVID-19:  Official data show confirmed cases have risen to 164,314,577 worldwide, with 3,406,720 deaths.  In the United States, confirmed cases rose to 32,997,870, with 587,225 deaths.  Vaccine doses delivered in the U.S. now total 346,672,525, while the number of people who have received at least their first shot totals 158,365,411.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections fell to 27,851 yesterday, back below the seven-day moving average of 32,032 and the 14-day moving average of 35,520.  New deaths related to the virus came in at 851.  Meanwhile, the nation’s mass vaccination program continues.  According to CDC data, 47.7% of the U.S. population has now received at least one dose of a vaccine, and 35.5% of the population is fully vaccinated.
• Even though regulators have now approved giving the vaccine to children as young as age 12, the patchwork of state laws that govern whether minors can receive shots without their parents’ permission brings a new wrinkle to inoculation efforts. For example, vaccine providers are trying to figure out how to navigate situations in which children want the shot, but their parents say no.
• In an Axios virtual event airing later today, top Biden administration pandemic official Dr. Anthony Fauci said many Americans are “misinterpreting” the CDC’s new mask guidance as an approval to forego masks indoors.  According to Fauci, “People are misinterpreting, thinking that this is a removal of a mask mandate for everyone. It’s not.  It’s an assurance to those who are vaccinated that they can feel safe, be they outdoors or indoors . . . It did not explicitly say that unvaccinated people should abandon their masks.”
• Just a day after his government relaxed restrictions on international travel from the U.K., Prime Minister Johnson urged Britons not to travel to countries on the government’s “amber list,” including France and Spain, except under exceptional circumstances.  The warning came after reports on Monday that approximately 150 flights had already departed from the U.K. to such destinations.
• In contrast to Britain’s caution regarding much of the Continent, ambassadors from the 27 nations of the EU today recommended a loosening of the EU’s travel restrictions.  The move could open the EU to visitors from the U.S. as early as this summer, although it still needs to be approved by the EU’s national leaders, and details still need to be worked out.  In any case, bringing back visitors from the U.S. and other wealthy, non-European countries could provide a significant boost to many tourism-dependent countries in Europe.
• Despite the positive trends in the U.S. and several other Western countries, infections are rebounding again in some Asian countries that had previously looked like success stories in combatting the pandemic, including Taiwan, Vietnam, and Singapore.  Amid rising infections in southern Japan, the head of Okinawa Prefecture asked the central government to add it to the list of nine other local administrations currently under a state of emergency because of the pandemic.
• European Commission Executive Vice President Dombrovskis said members of the World Trade Organization should use existing rules to make it easier to share intellectual property for coronavirus vaccines, rather than expand the ability of governments to override patents as proposed by the U.S.
  • The WTO’s longstanding “Agreement on Trade-Related Aspects of Intellectual Property Rights” already allows a government to license a patented invention to a third party without the consent of the patent holder. Under the rules, negotiations with rights holders can also be bypassed in a national emergency.
  • Critics say the mechanism is overly complex and not fit for rapidly expanding access to vaccines.  But then, the Biden proposal to override patents has also been criticized as unlikely to help less developed countries very quickly.

 Economic and Financial Market Impacts

• Ahead of an expected surge in tourism as the economy opens up again, hotels and resorts are finding it especially difficult to lure workers.  Among the challenges:  potential workers held back by health concerns, lack of childcare as schools remain closed or partially closed, enhanced unemployment benefits, higher wages on offer by competing industries, and the simple unattractiveness of physical work like cleaning rooms and making beds.
• Illustrating the supply chain problems holding back the global economic recovery and feeding into inflation concerns, Danish logistics data firm Sea-Intelligence said in March, only about 40% of container ships globally were arriving on time at ports.   Average delays stretched to more than six days. The slowdowns improved from February, but they remained far behind reliability levels of the previous two years when over 70% of ships arrived on time.
• All the same, the budding recovery in Europe and the quickly improving finances of its companies have started to encourage European firms to boost share buybacks, replicating resurgent share buybacks in the U.S.  If the buybacks continue, it will add to the allure of European stocks if the dollar continues to weaken as we expect.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we open with a range of global news developments, touching primarily on the energy industry and the Middle East.  The Israeli-Hamas conflict remains a major story, although there has been little to no direct impact on the financial markets so far.  There is also a potential new migration crisis brewing in Spain.  We end our report with the latest news on the coronavirus pandemic, including reports that many major U.S. retailers are lifting mask mandates in their stores–a move that could further boost Americans’ optimism and encourage more spending.

Global Energy Industry:  The International Energy Agency issued a report saying that reaching a global goal of net-zero carbon emissions by 2050 would require stopping all new oil and gas exploration and development projects from this year forward, drastically cutting fossil fuel consumption, and dramatically boosting investment in renewable energy projects.  Given perceptions that the IEA is allied with the global oil and gas industry, the report is taken as a surprising concession supporting green policies.  However, it hasn’t had a noticeable negative impact on the energy markets so far this morning, as the price for Brent Crude has once again surpassed $70 per barrel.

United States-Israel-Hamas:  Following a call on Monday with Prime Minister Netanyahu regarding the Israeli-Hamas conflict, the White House stated that President Biden “expressed his support for a cease-fire and discussed U.S. engagement with Egypt and other partners toward that end.”  The statement said that Biden supported Israel’s right to self-defense, nevertheless urged Israel to try to minimize civilian casualties.  In a word, it amounted to only minimal pushback against what Israel describes as an effort to degrade Hamas’s rocket factories, underground tunnels, and other military infrastructure that has allowed it to attack Israel.  The latest reports indicate Israel continues to attack Hamas targets today, with a new focus on trying to kill Hamas leaders.

United States-China:  Chinese mobile telephone giant China Mobile (0941.HK, 50.10) said it plans to sell approximately $6.1 billion worth of shares in Shanghai, days after learning it would definitely be ejected from U.S. markets under a Trump-era investment blacklist.  The move illustrates how U.S. policies restricting investors from holding Chinese assets for reasons like national security or inadequate auditing standards will tend to bifurcate the U.S. and Chinese equity markets.

Spain-Morocco:  Raising the specter of a new migrant crisis in Europe, a record number of migrants have entered Spain’s north African enclave of Ceuta after Morocco scaled back the policing of its border, following a diplomatic rift between the two countries.  Reports indicate Spanish Prime Minister Sánchez has mobilized army troops in Ceuta to help the police and civil guard patrol the border.

• Spanish-Moroccan relations have worsened since December, when President Trump said the U.S. would recognize Morocco’s sovereignty over Western Sahara, a former Spanish colonial territory, in return for Morocco’s recognition of Israel.  Morocco is now frustrated that Spain hasn’t followed the U.S. lead.
• The Moroccan government is also angry that Spain is providing medical care to Brahim Ghali, the head of the Polisario Front, which has been fighting for the independence of the Western Sahara region for years.  We described the situation in Western Sahara in our Weekly Geopolitical Reports of March 1 and March 8.

Chile:  The country’s election agency announced that leftist and leftist-leaning groups have won approximately 70% of the seats in the special assembly that will draft Chile’s new constitution.  President Piñera’s conservative coalition fell short of the 33 1/3% needed to block changes to the current constitution, virtually assuring that the final document will pave the way for a significant increase in social spending and the state’s role in the economy while weakening the country’s free-market model.  The results drove Chilean equities and the Chilean peso lower yesterday, and they will likely continue to weigh on Chilean assets at least in the near term.

COVID-19:  Official data show confirmed cases have risen to 163,714,589 worldwide, with 3,392,575 deaths.  In the United States, confirmed cases rose to 32,994,769, with 586,470 deaths.  Vaccine doses delivered in the U.S. now total 344,503,595, while the number of people who have received at least their first shot totals 157,827,208.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections jumped to 53,497 yesterday, well above both the seven-day moving average of just 33,213 and the 14-day moving average of 37,086.  Similarly, the number of new deaths related to the virus jumped to 401.  It wasn’t clear why new cases and deaths rose so much, but the numbers can be volatile.  Since the recent trends have been strongly downward, the jumps yesterday may not continue.  That’s especially the case as mass vaccinations continue.  The CDC reports that approximately 47% of U.S. residents have now received at least one dose of a vaccine, and 37% are fully vaccinated.
• As most of the ardent vaccine seekers have probably now gotten their shots, local health officials are coming up with innovative ways to reach those who are open to the vaccines but want them to be convenient.  Many vaccine programs are now giving shots in places like public transportation facilities, restaurants, factories, and other places of employment.
• Following the CDC’s new guidance last Thursday that fully vaccinated people may stop wearing face coverings in most indoor and outdoor settings, U.S. companies including Walmart (WMT, $138.89), Target (TGT, $210.02), CVS (CVS, $84.56), and Starbucks (SBUX, $110.98) have begun lifting requirements that staff and customers wear masks and practice social distancing in their stores.  Some firms, such as Macy’s (M, $19.16), will reportedly keep their mandates in place for now, but the broader lifting of restrictions could further encourage consumers to start spending again.
  • One question, however, is whether lifting the restrictions will make it harder to attract workers concerned about their health.
  • On the other hand, easing mask requirements for staff could make it easier to attract new employees who don’t want to deal with the hassle of wearing a mask for an entire work shift.
• As more and more Americans get vaccinated, especially in older age groups, the number of people hospitalized with COVID-19 is skewing more toward younger people.
• In Denmark, the leading political parties have agreed on an almost complete reopening of the nation’s economy starting this Friday.  Amid favorable progress on mass vaccinations and testing capabilities, the plan calls for public-sector workplaces, universities, sports and music clubs, zoos, theme parks, and saunas to open up again at the end of the week.  Only nightclubs will remain closed.
• Despite the move toward normalization in some areas, virus mutations remain a concern.  In the U.K., the number of local areas where the Indian variant makes up more than half of sequenced cases has almost doubled in just the last week.
• In Japan, the government is only now deciding it should consider allowing pharmacists to administer coronavirus vaccines, as the country’s mass vaccination program continues to proceed slowly.
• President Biden announced that the U.S. will increase the number of vaccine doses it will share with other countries to 80 million, including 20 million doses of the vaccines from Pfizer (PFE, $40.11), Moderna (MRNA, $160.43), and Johnson & Johnson (JNJ, $170.39).

 Economic and Financial Market Impacts

• Investors continue to pour into bank bonds and stocks as more and more evidence accumulates that the economy is recovering from the pandemic, albeit unevenly.

 View PDF