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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Monday.  It’s the 79^th anniversary of Pearl Harbor.  Equity markets are lower this morning.  Our coverage starts with Brexit; negotiations are coming to an end, and the “level playing field” issue appears to be the final sticking point.  An update on the EU budget follows.  Pandemic news is next.  There is an update on China; export data was stellar.  Economic news follows. A roundup of news from India, Venezuela, Saudi Arabia, and Russia wraps things up.  Here are the details:

Brexit:  Where to begin?  The EU Commission President von der Leyen and PM Johnson issued a short statement about continued negotiations.  The EU chief negotiator Barnier warns that he “cannot guarantee” a deal after 10 hours of talks yesterday.  Talks are said to be on a “knife edge.”  The GBP fell hard on reports of this friction.  There are also reports that the fisheries issue has been resolved, although we still don’t have official confirmation.  In the end, the last real sticking point is that the U.K. wants the freedom to make its own regulations and rules; the EU worries that if it gives Britain trade access, it will face an unequal regulatory environment that will give the U.K. an advantage.  Thus, the EU wants the U.K. to follow EU rules if it wants access; the U.K. views this as undermining the whole point of Brexit.  However, it isn’t just this issue; there are long-standing differences between Britain and the continent that are tied to centuries of history.  Reports are that France is hewing to a hardline position.  This should come as no surprise.  At the same time, a hard Brexit isn’t necessarily the most likely outcome.  It should be possible to create mechanisms that allow the EU to apply sanctions if the U.K. engages in regulatory arbitrage.  Thus, there is an element of political theater, and we still expect that a deal will be made.  Albeit, only at the last moment.  At the same time, it doesn’t look like the U.K. is ready for the trade environment that it has already agreed upon.  Some degree of disruption is likely even with a deal.  If there is no deal, expect a sharp drop in the GBP, to the $1.15/$1.20 area.  This won’t last and should be seen as a buying opportunity for U.K. assets.

EU Budget:  Budget talks continue with a meeting scheduled for Thursday to get final approval on the €750 billion aid budget.  The sticking point is that the law denies fund access to countries deemed to not have an independent judiciary, a rule targeted at Hungary and Poland.  Last week, it appeared that Poland may have been willing to make concessions.  Over the weekend, the right-wing press thundered about Polexit.  We don’t think Poland will leave the EU anytime soon, but it does suggest discussions will be tense.  This budget deal is historic; the creation of a Eurobond would be a huge step in making the euro a competitor to the dollar for reserve purposes.  Chancellor Merkel’s support for this measure could be her lasting legacy, so we will be watching to see if she can manage to get this budget passed.

COVID-19:  The number of reported cases is 67,178,542 with 1,537,975 fatalities.  In the U.S., there are 14,761,542 confirmed cases with 282,345 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.  U.S. hospitalizations have hit a new record.  The chart below shows that U.S. infection levels are rising, while the EU appears to have peaked.

 Virology

• We are watching the rollouts of vaccines around the world. It is our first look at how the distribution is working in real-time.
  • In the U.K., nursing homes are getting the first cut while the medical staff is left to wait. Britain moved early to approve emergency use for the vaccine.
  • Russia is starting mass immunizations using its vaccine. The West considers the Russian vaccine untested, so we will be watching for adverse reactions.
  • In the U.S., nursing homes could receive the vaccine by the end of this month.
• Sweden, which had implemented mostly voluntary guidelines for managing the pandemic, has moved to mandatory restrictions as infection rates soar.
• There has been some preliminary analysis regarding whether early exposure to other coronaviruses granted some level of immunity to COVID-19. This sort of thing isn’t unusual; the early vaccinations for smallpox came from cowpox.  The focus is on East Asia, which dealt with SARS in 2003.  There is speculation that this exposure gave some level of immunity, and thus, has led to lower death rates.
• Fernando Gaviria, a Colombian professional cyclist, has confirmed a COVID-19 reinfection. His first infection was severe enough to put him in the hospital for two weeks.  The story is good and bad news.  The bad news is that he tested positive for the virus; the good news is that he was asymptomatic.  Reinfection is a problem.  If it becomes common, it would mean the virus would become endemic, meaning that even with a vaccine, it would still circulate.  It may also mean that repeat infections may not be as severe.

China:  Exports rose sharply in November, up 21.1% from last year in dollar terms.  Imports rose by 4.5%.

On a non-seasonally adjusted basis, this is a record trade surplus.  Goods demand has been elevated while services have been depressed, which boosted China’s exports.

• FTSE-Russell is pulling listings that have been banned by the U.S. for their ties to the Chinese military. Other providers are considering a similar move.
• The TikTok deadline has passed; the app apparently still works, as the U.S. is still in talks to allow it to remain available.
• In further evidence that the U.S. is preparing for a Cold War with China, Congress is creating a new framework for dealing with China that will better coordinate efforts to deal with Beijing.
• Washington is preparing new sanctions on Chinese officials over the recent decision by Beijing to disqualify elected opposition legislators in Hong Kong.
• China continues its efforts to argue that COVID-19 didn’t originate in China.

Economics and Policy:  It’s a busy week for policymakers.

• By December 11, Congress will need to pass a short-term budget measure to fund the government for a week. This will allow for more substantial talks for a longer-term measure.  There are also ongoing talks for pandemic relief.  There is bipartisan support for pandemic relief, but it isn’t clear if the leadership is willing to accept the current measure.
• Chick-fil-A is suing major poultry producers, accusing them of price-fixing.
• A new breed of “buy now, pay later” firms are emerging that allow purchasers to order items online and pay them off in installments with no interest. The firms make their money through merchant fees.  It would appear that these firms are a threat to the credit card issuers; if they are, we would expect a flurry of mergers.

Foreign roundup:

• Indian farm protests continue; small farmers are worried that deregulation will lead to consolidation and push them off their land. We suspect this is exactly the goal of deregulation, as additional larger farms would boost productivity.  Farmers have been lighting bonfires with chaff to wage their protests.
• Saudi Arabia has been engaged in a flurry of negotiations. It has been working to end the blockade of Qatar, and there are reports of backchannel negotiations with Israel.  The pushback has started; over the weekend, Prince Turki al-Faisal, the former intelligence chief with close ties to King Salman, slammed the idea of a deal with Israel.  Our read?  The old guard in Saudi Arabia is reluctant to make a deal with Israel; CP Salman, the son of the king, is likely more open to such a deal, as it will be necessary to create a bulwark against not just Iran but Turkey as well.
• The U.S. deployed cyber operatives in Estonia last month to monitor Russian activity surrounding the election.
• Legislative elections were held in Venezuela yesterday, and it is very likely Maduro’s coalition will dominate the body. It had been held by the opposition, but parties opposed to Maduro decided to boycott the election, ensuring Maduro will get control.

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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 Employment Friday!  We examine the data in detail below, but the quick take is that the data was weaker than expected.  U.S. equity futures are moving higher this morning.  We lead off with pandemic news.  OPEC comes next, followed by an update on China.  The EU and Brexit are the next up.  We close with a roundup of economic news.  Being Friday, we have a new Asset Allocation Weekly, but due to the holiday, the podcast and chart book that usually accompany the report won’t be available this week.  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.  Let’s get to it!

COVID-19:  The number of reported cases is 65,323,809 with 1,508,906 fatalities.  In the U.S., there are 14,147,754 confirmed cases with 276,401 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.  U.S. infection levels, hospitalizations, and deaths hit record highs yesterday.  The R_t data is showing some improvement; 10 states now have a reading of <1, meaning a decline in the spread of the virus.  With respect to the virus, the worst state is Oregon, and the best is Iowa.

Virology:

• Yesterday we got an insight into the sensitivity of equities to adverse vaccine news. Pfizer (PFE, USD, 40.09) announced that it would only ship about 50% of the vaccines it had originally planned this year due to problems tied to scaling up production and logistics.  Equities took a dip on that news, although did manage to right themselves before the close.  Since the pandemic began, we have been discussing the tenuous logistics of the supply chain for vaccine distribution.  Vial glass, dry ice, special trucks, freezing, and refrigeration at the retail level are all part of what goes into moving the vaccine to the injection site.  And, that says nothing about ramping up actual vaccine production.  Here is a recent podcast highlighting some of the issues.
  • The development of the vaccine has been unprecedented in human history. The fastest vaccine development prior to COVID-19 was for mumps, and that took four years.  There is a lot of optimism building in financial markets; although we don’t think it is misplaced, we should be reminded that getting a vaccine out won’t immediately lead to a return to pre-virus conditions. 
• Cyber security experts and Homeland Security report that cyberattackers, most likely state-sponsored, have been trying to crack into the “cold chain” logistics of vaccine distribution. It isn’t clear if the goal is to gain the secrets of distribution, or more ominously, to disrupt it.  However, given that the hackers didn’t try to create a ransom situation, it leads researchers to suspect a state was behind the hacking.  Most of the attacks were “spear phishing” where a specific individual was targeted, often with an illicit order for products.
  • Although this attack was likely state-sponsored, organized crime is interested in getting involved in vaccines. We would anticipate a black market to develop as those with money attempt to “jump the queue.”  We could also see the proliferation of fake vaccines, especially in lesser developed countries.
• Pandemic response in the U.S. has become politicized. The political class has not helped the cause by flouting the rules with their own behavior.  These actions make it difficult to enforce new restrictions.
• Hospital capacity is becoming stretched; not only is there a scramble for beds, but getting and maintaining staffing is also a concern. Hospitals are luring retired nurses back to work and are putting students on the front lines.
• Social isolation appears to be part of an upswing in opioid overdoses.

OPEC:  OPEC+ was unable to hold the line on production restrictions.  Quotas will be expanded by 0.5 mbpd starting in January.  We expected a contentious meeting, but we also thought the cartel would hold the line on output.  However, the fact that the Saudis are not moving to recapture market share is a favorable sign, and prices have worked higher despite the news.

China:  Here is the latest.

• As we noted yesterday, Director of National Intelligence Ratcliffe made a public declaration that China is the largest national security threat facing the U.S. Such a public display will certainly harden positions and reduce the incoming Biden administration’s flexibility in dealing with China.  At the same time, opposition to China is now bipartisan, so there probably wasn’t much room anyway.
• The U.S. has tightened visa rules on Chinese nationals who are CPC members. It will limit these persons to 30-day, single-entry visas.
• The Chinese audit bill goes to the White House, where President Trump is expected to sign the measure. We note that the bill won’t have any legal effect until April 30, 2023.  Although this measure, if fully implemented, could push Chinese firms off U.S. exchanges, we expect a workaround to be created.  At the same time, Chinese firms are hedging their bets by listing in Hong Kong.
• Remember ByteDance? Today is the deadline day for TikTok.  We will be watching to see if there is another extension.
• Australia has passed new legislation that will give the federal government authority to limit the ability of bodies, including states or cities, to make independent deals with China.
• Chinese criminal gangs are bringing technology to the money laundering business.
• Chinese financial regulators are warning state and local governments that they should not expect bailouts from the central government for the dodgy debt of SOEs. It is looking like there will be a deal with Huawei’s (002502, CNY, 2.95) CFO Meng Wanzhou that will allow her to return to China with an admission of guilt.  We would expect two Canadian nationals that are being held to be released.
• It will be quite difficult to isolate China; an example is the comment from Daimler (DMLRY, USD, 17.10) CEO Kallenius, who touted his company’s sales growth of 24% at the end of September.

Brexit and the EU:  Brexit negotiations are getting testy, and Poland is backing down.

• Michel Barnier is facing pressure from EU countries, mostly France, that worry he will give away too much to make a deal with the U.K. We note that Germany appears to support making arrangements with Westminster, but France is less keen.  We still expect a deal to be made, but not until the second half of this month.
• As we noted yesterday, the EU was threatening to cut off Poland and Hungary for bailout funds if they tried to veto the budget. It appears that Poland is backing off its hardline stance, apparently needing the funding more than its judicial independence.

Economics and Policy:  Movies may never be the same.

• The stall in the labor force in November is confirmed with a report from the WSJ on how the pandemic is reducing employment for older workers and women. At the same time, retailers are paying bonuses to their workers to keep them around for the holiday rush.
• Although talks continue on another round of stimulus, the usual sticking points remain. The GOP loathes to help state and local governments, while Democrats don’t want to give businesses liability protection.  Still, moderates in Congress are pressing the leadership to make a deal.
• There are some experiences that fade by generation. For example, baby boomers remember snow tires, drive-in movies, carburetors, etc.  We may be on the way to ending the movie theater experience.  Warner Brothers, a studio owned by AT&T (T, USD, 29.23), announced it will not release movies first to theaters and then to streaming.  Instead, the releases will be simultaneous.  Although the policy may change when the pandemic fades, it may also become permanent, which would likely end public movie theaters.
• We are in a La Niña year, which usually means mild winters and dry conditions for crops. This weather event has boosted grain prices.
• Chris Waller was confirmed by the Senate, but just barely. He made it by one vote, 48 to 47, with no support from Democrats.  This is a sad commentary.  Waller is about as mainstream as one can find, and by all accounts he will be a reliable dove.  Clearly some of this is partisanship; the Democrats will lose the chance to fill a spot on the FOMC.  At the same time, it is hard to see how they could argue that Waller is unqualified.  The fact that no Democrat voted for him, even though some did in committee in February, suggests that either (a) this is pure hardball politics, or (b) the “Overton window” has now shifted so much that a mainstream dove isn’t good enough for the extreme wings of either party.  We fully expect the Fed to become increasingly politicized over time and eventually become a funding arm of the Treasury.  We would view the partisan nature of this vote as further evidence of this trend.

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  U.S. equity futures are steady this morning in front of tomorrow’s employment data.  There is a lot of news this morning.  We lead off with China news, as the House passes the Senate bill on the issue of auditing Chinese firms listed in the U.S.  Congressional and Fed news comes next; a pandemic relief bill may be coming.  In Middle East news, OPEC is near a deal, and the Saudi blockade on Qatar may be over.  We update the pandemic news next.  Brexit and the EU budget follow.  We take a look at Russia’s activities in Africa and farm reform in India.  Finally, we close with economic odds and ends.  Since it’s Thursday, a new Weekly Energy Update is available.  Here are the details:

China:  Here is the latest:

• In a rare unanimous vote, the House approved legislation that would ban Chinese listed firms on U.S. exchanges unless they submit to American-approved auditors. Firms will have three years to comply.  We note that the SEC is working on a plan that would allow Chinese auditors to receive U.S. approval which may allow Chinese listings to continue.  There are two elements underlying this issue.  The first is that lax auditing standards have led to weak investor protections, and forcing Chinese firms listing in the U.S. to match American accounting standards would provide better protection.  The second is that rising tensions between China and the U.S. may lead Beijing to prefer Chinese firms list in Hong Kong or Shanghai.
• Australia’s Former PM Turnbull is trying to cool tensions between Australia and China, asking businesses to not publicly criticize Beijing. As we have noted recently, relations between the two countries have been deteriorating; it all began when Canberra sought an international investigation of the COVID-19 outbreak in Wuhan.  Since then, China has been disrupting trade and has been waging escalating criticism of Australia.
  • As China ratchets pressure on Australia, the U.S. and U.K. both reiterated their support for Canberra. This show of support suggests China’s policy against Australia is backfiring.
• There is often a tendency to assume that new administrations can easily reverse the policies of their predecessors. It is usually much more difficult than expected.  Regarding China, it is becoming increasingly obvious that attitudes between the U.S. and China are hardening on a bipartisan basis.  In a political environment where there is little common ground, China is emerging as one area of broad consensus.  This situation is evident by a recent Congressional committee position that U.S. investment in China should face greater scrutiny.
  • The incoming Biden administration is considering the appointment of a “China tsar” to help coordinate policy regarding China.
  • At the same time, financial services continue to push for closer ties to China.
• The U.S.-China Economic and Security Review Commission, a bipartisan group that monitors relations between the two nations, in its annual report recommended an ambassador-level appointment to Taiwan. Such an appointment would anger Beijing, who sees Taiwan as a province.
• We continue to monitor China’s spate of SOE defaults. The newest event is tied to Huachen Automotive Group (BCAUF, USD 0.91).  The automaker is well connected, the largest SOE in Liaoning province.  Lenders, who have lent CNY 33.5 billion (USD 5.0 billion), supplied credit to the firm mostly due to its state ties.  Although a default hasn’t occurred yet, negotiations between creditors and the firm have started, and there is potential for a credit event.
• An apartment leasing firm called Eggshell is catching the attention of financial regulators. The firm was involved in a form of rental carry; it would offer tenants a discount if they signed up for bank loans.  The bank would collect the rents.  The firm would then pay landlords by borrowing shorter term loans and earning the difference.  The pandemic cut the demand for leasing, leaving less revenue to service the landlord loans.  It appears the company is starting to default on these bank loans, and it is unclear how authorities will resolve the issue.
• There are growing reports of “house flipping” in major Chinese cities, a sign of easy credit and strong housing demand.
• The Xi government is considering extending the official retirement age. Currently, men can retire at 60 years old and women at age 55.  Given China’s aging demographics and longer life expectancy, extending the retirement age makes sense.  However, recent proposals to make the change have not gone over well.
• Despite widespread attempts to curtail Chinese investment in U.S. technology firms, state back investment funds are continuing to place funds in American firms. It is not evident that these investments received approval by CIFUS.  It is possible they were given permission, but it wasn’t made public.
• More than 1,000 Chinese nationals involved in research in the U.S. have left the country. There has been increased scrutiny of Chinese intellectual theft, and this large number of exits suggests that either (a) there was a lot of espionage, or (b) the monitoring had become onerous.  It is possible both options are true.
• Director of National Intelligence Radcliffe is expected to give a speech today warning of the Chinese threat to national security. It is not all that common for a person of Radcliffe’s stature to make such a public declaration.  There is an element within the Trump administration that is pushing the idea of a cold war with China that isn’t necessarily consistent with the populist goal of ending American hegemony.
• The U.S. is banning cotton products from the Xinjiang region on evidence that forced labor may be involved in the production of these goods.

Congressional and Fed news:  Negotiations on a pandemic relief bill are heating up.  A new proposal for $908 billion in aid is being considered.  This bill is less than a third of what Congressional Democrats were pushing in October.  Some of the thaw in relations is based on the idea that a Biden administration will push for another round of stimulus after inauguration, so getting a smaller bill passed now for immediate aid has gained favor.  We do note there is increasing speculation that the FOMC may increase bond buying in an attempt to cap long-duration Treasury yields.  History suggests that without an explicit signal that the Fed will expand its balance sheet to any degree to prevent rates from rising, this effort will probably fail.  In the last decade, periods of QE tended to coincide with rising long-term interest rates, as the market viewed the balance sheet expansion as potentially inflationary.  We do expect the Fed to eventually engage in yield curve control in a bid to lift housing.

• Mark Kelly (D-AZ) joined the Senate yesterday and, by doing so, seems to have ended Judy Shelton’s chances of being confirmed for the FOMC. It does appear that Chris Waller, the head of research for the St. Louis FRB, will be confirmed.  That will leave one open position on the committee.  Waller is a conventional choice, but Shelton was controversial, and, in the end, there were enough establishment Republicans who simply couldn’t vote for her confirmation.
• The Beige Book reflects an economy that is losing momentum. Four of the 12 districts reported negative growth, and others noted that growth is slowing.

Middle East and OPEC:  We discuss the OPEC meeting in today’s WEU, but since the report goes to the editors Wednesday afternoon, we didn’t have the actual outcome of the meeting.  And, we still don’t; members are deadlocked over a production agreement.  It was widely expected that the cartel would extend production cuts through Q1 2021.  However, we may see a modest production increase, because there is a rising push from some members to boost output.  We still expect a deal, but it is becoming clear that discipline is fraying.

• In the wake of the assassination of Mohsen Fakhrizadeh, Iran’s legislature voted to ramp up the production of enriched uranium. If the U.S. doesn’t lift sanctions by early February, Iran plans to expel IAEA inspectors.  The incoming Biden administration has suggested it would like to return to the JCPOA, but that may simply not be possible.
• Saudi Arabia appears ready to end its blockade of Qatar as part of U.S. facilitated negotiations.
• The U.S. is planning to withdraw some members of this Baghdad embassy staff as tension escalate.

COVID-19:  The number of reported cases is 64,648,033 with 1,495,919 fatalities.  In the U.S., there are 13,925,990 confirmed cases with 273,847 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.  Rates of hospitalizations are rising in most states.

Virology:

• Leaked documents from Hubei province confirm what has been suspected for some time; Beijing deliberately undercounted COVID-19 infections to downplay the spread of the disease.
• The OECD’s forecast released this week suggests the pace of the recovery will slow in H1 2021, and that most economies won’t be in expansion until 2022. Only China will return to robust economic growth.
• The U.K. has approved the Pfizer (PFE, USD, 40.80)/BioNtech (BNTX, USD 121.09) vaccine for emergency distribution and will start administering it next week. U.S. vaccine approval procedures are more strict, and thus, it may be a few more weeks before the FDA approves any vaccine.
• The CDC has shortened quarantine recommendations.

Brexit and the EU:  EU officials are warning the bloc is preparing for a hard Brexit.  We still expect a deal, but it won’t come until near the end of the month.  There will be wide protests from EU nations stating that they haven’t been given enough time to look at the agreement, but in reality, the unwieldy confirmation process of the EU almost requires near crisis conditions for agreements to be reached.

• We continue to wait for the passage of the EU budget, which contains the €750 billion Eurobond. EU Commission President von der Leyen is threatening to move forward with the fund with 25 nations, which would exclude Hungary and Poland, who have blocked the budget.  These two nations are upset by measures that would make agreeing to judicial independence necessary to receive funds.

Russia and Africa:  Russia has been expanding its influence in Africa.  It has approved a new naval base in Sudan and has boosted arms sales in the region.  U.S. restrictions on arms sales have created an opening for Russia to sell military items to the region.  One factor that seems to be driving Russia’s activity is that it is actively seeking mining ventures.  As the world moves away from oil, metals become critical for the new infrastructure.  Thus, acquiring mines is paramount, especially to an economy so dependent on oil.  The U.S. still has a significant influence on the continent but is facing competition from Moscow.

India:  The Modi government is planning to deregulate the agricultural markets in an effort to boost productivity.  However, the proposal isn’t sitting well with farmers.  Usually, agricultural reforms benefit larger farms and tend to disadvantage smaller farmers.  Fears of being deprived of income are leading to widespread protests.  There is no evidence that the government is prepared to backtrack.

Economic odds and ends:  Here are various stories we are tracking.

• Bankruptcies: Aggressive fiscal and monetary measures have led to a sharp decline in bankruptcies.  This is true in the U.S. and Europe.  However, we would expect a surge in insolvencies next year.  The trick is going to be sorting out which firms are insolvent and which ones are merely illiquid.  There are all sorts of stories circulating about “zombie” companies, but we suspect that some of these will return to normal life as growth accelerates.  Nonetheless, some are truly insolvent and need to be liquidated.
• Libor: LIBOR was slated for termination at the end of 2021.  However, it looks like it has been granted a partial reprieve.  The IBA, the body that complies and publishes LIBOR rates, will halt publication for one-week and one-month LIBOR at the end of next year, but they will publish other rates until June 30, 2023.
• Soybeans: Soybean prices have been surging in recent weeks, helped by Chinese buying and dry conditions in South America.  However, reports that Chinese buyers are trying to cancel earlier orders due to negative crush margins[1] has led to a sharp decline in Chicago soybean prices.

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[1] A crush margin is the value of products from soy, mainly soymeal and soyoil, compared to soybean prices.

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 President-elect Biden’s economic team, which was formally introduced yesterday.  We then cover developments related to Brexit, the EU’s proposed coronavirus recovery fund, mutualized debt, and other international issues.  We end with our usual review of the latest pandemic developments, including the important news that the U.K. has granted the first approval for a vaccine in Western industrialized countries, and lawmakers in the U.S. have resumed their discussions about a new pandemic relief bill.

U.S. Presidential Transition:  President-elect Biden formally introduced his picks for key economic positions yesterday, emphasizing their experience and diverse backgrounds.  He announced that the team was working on a plan to revitalize the U.S. economy and help the nation recover from the coronavirus crisis.  This article provides a useful overview of the general mindset of the new economic team.  Importantly, interviews and a review of their recent statements suggest the team members have no predisposition to go back to the full-bodied embrace of globalism that was so prevalent among Democrats and Republicans in the 1990s and early 2000s.  The team, which is heavily populated by labor economists, appears to have fully internalized the damage globalization inflicted on U.S. manufacturing and factory workers, even as it brought benefits like lower inflation.  It therefore appears that the thrust of Biden’s international economic policy, especially given the likely constraints imposed by Congress, will be to adjust and soften some of the harder edges of Trumpian deglobalization but not to go back to full globalization.  In addition, the Biden team will likely focus its protectionist measures against Chinese economic cheating, while easing tariffs and other measures aimed at traditional U.S. allies, in order to present a united front against Beijing.

• Biden also called on Congress to pass a robust coronavirus relief bill as soon as possible.
• However, he said a larger stimulus effort would be necessary during his administration to address the long-term impact of the pandemic.

Brexit:  The EU’s top Brexit negotiator, Michel Barnier, said he is working on “creative” compromises with the U.K. in order to strike a trade deal before the year-end deadline.  According to Barnier, the next 36 hours will be critical to deciding whether or not there will be a hard Brexit.  In fact, he stressed that by the end of the week Brussels and London need to assess whether an agreement is possible.

• In a closed-door briefing for EU lawmakers, Barnier said key sticking points remain in the areas of “level playing field” conditions for businesses, EU fishing rights in British waters, and how any trade deal might be implemented.
• Barnier said the compromises being considered include a transitional period for fishing rights and a broader review clause for the trade deal.

European Union:  As Poland and Hungary continue to block the EU’s long-term budget, pandemic recovery fund, and mutual EU debt proposal, an official at the European Commission said EU leaders are considering ways to push ahead without them.  One idea being considered is to set up the recovery fund as a temporary “bridge” until Poland and Hungary come around to supporting it.  By demonstrating the determination of EU leaders to get the fund and mutual debt program in place, and by increasing the pressure on Poland and Hungary to back down, the move is probably a modest positive for European equities and the Euro.

China-Hong Kong:  In Hong Kong, pro-democracy activist Joshua Wong was sentenced to 13 and a half months in prison after pleading guilty to charges of organizing, participating in, and inciting others to take part in an unauthorized assembly when protesters surrounded police headquarters last summer.  Several other anti-China activists were also sentenced in connection with the protest.  Although China’s clampdown on Hong Kong’s freedoms was not a major focus of the Trump administration, it’s likely to get much more attention from the incoming Biden team and will likely keep U.S.-China tensions high.  In turn, that will keep alive political risks related to Chinese assets trading in the U.S.

COVID-19:  Official data show confirmed cases have risen to 64,015,351 worldwide, with 1,483,676 deaths.  In the United States, confirmed cases rose to 13,728,154 with 270,691 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 180,000 yesterday, and coronavirus-related hospitalizations rose to yet another record of 98,691.  Of those hospitalized, 19,035 were in intensive care, setting another record.  California and Texas continue to see extremely high infection rates, but in reality, the resurgence of the disease is widely spread throughout the country.
• In the first approval of a coronavirus vaccine among the Western developed countries, the U.K. has authorized use of the compound developed by Pfizer (PFE, 39.41) and BioNTech (BNTX, 114.01).  According to the British government, initial doses of the shot will be available in the U.K. within days.  Under provisional plans released by the government last month, the vaccine will first be made available to nursing home residents and staff. It will then be administered to those over the age of 80 and to frontline healthcare workers.
• As expected, a panel of experts advising the Centers for Disease Control and Prevention yesterday voted 13-1 in favor of reserving the first available coronavirus vaccine doses for healthcare workers and residents of long-term care facilities.  Other high-risk populations – including essential workers such as teachers, police, adults with underlying health conditions, and people ages 65 and over who aren’t in communal settings – are expected to be next in line, although the panel didn’t set recommendations for them yet.
  • The CDC usually follows the recommendation of its advisory panel.  If they are accepted by the agency’s director and Secretary of Health and Human Services Alex Azar, they will become official CDC policy.  A spokeswoman said CDC Director Robert Redfield will likely make his decision on Wednesday.
  • States wouldn’t have to follow the CDC recommendations, but state and local authorities are expected to rely on them as guideposts for deciding who gets the vaccine first. States have until Friday to indicate to the federal government where they want their initial doses sent.

 Economic Impacts

• According to a survey by the National Retail Federation and Prosper Insights & Analytics, U.S shoppers spent an average of just under $312 on holiday-related purchases from Thanksgiving to Cyber Monday, down 14% from 2019.  The decline reflected a huge drop in in-store purchases because of the pandemic, which was only partially offset by online purchases.
• In a sign that inflation expectations are rising with the prospects for safe and effective vaccines and a likely economic recovery, the break-even rate on 10-year TIPS hit 1.83% yesterday, reaching its highest point since May of last year.  A swap rate that measures expectations for the average level of inflation over five years, five years from now, has jumped to 2.25%, exceeding the 2.0% inflation target that the Fed has for years persistently failed to achieve.
• In another sign that vaccine progress and an impending economic recovery are impacting the markets, investors have backed off from bets on sub-zero interest rates in the U.K.  According to derivative contracts linked to the key British bank rate, the Bank of England’s main interest rate is now expected to trough at roughly zero percent in late 2022.

 U.S. Policy Response

• At a Senate Banking Committee hearing yesterday, Treasury Secretary Mnuchin defended his decision last month not to renew a suite of emergency Federal Reserve lending programs propping up various financial markets, while Fed Chair Powell called the move “premature.”  As might be expected, Republicans on the panel generally supported Mnuchin, while Democrats supported Powell’s position.  Although we suspect the economy and markets can get by when the programs expire at the end of December, they will be operating with significantly less insurance than they would have otherwise, raising risks if the pandemic or other crisis intensifies again.
• Meanwhile, lawmakers refocusing after the drama of the elections have launched a number of new initiatives aimed at another pandemic relief bill.  House Speaker Pelosi and Treasury Secretary Mnuchin spoke by telephone about a new coronavirus relief bill yesterday, and a bipartisan group of House and Senate lawmakers unveiled a $908 billion aid proposal seeking a middle ground between Democratic and Republican leaders’ stances. Republican and Democratic leaders also traded new offers, as the looming expiration of some relief measures intensified the pace of year-end negotiations.
• Janet Yellen warned of “more devastation” if the country fails to address the economic fallout from the coronavirus pandemic and its disproportionate toll on low-income families, as she was introduced yesterday by Joe Biden as the next Treasury secretary.
• In monetary policy, some investors are betting the Fed could start buying more long-term U.S. Treasury securities as soon as its next policy meeting, a trend that has helped temper some recent selling and kept yields from rising higher.

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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 developments as President-elect Biden builds out his policy team.  It now appears his nominee for the Office of Management and Budget (OMB) is generating congressional pushback.  We then review key international developments, including a renewed effort by the Russian government to silence opposition leader Aleksei Navalny, who was poisoned with a nerve agent this summer.  We end with the latest positive coronavirus news.  As we discuss below, the positive prospects for vaccines coupled with the likely continuance of stimulative monetary and fiscal policies continue to buoy risk assets so far today.

U.S. Presidential Transition:  Reports indicate President-Elect Biden will name Brian Deese to be the director of his National Economic Council.  Deese first joined the council after working on Barack Obama’s presidential campaign in 2008, eventually rising to deputy director. He then served as Deputy Director of the OMB and was later promoted to Senior Adviser to the President, a position that focused in part on climate change and energy issues. He played a central role in negotiating the international climate-change agreement that was reached in Paris in 2015.  He also worked on issues related to the auto and financial industries, as well as the Supreme Court.  Since leaving the White House, Deese has worked at BlackRock as global head of sustainable investing.

• Meanwhile, Biden’s plan to nominate Neera Tanden to head the OMB is already stirring tensions on Capitol Hill, where Republicans say her past comments will threaten her confirmation and undercut the new president’s pledge to calm political waters.
• In any case, Biden’s appointments to date reflect a strong preference for experienced policy hands with whom Biden has already had a personal relationship.

 United States-European Union:  Officials from the EU continue to plan enthusiastically for a reset of EU-U.S. relations after Biden is inaugurated as president.  EU ambassadors yesterday supported European Council President Michel’s idea of inviting Biden to an EU-U.S. summit next year. According to the report, the ambassadors discussed the future of transatlantic relations and “concurred on the need to reinvigorate the transatlantic partnership, while continuing to pursue an agenda to make the EU stronger and more autonomous.”

United States-China:  Without providing details, the Chinese government has accused U.S. officials of harassing Chinese airline and shipping crews that arrive in the U.S. by questioning whether they are members of the Communist Party.  U.S. officials didn’t confirm the moves, but it is plausible that this is another instance of intensifying U.S. pressure on China and its effort to plant spies and agents of influence in the U.S.  Application forms for foreign nationals seeking U.S. visas for temporary travel to the country, including crew member visas, have included a question on whether the applicant is “a member of or affiliated with the Communist or other totalitarian party.”

NATO-China:  In yet another example of increasing tensions between the developed democracies and China, a study commissioned by NATO Secretary-General Jens Stoltenberg says the alliance should devote much more of its time and resources to security threats posed by Beijing, while at the same time maintaining its traditional focus on deterring Russian aggression.

Russia:  Investigators in Moscow have launched a probe into opposition politician Aleksei Navalny regarding an April interview in which he allegedly called for the forcible change of Russia’s constitutional order.  In the interview, Navalny criticized the Kremlin for rejecting his team’s proposal to provide Russian families and small businesses with financial support during the coronavirus pandemic and said the authorities in Russia “must be overthrown right now…most likely by force” for neglecting the needs of citizens.  The interviewer then directly pointed to the statements as being merely Navalny’s thoughts, not open calls to overthrow the government, which Navalny confirmed.

COVID-19:  Official data show confirmed cases have risen to 63,384,168 worldwide, with 1,470,971 deaths.  In the United States, confirmed cases rose to 13,546,787 with 268,103 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 a relatively modest 157,901 yesterday, but hospitalizations rose to yet another record of 96,039.  The number in intensive care rose to a record of 18,505, prompting further alarm among state and local health officials.  In California, Governor Newsom pointed to rising hospitalizations and increasing positive test rates as he warned of possible new stay-at-home orders in the state.
• A new study by the U.S. Centers for Disease Control and Prevention found evidence of COVID-19 infection in 106 of 7,389 blood donations collected by the Red Cross from mid-December 2019 to mid-January 2020.  The study suggests the virus was spreading in the U.S. about a month earlier than previously known.
• As work on COVID-19 vaccines continues apace, a panel of vaccine experts advising the U.S. government is expected to recommend today who should get the initial limited supplies of the shots.  Expected to be first in line: health workers treating coronavirus patients and nursing-home residents.
• Pfizer (PFE, 38.31) and BioNTech (BNTX, 124.24), as well as their vaccine rival Moderna (MRNA, 152,74), formally applied to the European Medicines Agency for emergency use of their coronavirus vaccines in the EU.  The agency plans to make a judgment on the Pfizer/BioNTech vaccine by December 29 at the latest, while it will issue its ruling on Moderna’s candidate by January 12.
  • The timeline potentially means that the distribution of a vaccine in the EU won’t happen until January.
  • The vaccine being developed by AstraZeneca (AZN, 52.94) and Oxford University won’t be reviewed in the EU until later in January.
• Sweden’s public health agency has made another policy U-turn, bowing to critics who argue it has underestimated the potential for asymptomatic transmission of COVID-19.  The agency now recommends that children who live with someone infected by the disease should stay at home, contrary to previous advice that they should go to school or daycare.  The move was a reversal of the October recommendation that adults who live with an infected person should receive instructions from a doctor, rather than going to work as normal.
• Scientists investigating why COVID-19 sometimes produces prolonged, “long-haul” disabilities think it may trigger postural orthostatic tachycardia syndrome, also known as POTS.  The good news is that there are protocols and treatments for POTS.  However, progress is often quite slow, and it’s rare for POTS to completely go away, even with treatment.

 Economic Impacts

• According to real estate analysts, the recent surge in COVID-19 cases across the U.S. has led to an uptick in Americans resuming work at home after some momentum had been building for returning to offices.
• In its latest Global Economic Outlook report, the OECD warned that even though the new coronavirus vaccines offer hope for the global economy, there are still many pitfalls to overcome, and overall economic activity is unlikely to reach its pre-pandemic level before the end of next year.

 U.S. Policy Response

• In a testimony prepared for delivery at a congressional hearing today, Federal Reserve Chair Powell will say the central bank’s actions to backstop credit markets after the coronavirus convulsed Wall Street this past spring had unlocked almost $2 trillion to support businesses, cities and states.
  • The prepared testimony makes no mention of Treasury Secretary Mnuchin’s decision not to extend five of those programs past the end of the year, but since Mnuchin is also scheduled to testify at the hearing, legislators are likely to probe the implications of cutting off those programs in just four weeks.
  • Powell is also expected to caution that even though the prospects for safe and effective vaccines are positive, there are also many implementation risks in terms of manufacturing, distribution, and vaccination uptake.  While all that is true, it’s important to remember that the more officials remain cautious about implementation risks, the more likely they are to keep in place the current economic support measures.  For example, many will continue to push for yet another fiscal relief package.  That suggests 2021 could be a year when widespread vaccinations allow for a major economic recovery, in addition to continued fiscal and monetary support.  That goes far toward explaining investors’ continued enthusiasm for equities and other risk assets.

 Foreign Policy Response

• Canada’s budget deficit is growing at the fastest rate among developed nations, as its officials bet an aggressive approach will pay off in regaining lost jobs.
  • Officials argue that the country can afford to pour money into the economy while borrowing costs are historically low.
  • However, some economists warn that the heavy spending could lead to a fiscal crisis, and one major ratings firm has already stripped the country of its triple-A rating.

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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, the last day of November!  We’re back after a few days off.  U.S. equity futures are lower this morning in a quiet trade.  Gold continues to decline as well; we comment below.  We lead off with Iran and last Friday’s assassination and include other news from the Middle East.  China news follows; North Korea comes next.  We update the latest on Brexit as the deadline looms, and other European news is included.  We update the pandemic news and close with economics and policy.

Gold:  We have held gold in our asset allocation portfolios since early 2018, so we are watching with great interest the recent decline in gold prices.  Overall, the fundamentals for gold appear solid.  The central banks are still expanding their balance sheets, the dollar is weakening, and there is no sign of monetary policy tightening.  So, why the drop?  The most likely reason is hope for a vaccine.  Although the longer-term fundamental factors point to higher prices, the increasing likelihood of a vaccine next year is likely shifting funds away from gold to other assets, including industrial metals and equities.  In addition, cryptocurrencies are now sharing the spotlight with gold as a debasement hedge.  We have no reason to believe gold prices will not rise over time, but in the short run, the 1750/1700 area looks like a support zone.  We will have more to say on this asset in an upcoming Asset Allocation Weekly.

Iran:  Mohsen Fakhrizadeh, a leading Iranian nuclear scientist, was assassinated on Friday while traveling in a motorcade outside of Tehran.  Israel is thought to be behind the attack, although its policy is to never admit or deny an operation unless its personnel are caught.  It appears the assassination was partially done by remote control.  This isn’t the first time Iranian nuclear scientists have been targeted; at least four others were assassinated between 2010 to 2012.  Iran will likely avoid escalating the situation to avoid undermining the potential for improved relations with the incoming Biden administration.  In addition, Tehran will want to avoid an escalation in the waning days of the Trump administration, fearing a “parting shot” from Washington.  This gives Iran’s adversaries a window of opportunity to engage in attacks. At the same time, this attack, along with others, will make it difficult for Iran to change its relations with the U.S., even with a new administration in place.  Iran generally doesn’t directly attack Israel but instead focuses on Israel’s overseas interests.  However, it will be difficult for Iran not to respond in some fashion; the trouble is that responding after the inauguration would make it nearly impossible for the Biden administration to open negotiations.  The impact on markets, thus far, has been modest.  Iran isn’t trading much oil, and we would not anticipate any disruptions in oil supply, although there is a possibility that U.S. interests in Iraq could be targeted.

• An underlying problem in Iran is that in a country under tight controls, how is it possible that assassinations like this can occur? It appears that Iran’s security services are being penetrated.  Not only did we see Friday’s assassination, but the attack on Soleimani earlier this year shows a critical breakdown in operational security.  Our suspicion is that there is deep discontent with the regime, and even though the penalty for leaking sensitive information is almost certainly execution, it still seems to be happening.  The killing of Mohsen Fakhrizadeh was partially done remotely, meaning there was a high level of planning involved, which makes such operations vulnerable to discovery.  The fact that these high-profile targets continue to be struck suggests that Iran’s security services are failing to protect these individuals, and there are plenty of people with inside knowledge willing to share key information.
• In other Middle East news, the administration is working to end the standoff between Qatar and Saudi Arabia. Three years ago, Riyadh established a blockade on Qatar (there were pictures of dairy cows being flown into Qatar as part of the response).  According to reports, Jared Kushner is going to the region to hold talks on ending the blockade.

China:

• The EU is clearly hoping to improve relations with the U.S. in light of a new administration. The Europeans are offering a plan to create a common front against China in return for a less confrontational relationship with Washington.  We would expect the EU to back away from digital taxes as part of this offer.  There will be elements of this offer that will be attractive to the U.S., but part of the EU’s goal will be to continue Germany’s export economic model.  A unified front against Beijing makes sense, but our inclination is that Brussels is likely expecting more from the U.S. regarding trade than Washington will be willing to offer.
• More companies have been added to the blacklist of Chinese companies with ties to the military.
• The Chinese economy continues to show signs of recovery; its PMI reports remain at expansion levels.
• Tensions with Australia continue to escalate. Canberra is threatening to take Beijing to the WTO over barley tariffs.  Meanwhile, Beijing has sent doctored images of Australian soldiers committing atrocities in Afghanistan into social media, leading to protests from PM Morrison.
• The House is apparently taking up a previously passed Senate measure that would require Chinese firms that have listed on U.S. exchanges to be audited by American-approved accounting firms or face delisting. This issue has been contentious for years, but the Senate bill carries the potential for substantial power to force Chinese firms to accept U.S. regulatory oversight.

North Korea:  We are seeing scattered reports of erratic government behaviors emerging from the Hermit Kingdom.  According to reports, Pyongyang has been shut down, perhaps signaling a virus issue.  At the same time, uncertainty about the Biden administration has led the administration to warn diplomats to keep a low profile.  The exchange rate unexpectedly appreciated earlier this month; it has declined over the past week as authorities cracked down on the use of foreign currency.  A dealer was reportedly executed due to the depreciation.  Overall, it is difficult to know what exactly is going on in North Korea, but there does appear to be rising tension.

Brexit and the EU: 

• The deadline for a deal is looming—New Year’s Day will be it, and if a deal isn’t reached, a hard Brexit will occur. Even if a deal is made, it appears that neither side is prepared for border checks.
• The, Akademik Cherskiy, a Russian pipe laying ship, is apparently the only one in the Russian fleet that can complete the Nord Stream 2 pipeline project that would bring Russian natural gas directly to Germany, bypassing Ukraine. Both the U.S. and Ukraine oppose the pipeline.  The former wants Europe to buy U.S. liquified natural gas, LNG, and to reduce Russian influence in the EU, and the latter wants to keep control of the natural gas “chokepoint” that it has over Russian gas exports.  Apparently, the Akademik Cherskiy needs retrofitting to lay larger pipe and finish the project.  Congress has sanctions prepared, and there is a race to finish or kill the project before the new administration takes office.

COVID-19:  The number of reported cases is 62,838,150 with 1,461,249 fatalities.  In the U.S., there are 13,386,255 confirmed cases with 266,887 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.  Case levels appear to be peaking, although holiday travel could trigger another surge.

Virology:

• Viruses tend to mutate, and COVID-19 is no exception. There was evidence that the virus had mutated from its initial form noted in Wuhan to one that was much more transmissible.  Although there was a great deal of skepticism about these reports initially, there is a rising consensus that, in fact, there was a mutation, and it did make things worse.
• Pharmacies are adding freezers in anticipation of holding the COVID-19 vaccines.
• The NFL is dealing with a myriad of pandemic issues. Games have been postponed.  A ban on gatherings in Santa Clara County could force the 49ers to move two home games.  Denver was without a quarterback for its game yesterday.
• Moderna (MRNA, USD 127.03) said it will request authorization for its vaccines from EU and U.S. regulators.
• One emerging problems with COVID-19 is lingering neurological issues.

Economics and policy:

• Congress returns today with 11 days to fund the government and perhaps fill two positions on the FOMC.
• State and local governments are struggling with higher demand for services amid falling revenues.  Without federal support, government could become a drag on GDP as it was in 2008-12.
• Evictions are starting to rise as bans against them are rolling off. This problem will increase into early next year due to the expiration of several benefits.
• The pandemic led to a very modest “Black Friday,” although online activity was elevated. Today is “Cyber Monday,” and it looks to be a strong one.
• The expansion of debt worldwide is breaking records. Given low interest rates, firms and governments, in particular, are expanding borrowing.  This overhang will tend to force policymakers to keep policy accommodative.
• The EU is looking to create policies designed to keep tech firms from getting too big in the first place. We doubt these measures will work.  Due to network effects, technology firms have the characteristics of natural monopolies.  In other words, they have increasing returns to scale that reward expansion.  Natural monopolies are better candidates for regulation, not competition.
• Working from home has been a big part of the business response to the pandemic.  However, there is a potentially dark element to this development.  Firms may realize that if work can be done remotely, let’s say, in Nevada instead of the Bay area, then it can be done even more cheaply in Panama.  Tech firms are already looking to reduce wages to workers who work remotely from lower-cost areas; the natural extension would be to move that work offshore.  Even if it doesn’t happen, the threat could act as a dampener for wages.

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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 news related to the presidential election and transition.  The Trump administration is now allowing Vice President Biden’s team to access federal resources for the transition of power, and the resulting reduction in uncertainty is giving a boost to risk assets from equities to crude oil.  We also discuss developments overseas and the latest on the coronavirus.  As a reminder, for Thanksgiving, the Daily Comment will take a couple of days off, with no comment after today.  We will return on Monday, November 30.  There will also be no Asset Allocation Weekly (AAW) or Weekly Energy Update (WEU) next week.

U.S. Presidential Election:  Michigan certified Vice President Biden’s win in that state, and the Pennsylvania Supreme Court declined to invalidate thousands of mail-in and absentee ballots with minor errors that favored Biden.  As late as yesterday, President Trump vowed to continue his long-shot legal challenges to overturn Biden’s win, but his already-low chance of success continues to decline as his campaign has failed to produce credible, admissible evidence of significant electoral irregularities.  In a sign that companies are already shifting their behavior in response to Trump’s loss, General Motors (GM, 44.77) said it will no longer back the Trump administration’s legal battle to strip California of its authority to set its own fuel-efficiency regulations.  Instead, GM said its goals for green cars are aligned with the state and the incoming Biden administration.

U.S. Presidential Transition:  Against the backdrop of the developments in Michigan and Pennsylvania, General Services Administration chief Emily Murphy yesterday determined that Vice President Biden has qualified for the resources and services available to the winner of the presidential election.  The decision allows Biden and his team to begin the formal transition of power in the normal manner.  Even before that news came out, however, the Biden team disclosed several key picks for the president-elect’s cabinet.  Overall, the picks noted below, as well as others that have also been disclosed, point to a relatively centrist, establishment-oriented economic and foreign policy team that is deeply experienced and knowledgeable about how Washington works.  The team members, many of whom have a history of working closely with Biden, are also committed to U.S. global leadership and constructing a broad coalition of allied democracies as the best way to channel China’s rise and counter its malign geopolitical and economic moves around the world.  However, it remains quite unclear how effectively the team will be able to counter calls for global retrenchment from populists on both the left and the right.  The key picks include:

• Treasury Secretary: Janet Yellen, formerly Federal Reserve Governor and, before that, Chief of the White House Council of Economic Advisors.  Yellen has recently been advocating for continued fiscal support to help get the economy over the remaining months of the coronavirus pandemic, so her appointment is cheering equity investors but contributing to a modest pullback in the dollar so far this morning.
• Secretary of State: Anthony Blinken, former Deputy Secretary of State and Biden’s national security advisor during the Obama administration
• National Security Advisor: Jake Sullivan, former Director of Policy Planning at the State Department and another national security advisor for Biden during his years as vice president
• Secretary of Homeland Security: Alejandro Mayorkas, a former deputy director of the department and federal prosecutor

Brexit:  As the United Kingdom and the European Union approach the year-end negotiating deadline for a post-Brexit trade deal, officials on both sides are making a late push to ensure a smooth transition for financial markets.  For example, European regulators yesterday finalized a change seeking to avoid chaos in £15 trillion of derivatives contracts held between U.K. and EU counterparties.  Goldman Sachs (GS, 228.83) said it would set up a trading hub in Paris for Sigma X, its private European stock market, in order to ensure that its clients can still trade seamlessly, even after a hard Brexit.

Germany:  Spurred in part by the collapse of payment company Wirecard (WCAGY, 0.3425) because of a multibillion-dollar fraud, the DAX-30 index of German stocks is expanding to 40 members and will now require all potential members to achieve positive operating profit for two full years before joining.  In another rule change, DAX companies must have an audit committee that adheres to the German Corporate Governance Code.  To the extent that the rule changes tighten up listing standards, the moves could be positive for German equities going forward.

European Union-Turkey:  A German navy frigate trying to enforce the EU’s embargo on arms shipments to Libya was forced to abandon its search of a Turkish cargo ship suspected of delivering weapons to Libya after the Turkish government raised objections.  The incident will likely further hike tensions between the EU and Turkey, which have been exacerbated by Turkey’s aggressive territorial claims in the Mediterranean Sea and its activities in the Libyan civil war.

Yemen-Saudi Arabia:  Yemen’s Iranian-backed Houthi rebels claim to have damaged an oil facility in the Saudi port city of Jeddah in a rocket attack.  If true, the assault would demonstrate the rebels’ ability to strike deep into Saudi Arabia and damage large portions of its key oil production infrastructure.  Along with news pointing to a more certain U.S. presidential transition, the attack is helping boost global oil prices so far today.

COVID-19:  Official data show confirmed cases have risen to 59,342,857 worldwide, with 1,399,373 deaths.  In the United States, confirmed cases rose to 12,421,993 with 257,707 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 169,190 yesterday, while the seven-day moving average stood at 172,118 and the 14-day moving average came in at 163,225.  Just as important, the number of U.S. hospitalizations rose to a record high of 85,836.  Deaths related to the virus totaled 889.  The U.S. and Europe remain the regions most afflicted by the new resurgence of the virus.
• According to the University of Washington’s Institute for Health Metrics and Evaluation, the virus is now killing around 0.6% of the people it infects compared with about 0.9% at the beginning of the crisis in April.  Some scientists believe the actual death rate is currently only about 0.15%; the death rate is 0.10% for seasonal influenza.  In any case, today’s much lower death rates reflect factors like younger, healthier populations getting infected and much-improved treatment protocols.  The problem is that the death rate could climb again with the latest nationwide rise in cases as patients overwhelm hospitals, straining their capacity and staff, and lowering the quality of care.
• Although there are several vaccine candidates close to getting approval for emergency use around the world, one big issue will be whether the trade-offs between their different characteristics will give some of them an edge over the others.  For example, the financial backers and developers of Russia’s Sputnik-V vaccine say its two shots required to vaccinate one person will cost “less than $20” on international markets and will be free of charge for Russian citizens.  That compares with a total cost of about $18 for the highly effective vaccine being developed by Pfizer (PFE, 36.52), which also requires difficult ultra-cold storage.  In contrast, the somewhat less effective vaccine being developed by AstraZeneca (AZN, 54.70) and Oxford University will reportedly be sold in Europe for around $3 per shot and will only require normal refrigeration.

 Economic Impacts

• Now that there are three major vaccine candidates that appear to be safe and effective, a debate is arising about future inflation trends.  Some economists believe a strong economic rebound in 2021 and 2022 will boost price increases for an extended period, while others believe any inflation spurt would soon be overwhelmed by longer-term disinflationary trends like slowing population growth.

 U.S. Policy Response

• The Small Business Administration is beginning to ask some Paycheck Protection Program borrowers to document why they needed the loans, drawing concern from advocacy and trade groups that say such disclosures weren’t required when the businesses applied for aid.

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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!  Equities are higher this morning as a third vaccine candidate shows promise.  We begin our coverage with a recap of the G-20.  Not much happened, so it will be short. We include foreign policy news. Brexit appears to be approaching the last minute; we discuss this below.  Pandemic coverage follows along with a comment on China’s bond market.  We close with economic odds and ends.  As a reminder, for Thanksgiving, the Daily Comment will take a couple of days off, with no comment after Tuesday.  We will return on Monday, November 30.  There will also be no Asset Allocation Weekly (AAW) or Weekly Energy Update (WEU) next week.  Here are the details:

G-20 and foreign policy:  The meeting was held virtually over the weekend.  There were promises of cooperation, including regarding vaccine distribution, but little in the way of concrete proposals.  In part, world leaders are awaiting the final outcome of the U.S. election and the path of policy next year.  Thus, it was a rather uneventful meeting.

• The U.S. has formally ended the Open Skies treaty, which allowed intelligence overflights between Russia and the U.S. The specialized equipment the U.S. used to conduct the flights is also being sold off, making resumption of the treaty more difficult.
• Israeli PM Netanyahu and SoS Pompeo flew to Neom, a city on Saudi Arabia’s Red Sea coast, for a visit with CP Salman. Although there was no official confirmation of the meeting, there was little done to conceal the visit.  Saudi Arabia and Israel have had informal contacts for years, and the semi-open meeting should be seen as part of the reshuffling of positions as the U.S. reduces its influence in the region.  The visit appears to be mostly about isolating Iran.
• The U.S. has been threatening to withdraw from the WTO’s government purchases agreement. This agreement sets ground rules for allowing nations to restrict imports of government goods.  The fear is that if the U.S. abandons the rules, other nations will as well.  It could lead to a reduction of trade and allow China access to foreign government procurement that the U.S. currently supplies.

Brexit:  There are reports that the EU has quietly told the European Parliament to be prepared to vote on a Brexit deal around Christmas.  As is normal for EU deals, nothing gets done until the very last minute.  Although a vote at this time would ordinarily be a major hardship, it appears it will be held remotely, meaning MEPs won’t have to travel to Brussels.

• The U.K. and Canada have rolled over a trade deal that will extend current terms after New Year’s Day. This agreement is similar to one the U.K. inked with Japan.  Currently, the U.K. is bound by EU trade agreements, but next year, when it is formally out of the EU, it will need to negotiate its own.  The terms with Canada and Japan anticipate the exit.

COVID-19:  The number of reported cases is 59,004,131 with 1,363,736 fatalities.  In the U.S., there are 12,349,443 confirmed cases with 257,274 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:

• Some additional positive vaccine news—AstraZeneca (AZN, USD, 55.30) reports its vaccine, which is being jointly created with Oxford University, has a maximum 90% effectiveness rate, with an average of 70%. This vaccine differs from most recent efforts.  It uses traditional development methods instead of mRNA.  This means doesn’t need to be kept cool, and thus, would likely have wider international distribution.  Research has found that with this vaccine, a half dose followed a few weeks later with a full does was most effective.  This gives the world a third Western vaccine.
• Recent research raises concerns that COVID-19 can mutate in such a manner that allows reinfections.
• Mink culling has been reported in France; there is a strain of COVID-19 that has moved from humans to minks and back, raising worries that this mutation will thwart vaccine efforts. Therefore, there has been culling of minks in Denmark, and this has apparently moved to France.
• There is evidence that the recent wave of infections in Europe is starting to wane. Officials are beginning to ease lockdowns for the holidays.  But, in its wake, hospitals in Europe are reaching capacity constraints.  Most of the fatalities are seen with people over 60 years old.
• In the U.S., public health officials are bracing for higher infections due to holiday travel.

China:  A recent wave of SOE bond defaults has led financial regulators to promise a crackdown.  Given China’s debt fueled growth model, it remains to be seen what that crackdown will look like.

Economic news:  Here’s an update of what we are following:

• Los Angeles port officials are reporting a massive backlog of container ships that are waiting to dock to unload their cargo. An influx of imports is colliding with capacity issues as the virus has reduced the workforce.  As the imports arrive, they will tend to raise the trade deficit and weigh on GDP.
• As the pandemic hit, firms began to hoard cash; as part of the effort to alleviate this, dividends were restricted.

There are reports that firms are resuming dividend payments in anticipation of a vaccine.

• For years, American car dealers have had large car lots with auto inventories. Car companies would maintain steady production, and during periods of slack demand, inventory levels would rise.  Although there has been a clear downtrend in retail car inventories, the pandemic has led to historically low inventory levels.

The pandemic may accelerate a change in how Americans buy cars.  Instead of getting the “how can I get you to drive off the lot with a new car today” from dealers, it may become a case where a buyer orders a car and waits a few weeks for delivery.  This change would reduce inventory costs to dealers, although it probably leads to higher prices (the pressure to sell a car off the lot is lower if there isn’t a car on the lot).  It probably reduces labor costs, too.  If a salesperson is merely an order taker, that can be done online.  However, this also means more variation of production schedules.  Some of this issue could be mitigated by simply creating an order backlog.  Europeans have been buying cars like this for years; Americans may be next.

• There is growing concern that forthcoming Q4 and Q1 economic growth will be weak. The second pandemic wave and the lack of fiscal stimulus are leading economists to reduce their expectations for growth.  We already see Europe’s economic data show signs of stalling.  President-elect Biden is apparently concerned enough that he is calling for a return to talks, and there are reports he is pressing Democratic leaders in Congress to accept a smaller spending package to bring aid to the economy.
• The Fed has agreed to return unused spending capacity to Congress; it is possible that this funding could facilitate a fiscal bill before year’s end. As to our comments last Friday, the Treasury did keep the MMK program in place, which is, in our opinion, the most critical of all the support programs.  Although we think the corporate and muni backstops should be permanent, if markets believe they will be returned as needed, their official existence isn’t as necessary.  The loss of the MMK backstop would be a problem.  The fact that this program remains suggests a broader understanding of how the current financial system truly works among policymakers.
• The OFR’s measure of financial stress has fallen to late February levels, suggesting that the financial system is functioning well.

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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!  Equity futures sold off overnight but have recovered from much of their losses.  We lead off today’s coverage with the Treasury’s decision to end support for a series of Federal Reserve backstop programs.  Pandemic news is up next, followed by an economic update and European news.  We discuss China news and close with a note about Venezuela.  Being Friday, a new Asset Allocation Weekly (AAW) is available, along with the associated podcast and chart book; this week, we take a look at the bond market.

A couple of editorial notes: first, for Thanksgiving, the Daily Comment will take a few days off, with no comment after Tuesday of next week.  We will return on Monday, November 30.  There will also be no AAW next week or Weekly Energy Update (WEU).  Second, as a reminder, 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:

The Fed and the Treasury:  The Treasury announced it will not extend several programs that the Fed implemented in March, including the ones for corporate credit, muni lending and the Main Street lending programs.  In the comments, we didn’t see anything regarding money market funds, but we are assuming that program will close too.  Without Treasury participation, the Fed will have to remove backstops for these various programs.  The reason is that if the Fed takes credit risk on its balance sheet, there is a chance of loss and funds from the Treasury would be needed to recapitalize the central bank.

It isn’t exactly clear to us why this program is being ended.  Our fear is that it reflects the fact that policymakers at the Treasury don’t understand how the financial system works.  The non-bank financial system is capital market lending using money markets (MMK) as a funding source.  As such, such funding is “runnable.”  MMK doesn’t have deposit insurance and a borrower using it as a source of funds could find it impossible to maintain funding in a period of crisis.  Although it is possible the Treasury doesn’t understand how the system works (we find it notable the degree of ignorance about how the current financial system operates[1]), it is also possible that this move is part of a broader “parting shot” to shape the incoming administration.  Ostensibly, the argument is that the programs weren’t being tapped and thus they were unnecessary.  That’s a bit like waking up every morning and cursing the fact that you lived and wasted that life insurance premium.

Is this a risk?  Yes, but probably not a big one.  It’s a bit like driving without insurance for a while.  That’s a risk, but if one is careful and nothing bad happens, all is well.  And, like car insurance, it can be bought and similarly the programs can always be reinstituted.  We do think the Fed understands its role; the fact that it moved in a few days to implement these programs in March when it took months in 2008 suggests institutional knowledge.  So, if markets go haywire, we should see the programs return quickly.

It is important to realize that the programs were not designed as stimulus but as insurance.  The fact that they were not aggressively used means they worked about as well as one would hope.  There has been a good deal of misunderstanding about these backstops.  We have heard complaints on podcasts that the fact that the Fed’s balance sheet wasn’t expanding is a sign the Fed wasn’t doing its job.  That being said, fears that the Fed could be used for fiscal activities and circumvent Congress are legitimate.  Ultimately, we need to make a choice—either MMK and the non-bank financial system needs to be regulated like banks or, if not, we have to accept occasional market panics.  Currently, we are trying to have the efficiency of the non-banking system but with rescues and bailouts, creating conditions of moral hazard and encouraging even more leverage and risk-taking.  The Fed’s application of backstops did stabilize the system but didn’t address the risk conditions that are created by the backstops.

• The administration is looking to take Fannie Mae (FNMA, USD 1.87) and Freddie Mac (FMCC, USD 1.76) out of receivership and put the two mortgage guarantors back into the private sector. This situation bears watching.  These two companies operated in a regulatory netherworld where they had an implicit government guarantee on the mortgage bonds they issued.  In 2008, the government had to rescue the two because of defaults on mortgages.  There is strong support for home ownership in the U.S. and thus a purely private system isn’t likely because it would raise borrowing costs.  But, a return to pre-2008 probably isn’t a good idea either.

COVID-19: The number of reported cases is 57,042,406 with 1,363,182 fatalities.  In the U.S., there are 11,720,318 confirmed cases with 252,564 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 remains grim—all but one state and territory have readings over 1, suggesting rising infection rates.  Again, this week, Mississippi has the lowest; Vermont now is the highest.

Virology:

• Pfizer (PFE, USD, 36.19) announced it will ask the FDA for emergency use authorization to distribute its vaccine. This request was expected and we would anticipate that the government will move quickly to grant the application.
• Although infection levels are elevated, treatments have improved and thus hospital stays and fatalities have declined.
  • The WHO is advising against prescribing remdesivir for hospitalized COVID-19 patients, suggesting there is little therapeutic benefit.
• Although the vaccine news is positive, there is growing concern about a rise in infections due to the holidays. The CDC has warned against Thanksgiving travel.  Airlines are reporting a drop in bookings as infections rise.  Compounding the concern is the return of college students for Thanksgiving; colleges have reported a rise in infections.
• In Europe, it appears infections have peaked, but there is a death from COVID-19 every 17 seconds.
  • The mink cull in Denmark has been a political debacle, forcing the agriculture minister to resign and may bring down the government.
  • One of the members of the Brexit negotiation team has tested positive, forcing talks to go virtual.
• Increasingly it looks like the transmission from surfaces is rare, so disinfecting measures are probably unnecessary.

Economic news:

• Real estate has been on a tear, supported by changes in generational behavior, work from home, and favorable housing affordability.  The boom is lifting lumber prices, which usually decline in Q4.

• The U.S. is releasing new rules designed to lower drug costs. There are two elements; first, payments to distributors will be reduced, and second, prices will be tied to those overseas.  The drug industry has generally opposed the measures.

Europe:  The EU summit of heads of state ended its virtual meeting.  It was a difficult gathering, with the historic stimulus plan still awaiting approval, continued uncertainty surrounding pandemic policy, and Brexit worries.  Chancellor Merkel promised to keep pressing the case, which is favorable.

• The U.K. announced a massive increase in defense spending, the largest rise since the Cold War

China:  There are reports that Katherine Tai, the chief trade lawyer for the House Ways and Means Committee, is being considered for USTR.  She is fluent in Mandarin, which suggests the focus of trade will remain on China.

Venezuela:  One feature often seen in revolutions is that the leadership turns on fellow travelers.  The Soviet leadership turned on Trotsky, for example.  In Venezuela, socialists who supported Chavez and Maduro are finding themselves on the outs as they complain about the cronyism and corruption.  In popular culture, this situation was well described in Orwell’s Animal Farm, where it was said that “all animals are equal, but some are more equal than others.”

• Opposition leaders are trying to prevent creditors from seizing assets on hopes that a new government will have access to them in the future.  Given the low odds that the opposition will be able to oust Maduro, we suspect creditors will move forward.

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[1] Here is a good book explaining it.