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

[Posted: 9:30 AM EDT] | PDF

Good morning.  It’s a risk-off day—equity markets are sharply lower on the news of a new strain of COVID-19.  We are seeing the usual price action in a risk-off situation.  Treasury yields are lower, equity values are down, and the dollar is stronger.  We begin today’s coverage with the pandemic.  There was some good news; the long-awaited stimulus package has been finalized.  Both Houses will vote on it over the next 48 hours and submit it to the White House for passage.  China news is next, including the intimidation of Taiwan.  We update the Russia hack and Brexit, and we close with economic news.  A note to readers—the Daily Comment will go on holiday hiatus starting December 23 and return on January 4.  Here are the details:

COVID-19:  The number of reported cases is 76,912,340 with 1,695,144 fatalities.  In the U.S., there are 17,847,629 confirmed cases with 317,729 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.

 Virology

• An apparent mutation of COVID-19, called B.1.1.7, has emerged in the U.K., setting off travel bans against Britain. The Eurotunnel and Eurostar have closed operations, and the Port of Dover has closed.  Travel traffic is snarled in both Europe and the U.K.  Although there is hope that the ban will only last 48 hours, we would not be surprised to see it extended.
  • Early research suggests the new variant is more transmissible, but there is no evidence to suggest that it is more lethal. Also, there is no evidence that it renders the current vaccines less effective.  However, we want to stress that the research is still early, and we don’t know definitively how big a problem this mutation could be.
  • A similar variant was found in South Africa.
  • Italy has reported the new U.K. strain in a patient.
• Is this new variant a serious problem? Potentially yes, but probably not.  Viruses mutate constantly, and, in fact, it is not uncommon that they mutate into a less virulent form.  Scientists have anticipated that there would be mutations, so this development doesn’t come as a huge surprise.  Although the worry is that this mutation will render the new vaccines less effective, that probably won’t be the case.  Even the flu vaccine offers some residual benefit for a couple of years.  And, the mRNA technology can be adjusted rather quickly.  If a major mutation does emerge, a new vaccine will probably be developed much sooner than in the past.  Although this news is disconcerting, it really isn’t a surprise.  The broad market reaction may have more to do with extended conditions and thin trading than any fundamental factors.

The stimulus package:  At long last, Congress has produced a stimulus bill, which is part of a much larger spending package.  Lawmakers combined a $900 billion stimulus bill with $1.4 trillion of omnibus spending and a host of other smaller bills to wrap up the year’s legislative activity.  Here is what is in the new stimulus bill:

• Unemployment insurance was supported but was at a lesser scale. Supplemental pandemic benefits were reduced to $300 per week, down from the July package (that has expired) of $600 per week.  So, it’s an increase from what was currently in place but less generous than what was available in the initial package.
• A $600 direct payment to individuals making $75 thousand per year or less.
• Small business aid of $355 billion
• Medical system support of $69 billion
• School aid of $82 billion
• Rental assistance of $25 billion
• Food aid of $26 billion
• Childcare support of $10 billion
• Forgiveness of a $10 billion postal loan
• Addons of tax extenders and water projects
• The Fed issue—the last sticking point was the part of the bill that would have closed the Fed’s emergency lending programs. It appears this was watered down, but it may be mostly strategic ambiguity.  The GOP leadership thinks the new language shuts down the program and re-appropriates the funding to the new stimulus bill, full stop.  Democrats believe the language is loose enough to allow the Fed to continue the programs without new Congressional approval.  We won’t know for sure who is correct until the next financial snag; let’s hope something can be worked out so we can avoid 2008 again.

So, what impact will this have?  It certainly will help, but we would not expect a lot of stimulative impacts.  Some of the broad market reaction today may be tied to the usual pattern of “buy rumor, sell fact.”  In other words, financial markets mostly discounted this outcome, and thus, a passage leads to profit-taking.

China:  Jack Ma kowtowed, and there was intimidation of Taiwan.

• As we discussed in November, Ant Group had its IPO delayed after one of the company’s founders, Jack Ma, lambasted regulators for their attempts to apply financial system regulations on his tech company. The government didn’t take that well, and the IPO, slated to the be largest ever, was shelved.  New reporting suggests that when regulators met with Ma in the wake of this meeting, he was unusually conciliatory.  No matter; the IPO was shelved anyway.  One potential outcome is that parts of Ant Group might be nationalized.  What this means for investors is that there is an embedded risk of state intervention in Chinese investment.
• China sent one of its two aircraft carrier groups through the Taiwan Strait in a clear attempt to intimidate. The carrier group trailed a U.S. warship that had traversed the strait the day before.  Taiwan scrambled its defenses, sending out its own ships.  China has been menacing Taiwan recently, perhaps to test the incoming administration or as a precursor to military action.
  • China’s behavior is being noted in the region. Japan’s military budget for the upcoming year is at a new record.

The hack:  One factor that has emerged in the Russian hack is that the Federal government does not deeply analyze the private-sector software it purchases.  Most likely, this policy is designed to maximize efficiency.  After all, if the private sector uses the package without incident, why shouldn’t the government.  The other extreme would be for the government to create its own software that would emphasize security at the cost of usability.  Although this extreme probably won’t be deployed widely, it is clear that this hack highlights the risk of using private-sector software without scrutiny.   Another element?  Hubris on the part of American cybersecurity officials may have led them to underestimate the power of Russia’s cyber capabilities.

Brexit:  Talks continue, but the same issues bedevil negotiators.  The new mutation is complicating the situation as households start to hoard and lockdowns tighten.   The increasing likelihood of a no-deal Brexit is exacerbating supply problems.

Economic update:  Here is a roundup of items we are watching on the economic front.

• Japan PM Suga has indicated that the BOJ and the MOF should not allow the JPY to fall below JPY 100. This move is a mistake on several levels.
  • By stating a number, traders know they can appreciate the currency to this level without retaliation.
  • A clear indication like this will almost certainly lead to a reaction from the U.S., maybe even a “currency manipulator” designation.
  • This could be treated as a hostile act by the incoming administration.
• It is possible Suga is assuming that the U.S. will need Japan to contain China and will overlook this blatant action. That may be a gamble worth taking, but it should also be noted that Japan would not want to contain China alone.  During the Cold War, the U.S. often overlooked currency undervaluation as a cost of maintaining the coalition against communism.  The U.S. may not be as open in the new world.
• The Treasury is requiring new disclosure rules for cryptocurrency holdings. If there is anything that could take the wind out of the sails of bitcoin, regulation is a primary threat.
• The Fed’s decision to ease buyback rules has lifted financials after banks passed recent stress tests.
• Chris Waller was sworn in as Fed governor.

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

[Posted: 9:30 AM EDT] | PDF

Good morning on a busy Thursday (and a snowy one for our friends in the Northeast).  Equity futures are up this morning, while the dollar is down sharply and gold and bitcoin are higher.  In fact, bitcoin broke $20k, supported by comments that it is deeply undervalued.  Our coverage starts with the Fed, including an analysis of the interaction of the Fed, the Treasury, and the yield curve.  Up next is the forex market and the Treasury announcement that Vietnam and Switzerland are currency manipulators.  The EU passed its budget and is thinking about a “bad bank” to absorb nonperforming loans; Brexit appears close.  China news is next, followed by pandemic coverage.  We close with a roundup of policy and economic news.  Being Thursday, our Weekly Energy Update is available.  A note to readers—the Daily Comment will go on holiday hiatus starting Dec. 23 and return on Jan. 4.  Here are the details:

The Fed:  To some extent, the meeting was modestly hawkish.  The dots plot suggested a greater openness to rate hikes in 2023.

The sole rate hike forecast for 2022 did come down 50 bps but we added another member to hikes in 2023.  The majority are still holding to no rate hikes for 2021-23.  The FOMC also increased its expectations of this year’s GDP growth, from -3.7% in September to -2.4% at this meeting, and there were modest upward revisions to future years.  Unemployment is expected to decline more quickly as well.  But inflation won’t hit its 2% target over the forecast period.  There was no change to the allocation of purchases but the Fed did suggest it would continue QE for a long time.  Financial markets seemed to express some disappointment.  The dollar rallied a bit and equities were mixed, with non-cyclicals doing better than cyclical sectors.  Although the Fed dashed hopes of additional support (there was speculation the Fed would boost purchases at the long end), overall, this was mostly a steady policy outcome.  We expect Governor-appointee Waller to be sworn in for the next meeting, meaning we will have another dot on the plot.

A bit of “inside baseball”—the yield curve has steepened lately, leading to comments that the market is expecting a stronger economy going forward.  Although that may be the case, the steepening may have more mundane origins.  It starts with the Treasury.  It has been building its account at the Fed by issuing lots of T-bills.  Most likely, Mnuchin was worried about a government shutdown and was prefunding stimulus.  In any case, we have seen a sharp rise in the Treasury’s account at the Fed.

As the Treasury issued T-bills to fund this hoard, it has led to a drop in the average maturity of Fed holdings; last year, it was 70 months.  It has fallen to 62.5 months.  And, over the past decade, rising maturity coincided with the two-year/10-year yield curve.

As the Treasury draws down this account to fund stimulus (and assuming a funding bill passes this week), there will be pressure for the yield curve to flatten.  Stay tuned.

Forex:  The Treasury has a formal process to establish if a country is manipulating its currency.  The process seeks to determine if a country is preventing the appreciation of its currency to run a larger trade surplus with the U.S. than it would otherwise.  The U.S. announced yesterday that Vietnam and Switzerland are being named “manipulators.”  The designation will trigger a process where the U.S. engages with the countries in question to address America’s concerns.  If the negotiations don’t yield a satisfactory outcome, the U.S. can apply trade restrictions.  The case for Switzerland is straightforward—it intervenes regularly to prevent the appreciation of the CHF, but it has nothing to do with the U.S.  Without intervention, the CHF would appreciate against the EUR, making Switzerland less competitive within Europe.  So, there is no doubt Switzerland intervenes, but it isn’t to improve its position with the U.S.

The case of Vietnam is more complicated.  It has become a destination for productive capacity that is leaving China to land.  And so, almost by design, it has seen its current account expand.  We would expect some appreciation of the Vietnamese dong, but most likely it will be modest.  The action by the Treasury, though, may be signaling a greater openness to a weaker dollar, which is the goal of this policy.

The EU:  The EU budget has passed the European Parliament, meaning the Eurobond will be issued in the coming months.  This is a remarkable achievement and will support further integration of Europe.  We never thought Germany would accept this idea; a Eurobond will allow Italy to borrow in EU credit, something that has always terrified Berlin.  But, here we are!

• The EU is going to have a nonperforming debt problem. It’s a fact of life that some loans will go bad.  How to deal with bad loans is always a challenge.  If the creditor insists on full repayment, it can lead to bankruptcy which might have been unnecessary.  If the debtor is favored, moral hazard creeps in.  Consequently, societies try to balance off the interests of both parties.  In the meantime, banks holding nonperforming loans lose the capacity to make new loans, which can restrict future growth.  One tactic to address this problem is the bad bank.  A bank is created to buy the nonperforming loans to get those loans off the bank balance sheets, freeing up capacity for new lending.  The bad bank buys these loans at a discount and then works out arrangements with borrowers in default.  The trick is setting the value of the bad debt—make it too generous and it becomes a subsidy for the banks that made the bad loans in the first place.  Make it too low and banks can suffer unnecessary losses.  The EU is planning to set up a series of bad banks in member states to deal with loans gone sour due to the pandemic.

 Brexit:  According to reports, we are getting close to a Brexit deal.  In fact, the last sticking point may be fish, which should be manageable.  Both sides are still taking steps just in case talks fail.  One sign that we are close is that Parliament may reconvene from their Christmas break to vote on the treaty.  Another sign?  The GBP has been on a tear based on Brexit optimism.

China:  A new look at rebalancing and tensions with Australia rise further.

• Recently, General Secretary Xi held a talk about the need to bring about demand reform. If this speech is an outline of policy, it could be significant.  One of heterodox economics’ criticisms of capitalism is the tendency toward underconsumption.  Post-Marx analysis argued that colonialism was a response to this problem.  Essentially, capital ends up taking too much income from labor, leading to persistent underconsumption and income inequality.  One way to address the problem of underconsumption is to export the excess production.  China has been doing that for a while.  However, it appears that Xi may have concluded this path isn’t likely to be open in the future and the Belt and Road Project may not offer relief either.  Thus, actually changing income distribution to put more money into households and absorb the excess production through domestic consumption would be an epic change because it would also adversely impact the wealthy in China.
• China is apparently blocking imports of Australian coal, a notable escalation of the trade fight between the two countries. Canberra is threatening to take the issue to the WTO.  One reason China is picking on Australia is because it views it as the weakest link in the U.S. alliances against Beijing, e.g., the Quad, the “Five Eyes.”  There may be something to this; the political opposition is harshly criticizing the Morrison government for its handling of China.
  • As winter sets in, there has been a spike in coal prices and domestic mines are ramping up production.
• The BBC has a special report on forced labor and Chinese cotton.
• MSCI has dropped Chinese stocks cited by the U.S. for their ties to the People’s Liberation Army (PLA). The stocks will be officially removed on January 5.
• China has been pushing digital currencies and is one of the central banks in the forefront of developing official digital currencies. The PBOC warned merchants that they must accept cash for payment.
• The EU is in negotiations with China over investment. We note that Beijing is making it easier to invest in China, and Germany is giving some leeway on Chinese communications equipment.
• For the first time ever, Chinese military officials have decided not to participate in a semiannual military safety meeting.

COVID-19: The number of reported cases is 74,372,756 with 1,652,117 fatalities.  In the U.S., there are 16,984,580 confirmed cases with 307,543 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 Axios map is showing improvement in cases.

Virology

• Perhaps the most important “known unknown” is the type of immunity that the current COVID-19 vaccines will provide. In general, we don’t know whether or not these vaccines will provide “sterilizing immunity.”  Sterilizing immunity means that a person can’t be infected by the virus if exposed to it.  The lack of sterilizing immunity means that a vaccinated person can be infected by exposure to the virus but doesn’t get sick or exhibit symptoms.  The whooping cough vaccine, for example, does not give sterilizing immunity.  Thus, a vaccinated person could become an asymptomatic spreader of the virus.  If sterilizing immunity can be achieved, the world will get back to normal much quicker.  If the current vaccines do not bring sterilizing immunity, then societal protection will require widespread adoption of the vaccine to be effective and will require mask-wearing and social distancing to continue even for those who have been vaccinated.   In other words, if sterilizing immunity isn’t possible but a large number of people are vaccinated, then any spread would not be a major problem.  Although there have been polls suggesting reluctance to accept the vaccine, recent studies suggest a growing level of acceptance, which is good news.
• The Moderna (MRNA, USD, 137.03) vaccine is expected to get approval from the FDA. Its refrigeration requirements are less stringent than the current vaccine.
  • The U.S. and Pfizer (PFE, USD, 37.84) are negotiating a new supply arrangement.
  • The FDA has approved the first OTC test for COVID-19.
  • Although adverse reactions to the Pfizer vaccine seem to be rare, they are not unprecedented. Health care workers in the U.K. and Alaska have reported reactions to the vaccine that have required hospitalization.
• French President Macron has tested positive for COVID-19.
• Germany will begin vaccine distribution on December 27.
• Airlines are proving to be a critical part of the logistical chain for vaccine distribution.
• Sweden’s light response to COVID-19 is getting increased scrutiny as the health care system is overwhelmed.
• Firms are lobbying for their workers to be considered “essential.”
• The WHO is sending a team to Wuhan to investigate the origins of COVID-19.

Policy and economic news:  A fiscal deal appears close and tech comes under further pressure.

• Although a stimulus agreement is said to be close, we have not crossed the finish line quite yet. It does appear stimulus checks will be part of the bill, while state aid and liability protections were too difficult to pass.  The lack of state aid may prove to be an “own goal” in terms of boosting economic growth, a mistake that was made in the last business cycle.  States are critical to supporting the economy, but many are now being forced to cut spending in order to balance budgets.  For example, it will be the states that mostly manage the eviction situation.
• Although the Senate remains undecided, it should be noted that if the Democrats manage to win the two Georgia seats, the most important senator may be Joe Manchin (D-WV), who will likely become the pivot vote. A centrist, he will act as a brake on items like tax hikes and ending the filibuster.  This development has started to alarm the LWP.
• There is no doubt the pandemic has had a terrible impact on much of the economy. At the same time, we should not underestimate the flexibility of the economy in recovery.  In economics, one of the factors that affects industrial organization is the ease of entry and exit.  Perhaps one of the easiest industries to close and open is restaurants.  So, yes, a myriad of restaurants will and have closed, but don’t be surprised to see a surge of new entrants once vaccine distribution expands.
• Ten states have joined a suit against Google (GOOGL, USD, 1757.19), accusing the firm of collusion.
• Massachusetts has implemented legal action against Robinhood.  The firm has also agreed to pay the SEC $65 million to settle a “pay for flow” arrangement.

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

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with the latest pandemic news, including the state of play on the new pandemic relief proposal in Congress, which has been buoying equity markets.  We next turn to U.S. political and policy news, including a preview of today’s Federal Reserve meeting.  We end with various foreign developments; there are signs that the EU and Britain are on the verge of a post-Brexit trade deal.  Note to readers—our Daily Comment will go on holiday hiatus starting December 23 and return on January 4.

COVID-19:  Official data show confirmed cases have risen to 73,627,592 worldwide, with 1,638,842 deaths.  In the United States, confirmed cases rose to 16,725,039 with 303,872 deaths.  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 more than 198,000 yesterday, while hospitalizations related to the virus rose to another record of 112,816.  Among those hospitalized, the number in intensive care rose to yet another record of 21,897.  Deaths in which COVID-19 was designated as the proximate cause came in at 2,957.
• The FDA published its analyses of the vaccine developed by Moderna (MRNA, 147.22), and characterized the substance as safe and “highly effective.”  That sets the stage for an emergency authorization later this week that would add a second vaccine to the arsenal of defense against the pandemic.
  • The findings published yesterday will now go before an independent advisory panel, which will vote Thursday on whether to recommend authorization.
  • Barring complications, the FDA is aiming to authorize the emergency use of the Moderna vaccine on Friday.
• Meanwhile, the German firm BioNTech (BNTX, 111.20) said it will supply 100 million doses of the vaccine it developed with Pfizer (PFE, 38.71) to Chinese partner Fosun Pharma for use in mainland China next year.  The deal marks the country’s first publicly announced order of a foreign coronavirus vaccine.
• Although clinical testing of the Moderna and Pfizer/BioNTech vaccines has noted that some recipients have “mild” side effects, reports indicate that those reactions can sometimes be more than just a mere nuisance.
• In a strategy that goes against the grain of most other countries’ vaccination strategies, Indonesia plans to vaccinate its young working-age population against the coronavirus before its older citizens, in an effort to quickly build “herd immunity.”
• The FDA approved the emergency use of the first over-the-counter, self-testing COVID-19 antigen kit, which can produce results within 20 minutes.  The test, developed by Australia’s Ellume, consists of a nasal swab analyzer that connects to an application on a user’s smartphone, providing results without sending samples to a laboratory.

 Economic Impacts

• The European Central Bank said yesterday that lenders can restart limited dividend payments next year following a nine-month ban, although it also told banks to be prudent about bonuses given the economic crisis caused by the pandemic.

 U.S. Policy Response

• House Speaker Pelosi, Senate Majority Leader McConnell, Senate Minority Leader Schumer, and House Minority Leader McCarthy met several times yesterday to hammer out details of the latest pandemic relief bill, suggesting the leaders are close to a deal.  Last night McConnell said, “We’re making significant progress and I’m optimistic that we’re gonna be able to complete an understanding sometime soon.”  If Congress can pass a bill of about $748 billion, as now seems likely, it would help tide the economy over the current resurgence in infections until an expected rebound from vaccinations.  News of the latest negotiations therefore helped give the equity markets a major boost yesterday, and it looks like the positive sentiment is continuing so far this morning.

 Foreign Policy Response

• The European Union today unveiled plans to assist countries in setting up a network of national “bad banks” to soak up what could be $1.7 trillion in bad loans caused by the pandemic and allow healthier institutions to lend during the recovery.  However, the effort would rely on individual governments to sponsor the bad banks, falling short of more ambitious proposals for a continent-wide bad bank.

U.S. Presidential Transition:  One day after the Electoral College voted to affirm the election of Joe Biden as president, several leading Republicans finally offered him congratulations and acknowledged he would take the presidency in January.

• As we predicted in yesterday’s Comment, some Republicans said they would try to disrupt the formal count of the Electoral College votes before a joint session of Congress on January 6, but Republican leaders warned that such an effort would reflect badly on Republicans in the mid-term elections of 2022.
• Separately, reports said President-elect Biden would nominate South Bend, Indiana, Mayor Pete Buttigieg as his Secretary of Transportation and former Michigan Governor Jennifer Granholm as his Secretary of Energy.

U.S. Monetary Policy:  The Federal Reserve today completes its final policy meeting of 2020.  No change in the benchmark fed funds interest-rate target is anticipated, but the policymakers are widely expected to extend the timeframe for their current program of debt purchases by linking them to certain economic metrics in the recovery.  Against the backdrop of rising Treasury yields and a flood of new longer-dated debt from the Treasury Department, the policymakers are also coming under increased pressure to shift the bulk of its bond-buying to longer maturities, i.e., to adopt yield curve control.  However, the officials have not indicated any intention to do so at today’s meeting.

China:  MSCI said it will strip its indexes of stocks in seven Chinese companies that the U.S. government says help China’s military, including the country’s largest chipmaker and a major producer of surveillance equipment.  The move, which will take effect by the close of business on January 5, follows similar actions by other benchmark providers, including FTSE Russell and S&P Dow Jones Indices.  The move further highlights the risk that geopolitical and economic tensions could lead to restricted capital flows between China and the Western democracies.

Australia-China:  The Australian government said it is referring China to the World Trade Organization over Beijing’s imposition of punitive tariffs on Australian barley imports.  In addition, Trade Minister Simon Birmingham said Canberra reserved the right to appeal several other Chinese trade sanctions levied against Australian coal, beef, timber, and lobster in recent months.  The WTO filing escalates a bitter diplomatic and trade dispute between the countries, and it is likely to further exacerbate growing tensions between China and the Western democracies.

Eurozone:  The IHS Markit “flash” composite purchasing managers’ index for the Eurozone rose to 49.8 in December, beating expectations and posting a healthy climb from the final figure of 45.3 in November (see data tables below).  The figures suggest business activity in the Eurozone is now rebounding faster than anticipated after services companies benefited from a loosening of coronavirus restrictions in some countries, and manufacturers gained from rising exports.  All the same, fresh virus restrictions imposed in some countries this week are widely expected to push the region into a double-dip recession this winter.

Brexit:  As Britain and the European Union inch closer to the year-end deadline to complete a post-Brexit trade deal, signs are accumulating that an agreement is close.  This morning, British lawmakers were put on standby for an extended House of Commons sitting next week, which could provide an opportunity for them to scrutinize any deal.  Also, European Commission President von der Leyen today said, “there is a path to an agreement now,” even if it “may be very narrow.”  In response, sterling today has jumped to its highest level since early 2018.

• One British official said talks in Brussels last weekend had been “positive” and that progress had been made on resolving the biggest outstanding issue: a new level playing field to ensure fair competition.
• Eurosceptic parliament members said they could accept what the EU calls “a rebalancing mechanism,” which would allow both sides to call foul if they felt they were being unfairly undercut on regulations.
• The mechanism would involve an arbitration panel to determine whether any harm caused by regulatory divergence was serious and to ensure any punitive sanctions were proportionate.

Turkey:  Naci Agbal, the new governor of the Turkish Central Bank, said the institution will no longer sell dollars in an effort to prop up the lira, but will instead focus on rebuilding the nation’s depleted foreign exchange reserves and gradually raise interest rates if necessary to fight inflation.  The statement signaled a sharp change in direction after two years of a highly contentious policy of currency intervention that has added to Turkey’s financial mess.  In response to Agbal’s statement, the lira continues its recent rebound.

United States-Iran:  Several firms monitoring the global oil trade say Iran has circumvented U.S. sanctions and exported more oil to China and other countries in recent months, providing a lifeline for its struggling economy and undermining the Trump administration’s so-called maximum pressure campaign against Tehran.

Mexico:  President Andrés Manuel López Obrador’s ruling party pushed through a new law curbing the role of foreign law-enforcement officers in Mexico.  The legislation comes after the arrest in the U.S. of Mexico’s former defense minister on drug trafficking and corruption charges, which angered many in Mexico as an insult to the country’s sovereignty.

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

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with the latest coronavirus news.  Some of that news is good, such as the first U.S. vaccinations and signs that at least a trimmed down pandemic relief bill is in the offing again.  However, some of the news is worrisome, including the continued rise in infections and hospitalizations, as well as a possible new strain of the virus in Britain.  We then move to the latest U.S. presidential transition news, reports of new tech industry regulations, and various other news items from around the world that could impact the financial markets today.

COVID-19:  Official data show confirmed cases have risen to 72,991,941 worldwide, with 1,624,161 deaths.  In the United States, confirmed cases rose to 16,520,408 with 300,494 deaths.  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 topped 193,000 yesterday, falling slightly short of the record levels reached in early December.  Hospitalizations related to the virus hit yet another record of 110,549, with the number in intensive care also hitting a record of 21,456.  In contrast, new deaths came in only a bit above 1,400, which was significantly better than the seven-day moving average of about 2,400.
  • The autumn/winter resurgence continues to push many state and local governments to tighten economic lockdowns.
  • In Europe, many countries are also tightening restrictions.  The Dutch government imposed its strictest lockdown since the start of the pandemic; it closed all stores except for food and other essentials, in addition to consumer services and public venues including restaurants, hairdressers, and theaters. Most secondary education will move online.  In Germany, some economists are warning the latest clampdown could lead to a double-dip recession.
• According to the federal government, 55 sites nationwide received shipments of the new vaccine from Pfizer (PFE, 39.21) and BioNTech (BNTX, 108.27) around noon on Monday, and plans remain on track for a total of 636 locations to receive vaccines by Wednesday.
  • An additional 581 sites should receive shipments between Thursday and Sunday, completing the distribution of an initial 2.9 million doses.
  • According to new polling by Axios/Ipsos, the share of Americans who say they’ll get the COVID-19 vaccine as soon as it’s available has doubled since September, with more than one in four now putting their hands up.
• On a less positive note, British doctors say rolling out the Pfizer/BioNTech vaccine beyond hospitals will take longer than anticipated because of logistical challenges and complications thrown up by news in the U.K. of allergic reactions after the injection.  Following two severe allergic reactions on December 8, the first day of the U.K. vaccination campaign, doctors were told to monitor patients for 15 minutes after each injection.
• Also in the U.K., Health Secretary Matt Hancock told the House of Commons yesterday that a “new variant” of coronavirus has been identified in the country and could be causing the virus to spread faster in southern England.  While that news is scary, Hancock insisted that, “There is currently nothing to suggest that this variant is more likely to cause serious disease, and the latest clinical advice is that it is highly unlikely that this mutation would fail to respond to a vaccine.”  Let’s hope he’s right.
• The FDA today will release data on the effectiveness of the new vaccine being developed by Moderna (MRNA, 155.07).  That data is expected to set the vaccine up to be approved for emergency use later this week.
• New figures show that during the pandemic to date, state-run nursing homes for veterans have had some of the highest concentrations of infections and deaths.  An analysis by the Wall Street Journal found at least two such facilities where approximately one-third of the residents were infected and died.

 Economic Impacts

• In Japan, new polling shows a majority of Japanese people oppose holding the coronavirus-postponed Tokyo 2020 Olympics next year, favoring a further delay or outright cancellation of the massive event.  The polling, by national broadcaster NHK, found that just 27% of respondents support holding the games next year, with 32% backing cancellation and 31% favoring a further postponement due to coronavirus risks.

 U.S. Policy Response

• Republican and Democratic legislators working to craft a $908 billion pandemic relief bill failed to reach a deal on COVID-19 liability protections, increasing the chances that Congress will need to narrow the scope of any relief deal in a year-end package.
  • The group instead offered a $748 billion bill that includes only less-controversial items like an extension of unemployment insurance and funding for schools, vaccine distribution, and small businesses.
  • The substitute bill would exclude both the liability protection and aid to state and local governments, but it would also be much more likely to be passed into law.  Since even the smaller package would help support demand over the winter months and the current resurgence of infections, further progress on the bill would probably be supportive of equities.

 U.S. Presidential Transition:  The Electoral College met in the various state capitals and the District of Columbia, and gave Democratic presidential candidate Joe Biden a total of at least 302 votes, exceeding the 270 votes needed to win.

• The next major step in the process of electing the president comes on January 6, when Vice President Mike Pence will preside over a joint session of Congress in which the Electoral College votes from each state will be formally counted and an outcome declared.
• With the Electoral College action yesterday, several senior Republican leaders finally acknowledged that Biden will become the next president in late January.  In the meantime, however, some supporters of President Trump plan to continue legal action to overturn the election.  Given some Republicans’ aggressive court suits to impose blanket invalidations of Democratic-leaning votes, it probably can’t be ruled out that there will be some discussion of disrupting the January 6 procedures.  That disruption could conceivably create some market volatility over the next few weeks.  However, it is more likely that electoral disputes will continue to dissipate, and President-elect Biden will take office as scheduled in late January.

Technology Industry Regulation:  The U.S., the United Kingdom, and the European Union have all taken new steps adding to the regulatory risks facing major U.S. technology firms.  Those rising regulatory risks have probably contributed to the technology sector’s volatility in recent months, and the new measures promise that investors will remain concerned about new restrictions imposed on the industry.  The new steps include:

• United States.  The Federal Trade Commission ordered nine big social media and internet companies to provide a litany of data about their operations as part of a wide-ranging study into how they track users’ online activities and how they use that data.  Coupled with recent antitrust actions in the U.S. and Europe, the order illustrates the growing regulatory risk facing major U.S. technology firms.  This has probably contributed to their volatility in recent months.
• United Kingdom.  The British government today published its long-awaited proposal for online safety legislation, which would target major technology companies with multibillion-pound fines if they fail to rapidly remove illegal and harmful content from their platforms.  The rules would set out new “duty of care” requirements and require the companies to “remove and limit the spread of illegal content,” including child sexual abuse and terrorist material.
• European Union.  The European Commission today will unveil two draft laws that threaten to break up Big Tech companies if they repeatedly engage in anti-competitive behavior.  The proposed “Digital Markets Act” will aim at tackling unfair competition in the sector, while the “Digital Services Act” will force tech companies to take more responsibility for illegal behavior on their platforms.

• The proposals envision draconian punishments for firms that break the rules, ranging from massive fines to forced breakup for repeat offenders.
• After the proposals are published, they will have to be voted on by the European parliament, but there is no timetable for when they will come into force.

U.S. Monetary Policy:  The Federal Reserve today begins its final policy meeting of 2020, with any policy adjustments and new economic forecasts to be published tomorrow.  The policymakers are widely expected to extend the time frame for their current program of debt purchases by linking them to certain economic metrics in the recovery.  Against the backdrop of rising Treasury yields and a flood of new, longer-dated debt from the Treasury Department, the policymakers are also coming under increased pressure to shift the bulk of its bond-buying to longer maturities, i.e., to adopt yield curve control.

China Economic Performance:  China’s economic activity extended its momentum in November with an across-the-board recovery.  Indicators all accelerated including industrial production, investment, consumer spending, and job growth, and unemployment fell (see data tables below).  Industrial output alone was up 7.0% year-over-year, accelerating from a gain of 6.9% in October.

China Regulatory Policy:  The China Securities Regulatory Commission announced it was temporarily freezing the license of Golden Credit Rating, one of the country’s top debt-rating firms, and had forbidden the agency from taking on new business for three months.  The move, which comes after a former firm executive was accused of taking “massive” bribes, will further sour investors on Chinese credit markets and debt levels.  Indeed, the news about Golden Credit comes as Shandong Ruyi, China’s largest textile manufacturer, appeared set to default on a second bond in as many days.

China-Australia Trade:  The Australian government has asked Beijing to clarify whether it has formally banned Australian coal following Chinese state media reports that the country’s top economic advisory body allowed power stations to import coal without clearance restrictions, with the exception of coal from Australia.  If true, the Chinese move would represent a further effort to punish Australia for its call to investigate China’s role at the start of the coronavirus pandemic.

Russia:  A new joint investigation between Bellingcat and several media outlets has revealed evidence showing that the recent poisoning of Russian opposition leader Alexei Navalny was carried out by Russia’s Federal Security Service (FSB).

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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 as vaccine distribution begins.  The Electoral College votes today.  There are two big items today—Brexit and the vaccine, so we lead off with those two categories.  There was a major hack announced over the weekend.  The Fed meets this week.  We update economics and policy and close with a roundup of foreign news.  A note to readers—the Daily Comment will go on holiday hiatus starting December 23 and return on January 4.  And, watch for our 2021 Outlooks; we will publish both the 2021 Outlook and the 2021 Geopolitical Outlook later today.  Here are the details:

Brexit:  That “whoosh” you heard over the weekend was the passing of another deadline!  Last week, after PM Johnson and EC President von der Leyen met, Sunday was said to be the end of talks.  However, as we have seen throughout this whole process, the real deadline is that last possible day, which in this case, will be December 31, 2020.  The leadership indicated it would continue talking, even though the tone was decidedly pessimistic.  The GBP rallied on the news.  Here are the details of what we know so far:

• The “level playing field” issue has been a key sticking point. According to reports, although the two sides are not in agreement, there was a hint of progress on this issue, which is probably why talks were extended.
• The EU is clearly worried that if talks fail, individual EU states will try to make their own deals with the British. This action would undermine the EU and Brussels is warning them to continue to work in concert.
• The Royal Navy is preparing four patrol ships to guard British fishing areas if a hard Brexit occurs.
• The U.K. appears woefully unprepared for a hard Brexit. There are warnings that food shortages are possible; such warnings will only trigger hoarding, which will exacerbate the problem.  There are said to be two thousand vacancies in Britain’s civil service related to trade and other issues if a hard Brexit occurs.  Perhaps the lack of planning for a hard break has led EU negotiators to postulate that the Johnson government isn’t really serious about a sudden exit.  We suspect that if true, this is probably a miscalculation on the part of the EU.
• An interesting development is occurring in Norway. That nation has a trade arrangement with the EU even though it is not a member.    In the arrangement, Norway pays to be in the EU, but it has no say in its governance.  It has been offered as a model to the U.K., although it looks unattractive.  This arrangement has apparently become unpopular in Norway.  Next year, elections will be held, and Euroskeptic parties are making gains by promising to renegotiate the current arrangement.
• Overall, we still expect some sort of deal to be struck but not until the last possible moment. That is usually how EU negotiations work.

COVID-19:  The number of reported cases is 72,336,167 with 1,314,159 fatalities.  In the U.S., there are 16,257,899 confirmed cases with 299,191 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.

 Virology

• And so it begins—vaccine distribution of the Pfizer (PFE, USD, 41.12)/BioNTech (BNTX, USD, 127.30) is now underway.  It is a logistical challenge; the mRNA-based vaccine must be kept at -94^o until it reaches its final destination.  The first doses left Gerald R. Ford International Airport in Grand Rapids, MI from Pfizer’s Portage, MI facility over the weekend.  Injections at nursing homes are expected to begin today.  We also expect a massive public relations blitz to begin to encourage Americans to take the vaccine.
• Meanwhile, around the world, the news on the pandemic is grim:
  • South Korea, which has generally managed to keep the virus under control, is facing a new wave of infections as winter sets in. There is reluctance to implement restrictions due to the negative effect on the economy.  Japan is also seeing a rise in cases.
  • Germany is implementing new restrictions as cases and fatalities rise.
  • Sweden, which had famously opted for light restrictions and allowing for the virus spread to bring herd immunity, is facing serious ICU capacity constraints as infections rise. Its Nordic neighbors are offering help.
  • Russia is facing a wave of anti-vaccine online content which is apparently slowing the acceptance of Russia’s vaccine.
  • Peru has suspended its trials of China’s Sinopharm (SHTDY, USD, 12.28) vaccine due to a “serious adverse event.”
  • Sanofi (SNY, USD, 47.83) has suffered a serious setback in its vaccine as inadequate controls led to some participants getting too small a dose. The problem will delay its Phase 3 trials to H2 2021.
• Work from home has become part of the response to the pandemic. Google (GOOGL, USD, 1774.80) announced it won’t allow workers to return to the office until September 2021, and when they do, it will only be for 3 days a week.   It is looking increasingly like work from home will become a permanent part of the landscape going forward.

This chart shows nearly 50% of respondents to this survey would prefer to work more than three days per week from home.

The hack:  Over the weekend, several government departments, including Treasury and Commerce, admitted they had been hacked by what appears to be a foreign government, very likely Russia.  The hack came to light after the cybersecurity firm FireEye (FEYE, USD, 13.83) announced its systems had been penetrated through a software distribution management firm called SolarWinds (SWI, USD, 23.55).  The government has ordered all its departments to disconnect from the software.  According to reports, the hackers have been placing malware in U.S. computer systems since early spring, meaning they have had nine months to capture data.  It is still too early to tell what has been lost or what the hackers were after.  Apparently, it was a massive breach.

• Although it may not be related, Google has indicated it is facing a widespread outage.

The Fed:  The FOMC meets this week and is trying to manage an upcoming problem.  It is clear that the economy is going to face a serious slump in Q4 and Q1, but there could be a notable rebound as the vaccine is distributed.  Thus, should it add stimulus now to help the economy in the short run and run the risk of inflation or dealing with the signaling challenge of tapering stimulus later in 2021?  The good news about the vaccine is that it probably avoids the worst-case scenarios.   Nonetheless, the chances of a bad outcome are not zero; fiscal stimulus could disappoint, and the current vaccine is a new technology that hasn’t been used beyond clinical trials.  Thus, we expect the FOMC to extend its QE program.

Economics and policy:  Fiscal stimulus talks continue and are tied to vaccine distribution.

• The political standoff on a large fiscal support package has not been resolved, so Congress is preparing a smaller bill with what it hopes can pass. Although we suspect the current bill is inadequate to support the economy, something is better than nothing and would help.  We do note that some of the vaccine distribution is expected to be funded by state governments which may not have the revenue for this leg of the vaccine journey.
• It looks like a wave of evictions may be coming as Federal protections expire at the end of the year. We would not be surprised to see fewer evictions than expected, as landlords have little likelihood of getting back lost rent and finding solvent tenants might be difficult.  Thus, coming to some sort of terms might make more sense.
• Independent delivery drivers are putting burner phones in trees around distribution centers to get the first crack at delivery orders.
• We have seen a surge in industrial metals prices. Steel firms are reporting stronger demand and are restarting mills.  Prices are rising as well.

Foreign news:  A roundup.

• The BOJ’s Tankan survey of manufactures showed a stronger than expected rise in Q4.
• One of the challenges of moving production out of China is that Beijing has tended to keep a lid on worker unrest. Indian production workers attacked an iPhone factory owned by Winstron (3231, NTD, 31.05) over wages and working conditions.
• China announced it is prosecuting a rating agency manager who apparently took bribes to give companies favorable ratings.
• It is looking increasingly like the Belt and Road initiative is going to end up being China’s first overseas debt crisis.
• Iran’s execution of Ruhollah Zam, a journalist, was condemned by the EU. Iran has summoned the ambassadors of France and Germany to protest the interference in Iran’s internal affairs.  Iran’s decision to execute Zam will not help their goal of easing sanctions.
• Stagflation in Pakistan led to widespread protests yesterday.
• The Mexican legislature is fast-tracking a law that would reduce cooperation with the U.S. on drug trafficking. According to reports, the U.S. was caught off guard by the new law, which was proposed by AMLO.  The action stems from the U.S. decision to arrest former defense minister Gen. Salvador Cienfuegos earlier in the year on drug trafficking charges; the charges were later dropped.
• Iraq has struggled to maintain order this year. An area that had been relatively calm, the Kurdish north, faced protestors angry about delayed payments of government salaries and pensions.  The Kurdish leadership and Baghdad have been at loggerheads for some time, and the latter has retaliated by not sending funds to the Kurds.
• For years, Cuba’s official exchange rate of pesos to the USD has been parity. The market rate has been nowhere close to that level, but the parallel exchange rates have likely benefited insiders in the government.  In a surprise move, the government announced a massive devaluation, taking the official rate from 1:1 to 24:1.  We reported last week that there were protests by artists; the leadership wants to make sure that this devaluation won’t trigger civil unrest.  Although dollars circulate in Cuba, this devaluation will almost certainly trigger inflation and further impoverish those who don’t have access to dollars.
• The ECB will allow banks to resume paying dividends with some limits.

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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Friday!  The lack of progress on a stimulus package, the potential for a government shutdown, and the increasing likelihood of a disruptive Brexit are all weighing on equities this morning.  Accordingly, we lead off our coverage this morning with an update on the U.S. policy situation and Brexit.  The EU budget and other related news comes next.  We discuss China, followed by pandemic news, and we close with a wrap of international news.  Since it’s Friday, a new Asset Allocation Weekly is available, with the associated chart book and podcast.  This week, we discuss gold.  Starting in January, in a bid to shorten this report, we will no longer publish the AAW at the bottom of the Daily.  It will be available only as a stand-alone report but will be linked within the Daily Comment.  Here are the details:

Economics and Policy:  Stimulus talks are stalled.  Senate GOP leadership is backing away from the current proposals circulating in Congress.  The sticking points are the size and composition of the stimulus, liability protections, and state and local government support.  This week, Congress passed a one-week bill to keep the government funded.  Members are now using the looming shutdown as leverage to press for their legislative agendas.  We did see something worth noting yesterday―Senators Sanders (I-VT) and Hawley (R-MO) both supported a new round of stimulus checks.  For the record, Sanders is saying he would block government funding to get the money, whereas Hawley wouldn’t go that far…yet.  However, what caught our attention is that populists from the left and right joined forces on legislation.  This is the so-called “Nader coalition” that we have been watching for years.  Although it exists in theory, it is rarely seen in the wild.  Politically, this is important.  Although politics is usually parsed by party (Democrat/Republican) and leaning (conservative/liberal), we view these as superficial.  The real breakdown, in our opinion, is between populist and establishment, of which there are left- and right-wing varieties of each.  As populism rises, expect to see more left and right unity over various policy goals.  We don’t think Nader coalitions really work, because the social gaps are too wide.  But, on certain policies, there is enough common ground that coalitions can be built that appear to be jarring if one is not dividing politics along establishment/populist lines.

• After a borrowing binge, it appears we may see a pullback in new issuance next year. Many firms have refinanced the debt to lower interest rates and the likelihood of doing that next year is low.  And, the need for investment funds is less likely too, given how much slack remains in the economy.  If true, this development could help narrow credit spreads.

Brexit:  Both sides of the English Channel are warning that a hard break is increasingly likely.  It is difficult to tell whether these are real warnings or simply negotiating tactics.  If we take leaders at their word, it looks like the dreaded hard Brexit may be a reality.  We have been talking about this issue for a long time and must admit we are surprised that a compromise wasn’t possible.  And, it is still possible; the EU doesn’t tend to get anything done without a hard deadline.  That being said, the two sides are so far apart that there may not be enough strategic ambiguity to cover the gaps.

So, if we do get a hard Brexit, what happens?  As we have said in the past, there is a high likelihood of a sharp depreciation of the GBP ($1.20/$1.15) and a selloff in U.K. equities.  This weakness is probably a buying opportunity as the currency is already undervalued.  In the long run, we do expect some degree of accommodation to evolve.  The U.K. outside the EU is a serious threat to the latter; look for the U.K. to make limited deals with individual countries and industries that will send Brussels into apoplexy.  There will be losers, though.  A hard break is very supportive for U.S. financial firms—New York will gain on London.  We don’t see London’s business migrating to the continent but to the U.S.

EU:  We have a budget deal.  Fiscal stimulus and pandemic aid will be coming, funded in part by a Eurobond.  Poland and Hungary are claiming victory and so is the rest of the EU.  We think Poland and Hungary are the real winners as they will get money and not have to bend to EU rules on an independent judiciary.  We view this as bullish for the EUR, although it is likely that the market has already discounted this outcome.

China:  Tensions remain elevated on a number of fronts.

• Haze Fan, a Chinese national employed by Bloomberg news, has been detained on suspicion of endangering national security. Relations between international media and China have been fraught for a while and this is another example of stress.
• It’s the two-year anniversary since Michael Kovig and Michael Spavor were detained by Chinese officials. The “two Michaels” are Canadians and are thought to be held in retaliation for the detention of Meng Wanzhou, the CFO of Huawei (002502, CNY, 2.80).  Meng was arrested in Canada for extradition to the U.S. on charges that she violated U.S. sanctions on trade with Iran.  Soon after, China arrested the aforementioned Canadians.  The standoff continues, although we would not be shocked to see a swap at some point.
• Taiwan is facing a near constant barrage of threats from the mainland. The Chinese military continually flies near Taiwan, forcing the latter’s air defenses to be activated.  There is growing concern that these tactics are a precursor to the PLA eventually unifying the island with China by force.  President Tsai has been working to tighten relations between the U.S. and Taiwan, but the real issue is whether the U.S. views Taiwan as a strategic interest.  Taiwan would be a key strategic asset for any power trying to contain China, but it is uncertain whether the U.S. would be willing to risk a major conflict with China over the island.  That uncertainty is probably behind China’s incursions.
• The saga of Chinese corporate bond defaults continues to reverberate. The recent default by Tsinghua Unigroup (600100, CNY, 6.24) was notable because the company defaulted on bonds denominated in USD, which are often created to attract foreign buyers.  China has been steadily moving toward allowing market forces to determine the fate of firms.  Given China’s state of development, this makes sense.  However, there will almost certainly be a tradeoff, which is usually slower growth.  As Michael Pettis has said for years, China can have any level of growth it wants; it all depends on how much debt it is willing to incur.  If China is going to allow widespread defaults, even on SOEs, the tradeoff will be that investors will be more cautious, and this will tend to depress economic growth.
• For the past two decades, we have seen parallel trends in China between those wanting more state control over the economy and those wanting market control. Leaders since Deng have tended to vacillate between the two poles; fostering the former gave leaders more control but stifled growth.  Supporting the latter boosted growth but allowed power to develop outside of the CPC.  One way in which leaders tried to square the situation was to give entrepreneurs party membership.  However, as we noted over recent crackdowns on Chinese fintech firms, China appears to be opting for control over market freedom.  We would expect that decision to slow growth, a point the CPC leadership would probably dispute.
• The American Chamber of Commerce in China is a “friendly” group for Beijing. It is composed of American businesses operating in China and tends to be an ally of the leadership when dealing with Washington.  At a recent meeting/dinner, Wang Chen delivered a keynote speech.  It is generally assumed that Beijing insisted on him giving the delivery.  What makes this notable is that Wang is under direct U.S. sanction.  This is either an “own goal” by Beijing or a clear indication that it is willing to embarrass a group that is generally supportive of harmonious U.S./China relations.
• After China decided to bar critics, the China-Europe Trade Forum was cancelled.

COVID-19:  The number of reported cases is 69,738,975 with 1,585,048 fatalities.  In the U.S., there are 15,618,685 confirmed cases with 292,192 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 R_t data continues to show high levels of infection.  Only eight states have a reading <1.  Arizona is the highest, while Wyoming is the lowest.

Virology

• Yesterday, the FDA’s advisory panel endorsed the Pfizer (PFE, USD, 41.73)/BioNTech (BNTX, USD, 129.54) vaccine, paving the way for FDA approval.
• Determining who is an essential worker at this point is easy; medical personnel are going to get the vaccine first. But, after that, it may come down to political power.  All sorts of firms and industries will argue that their workers are essential because vaccinations pave the way for industries to return to normal.
• Russia is struggling with vaccine distribution. Manufacturing has lagged and medical authorities have warned against imbibing before getting the vaccine.

Foreign news:

• Morocco has joined the UAE, Bahrain, and Sudan in normalizing relations with Israel. Part of the arrangement is that the U.S. will acknowledge Morocco’s claim to a part of its western region that is facing a separatist movement.
• Turkey is facing new sanctions from the EU and the U.S. The U.S. is angry over the S-400, while the EU is upset with Turkey’s handling of refugees.
• The U.S. has dispatched B-52s to the Middle East as a deterrent to Iran.

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

[Posted: 9:30 AM EDT] | PDF

Good morning!  The ECB met today and decided to increase its long-term bond purchases; the market’s initial reaction is hawkish.  The EUR has rallied, and rates have lifted (albeit modestly).  U.S. equity futures are mostly sideways this morning.  There is a lot of news today.  We start with a quick look at the ECB then move to the FTC antitrust suit against Facebook (FB, USD, 277.92).  Brexit comes next as talks come down to the wire.  It looks like the EU budget has a fix, which means a Eurobond is likely.  Pandemic news follows.  We update the news from China.  Economic and policy news is next, and we close with miscellaneous foreign reports.  Being Thursday, the Weekly Energy Update is available; in the report, we link to the University of Chicago’s research showing the history of U.S. energy consumption.  Here are the details:

ECB:  Simply put, the ECB did everything that was expected in its announcement.  It is adding longer duration bonds to its purchases, boosting purchases, extending its other support programs, and continuing to press for inflation.  The market’s reaction was likely a surprise to policymakers.  Interest rates rose, and the currency appreciated.  It isn’t clear what the ECB can do if it wants a weaker currency and/or lower rates, other than a mandate to peg exchange and interest rates.  What is our take?  The currency was destined to rise because it is undervalued with only a peg policy (where the ECB would buy dollars in a consistent intervention program) to keep it suppressed.  In the press conference, there were no surprises.

Facebook:  Yesterday, the FTC and the attorneys general of 46 states joined in a lawsuit against Facebook.  The case against the company is that it bought potential competitors to prevent competition.  This case follows a similar one launched recently against Google (GOOGL, USD, 1777.86).  To some extent, the case against Facebook is based on a turn in the rules; from the mid-1980s until recently, policymakers used the Bork standard, which meant that the sole standard of harm was the impact on consumers.  As long as consumers were not clearly harmed, a company could do just about anything it wanted, and they have.  The Bork standard’s narrow interpretation of harm means that tech companies have engaged in political interference and labor suppression without fear of legal retribution, until now.  The thinking regarding antitrust has since taken a populist turn.  The FTC is seeking to unwind Facebook’s acquisitions of Instagram and WhatsApp, a move similar to the breakup of Standard Oil over a century ago.

The turn of fortune for the large-tech firms is unmistakable.  The Obama administration courted tech CEOs.  Sheryl Sandberg was thought to be slated for a cabinet job in the Clinton administration.  It still looks like both left- and right-wing establishments are uncomfortable bringing action against the tech firms (two GOP members of the FTC voted against the suit).  However, populists on both sides are supportive of further action against the companies.  We do note their end goals are not necessarily identical, but we would also note that the large tech firms are facing what may be their most potent threat—concerted antitrust action.  At the same time, antitrust action moves at legal, not market, speed, so the suits against both Google and Facebook will take a long time to work out.  Nevertheless, there does appear to be a trend in place.  What does this mean for investors?  It’s not necessarily bad.  The Standard Oil breakup created scads of smaller companies that all did quite well, probably enriching shareholders more than the single company would have.  Given the heavy weighting of the tech firms in passive indexes, there could be negative effects on overall index performance.

Brexit:  PM Johnson and EC President von der Leyen had dinner (we heard it was fish, which is symbolic) and discussions were said to be “frank,” which is usually diplomatic code for a shouting match.  The leaders agreed that Sunday will be it; if an agreement isn’t reached, we are probably on the way to a hard Brexit.  The two sides remain far apart.  The U.K. doesn’t want to live by EU rules but wants open access to trade; the EU wants to enforce automatic trade sanctions if there is a violation of EU rules, which is rejected by Westminster.  Germany, which has mostly been supportive of the U.K., is preparing for no deal.

We have seen years of EU negotiations where one can feel the breeze of deadlines passing, so even if we get to Monday without a deal, it doesn’t necessarily mean that a crisis is pending.  It is more likely that a hard Brexit will lead to real negotiations for a trade deal that both sides can live with.  In the short run, there are some important risks.  First, there will almost certainly be disruptions; shortages will likely pop up all over the U.K.  We would expect problems on the Ireland frontier.  Honda (HMC, USD, 29.97) recently was forced to close a plant due to parts shortages caused by port disruptions.  Our position has been that a hard Brexit will lead to a spike down in U.K. financial assets that will probably be a buying opportunity.  The price break will likely be painful; a GBP of $1.15/$1.20 in short order is likely.

EU:  Germany has presented a workaround to the rule of law issue that led to veto threats from Poland and Hungary.  The German plan requires a court decision before violators of the rule of law provisions could be enforced.  Reactions from Poland have been positive.  Most importantly, it gives Hungary and Poland a “win” that both political leaders needed.

• The EU is preparing additional sanctions on Turkey for its threats to affect natural gas drilling around Cyprus.
• The EU is preparing to enforce fines on tech firms who fail to police the internet.

COVID-19:  The number of reported cases is 69,027,093 with 1,572,162 fatalities.  In the U.S., there are 15,392,979 confirmed cases with 289,450 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 weekly Axios chart shows that infection rates are continuing to mount.

Virology

• The FDA is meeting to grant approval for the Pfizer (PFE. USD, 41.85)/BioNTech (BNTX, USD, 122.81) vaccine for broad distribution. The U.K. is warning that those with allergies may want to avoid taking this vaccine, as early distribution reports show adverse reactions to the drug.
  • The European Medicines Agency (EMA) reported that its data on the Pfizer/BioNTech vaccine was hacked.
  • Canada has approved this vaccine.
• A UAE report indicates that China’s Sinopharm (SHTDF, USD, 2.63) vaccine is 85% effective. The UAE was the first country to make this vaccine available.
• Although Putin’s daughter has taken the Russian vaccine, the leader himself has not.
• One of the challenges governments will face is tracking those who have had the vaccine.
• Although optimism surrounding the vaccines is high, the actual distribution will likely be slower than the current expectations indicate.
• Managing the economy and the pandemic is a balancing act. In Europe, we are seeing less stringent lockdowns and higher levels of infections.
• The pandemic is disrupting global supply chains.

China:  Here is what we are watching in China.

• It is becoming increasingly clear that activists in Hong Kong are either facing imprisonment or exile. The U.S. is threatening businesses over their activities in Hong Kong, making it clear that Washington’s position is that Hong Kong is no longer considered a separate entity.
• We are seeing increasing reports of China’s intelligence activities in the U.S. China’s intelligence services have been cultivating local politicians, likely trying to encourage ties to those who may “move up” to national roles.  China is also monitoring Chinese Americans with relatives in China to squelch their comments or force them to return to China.
• The debt default problem continues to fester. Coal SOEs are finding it difficult to sell bonds (no shocker there).  The coal industry has been especially hard hit, but it isn’t the only area of concern.  Chipmakers have also defaulted, as have real estate firms.
• China’s lending tied to the Belt and Road project appears to have fallen significantly.  A backlash tied to China’s geopolitical aims appears to be the primary cause.
• The S. is considering sanctions on China for violating restrictions on coal purchases from North Korea.
• S&P is cutting Chinese firms banned from the U.S. from its indices.

Economics and Policy:  An update on stimulus.

• Talks on stimulus are ongoing, but the issues continue. There is a division on whether unemployment benefits should be extended or if there should only be checks to households.  The issue of litigation protection has not been resolved.  Unfortunately, we only have a couple of days before recess, and a deal may not be forthcoming.
• The Supreme Court is said to be unconvinced that the government doesn’t have the power to sequester mortgage servicers’ profits.
• Asian nations are accumulating foreign reserves again, which is usually seen when they are trying to prevent appreciation. If so, we could see tensions rise as Washington wants to see the dollar weaken.
• The World Bank is projecting a slow recovery from the pandemic.
• Mortgage issuance is on a record pace as low-interest rates are boosting housing demand.
• An inflation indicator? Happy meal prices are said to be rising due to more expensive trinkets.

Foreign news:  A roundup.

• India is offering to sell the U.S. military trainer aircraft. The U.S. has been working to woo India and buying defense goods may be part of that process.
• We are seeing rare protests against the Cuban government in Cuba; according to reports, artists are using social media to make their feelings known.
• North Korea has launched a broadside against a South Korean official who criticized Pyongyang’s pandemic response. Kim Jong Un’s sister led the criticism.

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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today opens with the latest coronavirus news.  Importantly, the U.K. vaccinations yesterday turned up two negative reactions in people with allergy issues, but the news doesn’t seem to be undermining vaccine euphoria yet.  There’s also a new pandemic relief proposal from the White House to consider.  We follow the coronavirus news with an update on the U.S. presidential transition and the latest on Brexit negotiations.

COVID-19:  Official data show confirmed cases have risen to 68,387,002 worldwide, with 1,560,117 deaths.  In the United States, confirmed cases rose to 15,174,018 with 286,338 deaths.  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 topped 215,000 yesterday, while hospitalizations related to the virus rose to a new record of 104,600.  Among those hospitalized, the number in intensive care rose to a record of 20,483.  The number of new deaths surpassed 2,500, bringing the seven-day average of virus-related deaths to a near-record of 2,237.  Responding to the latest resurgence of the disease, state and local governments continue to impose new restrictions on business and social activity.
  • In Washington State, Governor Inslee extended broad limits on gatherings, restaurants, and other indoor activities until January 4.
  • In North Carolina, Governor Cooper said that beginning Friday he will institute a new, modified stay-at-home order, requiring business closures and people to remain at home from 10 p.m. to 5 a.m.
• Just a day after the U.K. started injecting people with the new coronavirus vaccine developed by Pfizer (PFE, 42.56) and BioNTech (BNTX, 128.11), British authorities said two recipients with a history of “significant” allergies had negative reactions to the shot.  In response, the Medicines and Healthcare Products Regulatory Agency said people with a history of allergies shouldn’t receive the vaccine.  Fortunately, there is little indication that the setback has damaged optimism about getting the pandemic under control, perhaps because observers understand that problems with allergies were investigated in clinical trials and not found to be a major issue.
• In the U.S., the leader of the advisory panel charged with evaluating the Pfizer/BioNTech vaccine said the shot is very likely to obtain emergency-use authorization because of its apparent high-efficacy rate of approximately 95%.  The panel meets to consider the vaccine tomorrow.
• The United Arab Emirates is the first foreign country to approve a COVID-19 vaccine developed by the Chinese state-owned pharmaceutical group Sinopharm (SHTDY, 12.24), saying the vaccine has 86% efficacy, according to interim results of a phase 3 trial.  The figures suggest the major foreign vaccines being developed outside the U.S. and Britain could be similarly effective.  If so, they could help ensure a successful global effort to rein in the disease.
• Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, yesterday said the new coronavirus vaccines could diminish the disease as successfully as the polio vaccine did for polio.  This would enable workers to return to offices and restaurants in the second half of 2021.  However, Fauci cautioned that hurdles still exist, including some people’s hesitancy to get vaccinated and getting through the current resurgence of infections.

 Market Impacts

• Investors betting that coronavirus vaccines will propel the global economic recovery next year continue to buy assets outside of the U.S., pushing the dollar lower and complicating European policymakers’ efforts to boost inflation.
  • The euro is currently up more than 8% against the greenback this year, putting it near its highest level since April 2018.
  • In technical terms, the U.S. Dollar Index has recently broken below a key support level, adding to expectations that the greenback will continue to weaken.

 U.S. Policy Response

• The Trump administration threw a curveball into the ongoing congressional negotiations over a new pandemic relief bill when he offered Democratic leaders a $916 billion bill that includes another round of direct payments to taxpayers.  The bill gives payments to individuals totaling $600 per person, but it wouldn’t include the $300 per week in extra unemployment benefits that were in last week’s bipartisan proposal.  Various lawmakers, ranging from Democratic Senator Bernie Sanders of Vermont to Republican Senator Josh Hawley of Missouri, have swung around to the idea of another round of direct payments to individuals, although it’s not clear whether they have enough momentum to get the idea into a bill.
  • Because of the exclusion of increased jobless benefits, House Speaker Pelosi and Senate Minority Leader Schumer expressed coolness toward the White House proposal.
  • Negotiations continue on the $908 billion bipartisan proposal, which would include aid to state and local governments as well as virus liability protections for businesses, nonprofits, and schools.
  • In any case, the continued negotiations and broad pushback against any effort to dramatically narrow the package should be evidence that a deal is more likely than no deal.  That should continue to support risk markets, as it did in helping lift the S&P 500 to yet another record close yesterday.

 U.S. Presidential Transition: Sources say President-elect Biden will nominate Ohio Representative Marcia Fudge to lead the Department of Housing and Urban Development and former Iowa Governor Tom Vilsack to head the Department of Agriculture, as he did through much of the Obama administration.

• Biden’s nominee for national security advisor, Jake Sullivan, signaled that the incoming administration will confront Beijing over its crackdown on civil freedoms in Hong Kong.  In a tweet, Sullivan wrote, “We stand united with our allies and partners against China’s assault on Hong Kong’s freedoms — and to help those persecuted find safe haven.”
• Biden’s nomination of retired Army General Lloyd Austin for defense secretary is generating pushback by lawmakers who prefer a civilian in the role and question Austin’s experience and expertise in Asia.
• Biden is also reportedly considering Pete Buttigieg, the former Democratic presidential candidate and past mayor of South Bend, Indiana, to be his ambassador to China.

Brexit: British Prime Minister Johnson travels to Brussels today for a working dinner with European Commission President von der Leyen in what may be the last chance to resolve their differences over a post-Brexit trade deal between the U.K. and the EU.  Ahead of the meeting, the Brits offered an olive branch by saying they will modify the Internal Market Bill currently being considered in parliament in order to eliminate controversial provisions that would allow Britain to break its withdrawal agreement with the EU.  All the same, German Chancellor Merkel warned that Brussels will accept a no-deal outcome of the talks if the two sides cannot minimize the risk of unfair competition between their markets.  We still believe a deal is likely, but the to-and-fro of the negotiations could spark some volatility in British and European assets or currencies in the coming days.  On a related note, the Johnson government said it will stop enforcing the EU’s punitive tariffs against the U.S. over aircraft subsidies, in an attempt to curry favor with the Biden administration and pave the way for a post-Brexit trade deal.

 Japan-North Korea: Lawmakers in Japan’s ruling party have approved a plan for the country to develop its own missiles capable of reaching North Korea as part of a defense buildup that would give Tokyo the ability to launch a preemptive strike if it anticipates an attack.

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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today opens with a discussion of the latest coronavirus developments.  The near-term bad news of worsening infections and continued hurdles to a new U.S. pandemic relief bill continue to present headwinds to risk markets. However, that is, at least partially, offset by news of the first public vaccinations in Britain, and there is a report suggesting the first U.S. vaccine will be approved in the coming days.  We next turn to presidential transition news and indications that Brexit negotiations remain fraught.  We conclude with miscellaneous global developments that are likely to affect the financial markets today.

COVID-19:  Official data show confirmed cases have risen to 67,740,458 worldwide, with 1,547,711 deaths.  In the United States, confirmed cases rose to 14,956,227 with 283,747 deaths.  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 more than 192,000 yesterday, with hospitalizations related to the virus topping 102,000.  Of those hospitalized because of the virus, the number in intensive care declined slightly to 20,098, but that was still enough to keep many hospitals under strain across the country.  New deaths related to the virus totaled approximately 1,400.  With the continued autumn/winter surge in infections and hospitalizations, many state and local governments are implementing additional restrictions on movement and business, including stay-at-home orders in parts of California.  We expect the potential for additional restrictions and new hurdles for a fiscal stimulus bill (see below) will remain a risk for the economy and equity markets in the short term until vaccinations can begin in mass and start protecting large segments of the population.
• On a much more positive note, the U.K. became the first Western country to distribute a COVID-19 vaccine to its population, as it began injecting the newly approved vaccine from Prizer (PFE, 41.25) and BioNTech (BNTX, 125.70) to those over 80 years old, nursing home staff, and other high-risk healthcare workers.
• Separately, in the U.S., the Food and Drug Administration released detailed analyses of the Pfizer/BioNTech vaccine in support of Thursday’s pivotal meeting of a panel that will advise on its possible U.S. approval for emergency use.
  • Importantly, the analyses show the vaccine met the criteria for success in that it reduced the risk of infection after the second dose was administered.
  • Among other issues, the data are also expected to show how the vaccine works with different age, ethnic, and other demographic groups. The FDA has advised vaccine companies that these subgroup analyses will help overcome any hesitancy among Americans to be vaccinated.
• Still, as if to illustrate the challenge in manufacturing huge amounts of the new vaccines, the British government’s vaccine task force acknowledged that just four million doses of the vaccine developed by Oxford University and AstraZeneca (AZN, 54.26) would be delivered this year, imported from the Netherlands and Germany.  Previously, the task force expected production of 30 million doses in the U.K. by year-end.
• As if to illustrate the challenges in planning and administering the new coronavirus vaccines, hospitals are struggling to decide which health-care workers should receive the small number of initially available doses.
  • December vaccine deliveries are expected to be enough for about 20 million people, according to federal officials.
  • That is slightly less than the amount needed to vaccinate all front-line medical professionals and long-term care residents—the groups that a Centers for Disease Control and Prevention advisory panel has recommended should be first in line.

 U.S. Policy Response

• As House and Senate lawmakers haggle over the latest pandemic relief proposal, a compromise package valued at about $908 billion, it appears the main sticking points consist of:  a) the Republicans’ demand to shield businesses, nonprofits, and schools from virus-related liabilities, and b) the Democrats’ insistence on aid to state and local governments.
  • Congressional leaders still hope to attach the relief package to a full-year spending bill needed to keep the government running once its current funding expires at 12:01 a.m. Saturday.
  • However, since lawmakers are still trying to reach an agreement on the full-year spending bill and the relief package, congressional leaders said they would pass a one-week extension of the government’s current funding to buy more time for negotiations. House Majority Leader Hoyer said the House would vote Wednesday on a short-term bill to keep the government funded through December 18.

 Foreign Policy Response

• In Japan, Prime Minister Suga launched Japan’s third fiscal stimulus of the year with a ¥30.6 trillion ($294 billion) package aimed at speeding up the nation’s recovery from COVID-19.
  • The supplementary budget, which is around 6% of GDP, follows earlier rounds of stimulus from April and May.
  • In a significant expansion of Japan’s spending, Suga’s package includes not just money to fight COVID-19, but trillions of yen aimed at investment in new digital and green technologies.
• With many EU countries taking on enormous amounts of new debt to fund their response to the crisis, some economists and officials have resurrected the idea that the European Central Bank should help ease their debt burden by forgiving the sovereign bonds that it owns.
• Even without that debt relief, we continue to see signs that stimulus programs around the world are helping individuals, and some businesses, improve their finances.  Even Greek banks, which are among Europe’s weakest, are getting rid of their bad loans at a healthy clip.
  • In spring, the pandemic interrupted plans among the country’s banks to shed loans still festering from the Eurozone crisis a decade ago.
  • However, stimulus from central banks and governments globally has sent fresh cash into funds that buy non-performing loans, reinvigorating their efforts.

U.S. Presidential Transition:  Against the backdrop of Georgia’s recertification of its election figures after completing its second recount, and ahead of tomorrow’s deadline for all states to complete the certification of their counts, sources said President-elect Biden will name retired Army General Lloyd Austin as his Defense Secretary.  General Austin would be the first Black to lead the Department of Defense.  He served in the military for more than four decades and ultimately commanded all U.S. forces in the Middle East during the Obama administration.

• At least two other leading candidates for the post had more expertise in top-level Pentagon programs and strategy, but they were seen as too close to leading defense companies.
• General Austin is perceived as cautious about U.S. troop deployments overseas, which is consistent with our view that even in a Biden administration, the United States will probably continue to pull back from its traditional role as global hegemon.
• Separately, Biden’s national security adviser, Jake Sullivan, said the incoming administration wants to put Iran “back into the box” by rejoining the 2015 nuclear deal and forcing Tehran to comply with the terms of the original agreement.  In return, the U.S. would be prepared to honor the terms of the 2015 deal.

 United States-China:  A second federal judge has blocked the Trump administration’s attempt to ban TikTok downloads in the U.S. due to national security concerns.  The decision underscores the dwindling legal options the Trump administration has to pursue an outright ban of the popular app.  TikTok’s parent company, the Chinese firm ByteDance, remains in talks with the U.S. government to finalize a proposed deal addressing the national security concerns, but friction over the app continues to exacerbate U.S.-China relations and play into the continued political risks arising therefrom.

China Belt and Road Initiative:  Researchers at Boston University have calculated that lending by the China Development Bank and the Export-Import Bank of China collapsed from a peak of $75 billion in 2016 to just $4 billion last year.  The analysis suggests Beijing is rethinking its infamous “Belt and Road Initiative,” which aims to help developing countries build trade-related infrastructure with Chinese loans.  The program has been castigated by many foreign observers for luring poorer countries into a debt trap and operating with low transparency and governance standards.  In addition, Chinese leaders may have been husbanding their dollar assets during the intensifying U.S.-China trade war after 2016.

China’s Domestic Debt Markets:  In China’s domestic debt markets, it appears that investors are finally cooling on debt from riskier Chinese companies after a string of missed payments by state-backed firms cast doubt on the reliability of government support.  The increased wariness has helped push new borrowing costs for these businesses to their highest in nearly two years, marring what has so far been a banner year for debt issuance.

Brexit:  A call yesterday between British Prime Minister Johnson and European Commission President Ursula von der Leyen failed to resolve the remaining sticking points for a post-Brexit trade deal between the U.K. and the EU.  Coupled with other signs that there has been no progress despite the intensifying lower-level talks in recent days, the failure of the leaders’ call is renewing concerns about a hard Brexit and weighing on British equities and the pound so far today.  However, in what may be the final play of the game, Johnson said he would travel to Brussels in the coming days to meet with von der Leyen in person.

• Johnson’s trip will most likely be on Wednesday, just ahead of a summit between the remaining EU members on Thursday.
• The main sticking points that need to be resolved relate to subsidies and other aid to industry that can impact whether the two sides are competing on a level playing field, as well as issues related to governance of the deal and fishing rights.

 European Union:  The president of the Eurogroup of EU finance ministers, Paschal Donohoe, said that because Brexit and the coronavirus pandemic have reinforced the need to solidify the Euro’s foundations, he will intensify his work on a controversial plan to create a Eurozone-wide bank deposit insurance system.

Turkey:  Following last month’s installation of a new finance minister and central bank governor, both of whom are more orthodox than their predecessors, foreign purchases of Turkish stocks and bonds have rebounded sharply enough to start propping up the country’s foreign reserves.  The lira has also gotten a lift, though it is important to remember that the new officials have their work cut out for them to keep repairing the damage caused by the coronavirus pandemic and years of bad economic policy in the country.

Russia:  An analysis by Daniel Ahn, a former deputy chief economist at the State Department, suggests Western sanctions have had an “outsized impact” on targeted Russian companies but may have actually strengthened President Vladimir Putin’s grip on the country’s tycoons.

• According to the analysis, Russian corporations have lost almost $100 billion since sanctions were imposed in 2014 following the annexation of Crimea.  That amount is equivalent to about 4.2% of Russia’s GDP at that time.
• Putin’s attempts to shield some of those companies from the sanctions through tax breaks, state contracts, and other methods have increased the total impact of sanctions on the economy to 8% of GDP and strengthened Putin’s influence on the companies’ leaders.

 India:  The country has been hit by severe road and rail traffic disruptions, as farmers and opposition activists intensified their campaign against new laws intended to pave the way for the reform of agricultural markets.

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