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

[Posted: 9:30 AM EDT] | PDF

Good morning and Happy Friday!  Equity markets are taking a breather this morning, lower after a strong and volatile week.  It’s employment day; we cover the data in detail below, but the quick read is that it came in much stronger than forecast.  We lead off with the state of the election.  Our pandemic recap follows.  The Fed met yesterday.  Not much happened, as expected, but we will give our take.  We close with a look at cryptocurrencies.  Being Friday, there is a new Asset Allocation Weekly along with the associated podcast and chart book.  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 it will be linked within the Daily Comment.  Here are the details:

Election update:  Although final results won’t be known for about two weeks, it appears VP Biden is on his way to a very narrow win.  By the most conservative estimate, he has captured 253 electoral votes and is leading in three of the five remaining states, although the lead is narrow.  The Senate isn’t resolved yet either.  Georgia will have one runoff election and perhaps two, but we doubt there will be a Democratic sweep; the more likely outcome is that the GOP remains in control of the Senate.  Although there have been sporadic protests, there has been nothing widespread and fears of massive civil unrest have failed to materialize… so far.  The lack of the worst-case outcome has supported risk assets this week.  If civil order remains and a peaceful transfer of power occurs, the outlook for equities is positive. We will have more to say on this topic in next week’s Asset Allocation Weekly.

COVID-19:  The number of reported cases is 48,801,037 with 1,235,335 deaths.  In the U.S., there are 9,610,965 confirmed cases with 234,944 deaths.  Yesterday, U.S. infection numbers hit another record. 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.  In the R_t data, only one state, Mississippi, has a reading of less than one.  Maine is reporting the fastest infection rate.

This chart below shows new deaths for selected nations, smoothed with a seven-day moving average, and comparing deaths per million on a log scale.

(Source: FT)

The rise in deaths across Europe is disturbing and has led to widespread lockdowns.

Virology: 

• In the race for a new vaccine, there are some candidates using a novel technique involving mRNA. If these novel vaccines work, it holds the promise of much faster production and more efficient vaccine development.  Pfizer’s (PFE, USD 36.39) vaccine is using this technology.  But, it has never been tried before and may fail.  An interesting side note to mRNA technology is that it depends on a lipid nanoparticle that is produced by only a few firms, including Polymun Scientific Immunbiologische Forschung GmbH, a small, privately held firm in Austria.  This side note highlights the underlying fragility of the highly efficient supply chains that have developed over the past forty years.  We expect that one of the factors that will change in light of the pandemic will be a jettisoning of the focus on efficiency to redundancy.  This change will make us safer but less efficient (and less profitable).
• One of the factors that could affect the acceptance of a COVID-19 vaccine is the fear of adverse reactions. Although Phase III trials are an attempt to determine safety and effectiveness, the trials really can’t measure adverse outcomes, especially for vulnerable groups, e.g., immune comprised recipients, the elderly, pregnant women, etc.  In an attempt to track these potential effects, government officials plan to use smartphone apps to help track results.  This development will allow officials to move quickly if adverse issues occur.

The Fed:  As expected, the Fed didn’t make any changes but did signal that the FOMC was concerned about the pandemic’s potential effect on the economy.  The Fed did hint that it may do something in December if it appears that fiscal action will be delayed.  We note that the head of the Senate Banking Committee, Pat Toomey (R-PA) wants to end the Fed’s emergency programs.  We agree with Toomey that some of what the Fed is doing borders on fiscal policy, which should be the purview of Congress.  However, some of the emergency programs should be seen as proper for acting as lender of last resort in a shadow banking environment.  Acting as a backstop for various markets prevents runs on various assets that are used in repo.  Although we are sympathetic to Toomey’s position[1], there is a risk that shutting down these programs may mean they are not in place when the next crisis comes.

• There was one sidelight to yesterday’s meeting; Mary Daly, President of the San Francisco FRB, voted as an alternate. Neel Kashkari, the President of the Minneapolis FRB, was unavailable as he was on paternity leave.  It is the first time in Fed history that a member of the FOMC has missed a meeting for this reason.

Cryptocurrency:  The Silk Road was an online drug bazaar that was shut down in 2015.  Yesterday, 69,000 of bitcoin were seized by the DOJ that were held in a wallet of Ross Ulbricht, who was convicted of drug trafficking and money laundering.  These coins had been stolen from Ulbricht but left untouched.  The government is expected to liquidate the bitcoins, but likely in tranches, so as to not affect the price.

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[1] Not that our sympathy matters.

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  Equity markets continue to rally and lead off our coverage this morning.  The winter surge in COVID-19 continues to gather pace and comes next in today’s commentary.  Central banks are batting third—the FOMC meeting concludes today, and the BOE made policy adjustments.  Brexit news follows.  Brazil news wraps up the report.  Being Thursday, the Weekly Energy Update is available.  Here are the details:

 The election and equities:  Since the media is transfixed on the vote, we will leave that item to them.  It does appear VP Biden is likely going to win the White House, but we may not know for sure for a few days.  Since yesterday’s opening, we have seen equity indices rally.  Here is what we think is behind it all:

• Assuming Biden wins, he has been granted a weak mandate and faces a hostile Senate. That means the more leftist elements of the Democratic platform are unlikely to pass.  It also constrains his cabinet selections.  Senator Warren (D-MA) won’t get any position that requires Senate approval, for example.  We may see more senators given cabinet appointments, as there is a history of giving former senators an easier path to confirmation.
• Tax hikes are probably not happening. The ACA is in deep danger.  Ending it without a replacement would induce chaos into the healthcare system.
• Although we do expect a fiscal package (Majority Leader McConnell suggests there should be one), it almost certainly won’t be as large as the House bill. This means that if the economy stumbles (and it looks like Q4 and Q1 will be weak) the Fed will have to do more on the monetary policy side.  Since monetary policy mostly works through the financial system by lowering the discount rate and lifting asset prices, it bodes well for financial assets.
• An element of the rally in equities is that there was an elevated level of fear going into the election. We have noted on several occasions that cash levels were rising.  In late October, we saw a rise in the VIX.

This above chart shows the VIX since Labor Day.  By late October, it hit a reading of 40; in looking at daily closes in this index since 1990, a reading of 40+ occurs around 2.6% of the time.  The high VIX and elevated cash all suggest investors were bracing for serious market risk from the election[1].  Although we are not out of the woods quite yet, so far, civil order has been maintained.  As these hedges unwind, it is giving a lift to financial assets, especially equities.  However, the rise in equities is far from universal; cyclical stocks have not participated in the same degree as they are more dependent on fiscal action, which is now less likely.  Health care stocks have lifted on the idea that a single-payer system is less likely.  We will have more to say about the ramifications of this election in the coming months.  But, in the meantime, the outcome of a divided government is friendly to long-duration assets, stocks, and long-duration bonds.

COVID-19:  The number of reported cases is 48,215,732 with 1,227,096 deaths.  In the U.S., there are 9,488,875 confirmed cases with 233,734 deaths.  Yesterday, the infection rates rose above 100,000 for the first time.  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 weekly state map shows the onset of winter; infection rates are mostly rising in the north and west, steady to falling in the south.

Virology: 

• Perhaps the most disturbing news we came across today originates in Denmark. It appears that COVID-19 has circulated in minks and has mutated into a new form that has infected at least 12 people in Denmark.  The country is the world’s largest producer of farmed minks, accounting for nearly 28% of the world’s mink output.  In order to quell the spread of this new strain, Denmark has ordered the culling of its massive mink herd.  It is still too early to tell exactly how this mutation has changed the virus, although primary indications are that it changes the “spikes” on the coronavirus and may undermine current vaccine efforts.  This explains the aggressive actions taken by Denmark.
• As infections and hospitalizations rise, we are seeing supplies of PPE tighten again.
• With surging infections, Europe is going through various stages of lockdown. Italy announced that it will close six regions and restrict travel in and out of these affected areas.  The U.K. Parliament approved a four-week national lockdown.
• We will close with some good news; AstraZeneca (AZN, USD 55.04) expects to announce the results of its Phase 3 trials before the year’s end.

Central Banks:  We report on two central banks this morning:

• The Bank of England sort of surprised the market by announcing its QE program will expand by GBP 150 billion, which was GBP 50 billion more than anticipated. However, there is a bit less here than meets the eye.  Central bank gilt purchases were extended for all of 2021 instead of the first half, meaning the overall monthly purchases will turn out to be about the same.  Essentially, QE was extended.  The GBP has rallied on the news; since QE is generally bearish for exchange rates, the fact the currency has rallied suggests this news was not bearish enough to offset the other bullish factors (e.g., expectations that Biden will win).
• The FOMC meeting concludes today. We know the markets expect too much new from this meeting.  The only area of interest will be the press conference, where we expect Chair Powell to plea for additional fiscal stimulus.

Brexit:  Although talks continue, the two sides remain stuck and deadlines are approaching.  Essentially, the problem is this—the U.K. wants out of the EU’s regulatory framework.  The EU won’t accept this and allow the U.K. open access to its market.  Westminster is dangling fishing rights for regulatory freedom.  If it wins on this point, it would be a shocker, although some areas in the EU would be severely harmed by losing access to fishing areas.  Another area where the U.K. has leverage is financial markets; its regulators are warning it won’t follow EU rules on dual listed securities if the EU doesn’t give London market access.  The transition period ends on 12/31 and it may not be possible for the EU to approve a deal at this late date.

Brazil:  Flávio Bolsonaro, the son of Brazil’s president, has been charged with corruption, specifically, embezzlement, money laundering, and criminal association.  He has been under investigation for two years.  According to reports, he was engaged in a familiar scheme in Brazil, where a state politician adds staff at the expense of the state, then demands kickbacks from workers.  The allegations have been denied, but at a minimum, it is a distraction and embarrassment for the administration.  At worst, it could create a political crisis.

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[1] Anecdotally, our conversations with financial advisors and their clients would tend to confirm this idea.

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 on the U.S. election situation, including a detailed recap of market action in the key asset classes overnight.  Believe it or not, there has also been news overseas while we’ve all been preoccupied with the U.S. polling.  We focus on a major development in China’s stance toward financial regulation.  As always, we review the latest coronavirus news.

U.S. Elections:  As of this writing, the presidential election remains too close to call.  Out of the 270 electoral college votes needed to win, news organizations have called some 238 for Vice President Biden and 213 for President Trump.  However, counting continues in key battleground states such as Wisconsin, Michigan, and Pennsylvania.  This is actually normal; counting usually continues after Election Day itself.  What’s not normal is that the huge surge in absentee and mail-in voting means the counting will likely continue for days.  Officials in Nevada, where only about 86% of the ballots have been counted so far, said they won’t even release updated totals until Thursday.  The most important development is that the expected “blue wave” of votes for Biden after the polls closed has not materialized, leaving increased uncertainty regarding where things stand.  As we suggested yesterday, we all need to remain patient as election officials count our votes and the votes of our fellow citizens.

• Shortly after 2 a.m., President Trump told supporters gathered in the White House’s East Room that he felt he had already won the election. He also hinted he would ask the Supreme Court to stop ongoing counting.  Speaking in Delaware before hundreds of vehicles in a car rally, Biden promised his supporters that their patience would ultimately be rewarded and said, “We believe we’re on track to win this election.”
• In addition to the absence of a blue wave for Biden, it is looking like the Democrats’ hopes of taking control of the Senate will be dashed. As with the presidential race, however, counting continues, and the final totals won’t be known for days.
• Market volatility has been extremely high as the votes have come in and various trends have arisen and fallen back. Here is what we’ve seen in the key asset classes:
  • Equities.  As the polls began to close, it became increasingly obvious that Biden’s “blue wave” wasn’t coming.  Investors who were complacent about a Biden win are now adjusting portfolios for the prospect that President Trump could remain in office.  With the idea that the path of policy would be more of the same, NASDAQ futures roared higher (around 9:00 pm CST), actually going limit up and forcing a trading halt for two minutes.  As the evening wore on, this index, dominated by tech firms, has held up (see graph below).  This market is betting that any future stimulus will be modest at best.

• • The Dollar. The dollar tells a similar story.  When the GOP was outperforming, the dollar jumped.  But, as we head into the morning and the possibility that Biden might win after all, the likelihood of dollar-bearish policy has led to a drop in the greenback (see chart below).

• • Gold. The market action with gold has been a near mirror image of the action in the dollar (see graph below).

• • Bonds.  Long-duration bond prices also had a wild night.  Prices initially fell on expectations of a blue wave, but as those expectations dissipated, long-term yields fell sharply and remain depressed.  Safe-haven buying, along with reduced chances of a massive fiscal stimulus bill out of Congress, are combining to keep Treasury yields sharply lower so far today.  The 10-year Treasury-note yield broke above 0.90% early in the evening, but it has now fallen back into the 0.70% area.

 China:  The key non-U.S. news yesterday was that the Shanghai Stock Exchange suspended the blockbuster initial public offering by Ant Financial that was scheduled for Thursday.  According to the exchange, the suspension was necessary because of a “changing regulatory environment” after billionaire founder Jack Ma was hauled into a closed-door meeting with four key financial regulators on Monday. The suspension forced Ant, which owns the Chinese digital payments platform Alipay, to also suspend the half of the IPO that was supposed to launch in Hong Kong on Thursday.

• The sudden roadblock was especially surprising because the Hong Kong and Shanghai exchanges, as well as China’s securities regulator, had earlier green-lighted Ant’s plans to go public. The largest ever IPO would also have been a major feather in the cap of Shanghai’s fledgling Nasdaq-style Science and Technology Innovation Board, known as the STAR Market, which is a pet project of Chinese President Xi Jinping.
• News reports suggest the reason for the suspension was the Chinese regulators’ demands for Ant to make a bigger commitment to low-profit microlending. However, the timing of the action, just days before the planned IPO, suggests something else is going on.  Some have speculated the problem was with statements Mr. Ma made at a recent conference, which were interpreted as an insult to Chinese regulators.  If so, the incident will paint Chinese financial markets as an unsophisticated venue where political sensitivities reign supreme, which in turn would undermine investor confidence in Chinese markets.  In any case, the New York shares of Alibaba Group (BABA, 285.57), which owns a 33% stake in Ant, fell 8.1% on Tuesday following the IPO suspension.

U.S. Technology Sector:  A new analysis by the Wall Street Journal shows that while the U.S. and Europe produced more than three-quarters of the world’s semiconductors in 1990, they now produce less than one quarter. The analysis suggests the epicenter of chip production has shifted in part because governments outside the U.S. offered often hefty financial incentives for factory construction to build up their domestic industries. Chip companies have also been attracted by growing networks of suppliers outside of the U.S., in addition to an expanding workforce of skilled engineers capable of operating expensive manufacturing machinery.

Europe:  A series of technology glitches at stock exchange group Euronext is feeding concerns that its efforts to build a central role in the region’s capital markets could intensify risks around a single point of failure.  On Monday, trading in warrants across Euronext’s network halted for an hour, just two weeks after a chaotic day disrupted trading across equities, exchange-traded funds, derivatives, and other markets.

Brazil.  Prosecutors have filed graft charges against the son of President Bolsonaro.  The move ratchets up pressure on the conservative leader, who came to power on the promise of stamping out corruption.  The increase in political risk could also be a new headwind for Brazilian assets.

Ethiopia:  Prime Minister Abiy Ahmed said he sent federal troops to quell a rebellion in the northern region of Tigray.  This escalation of tensions brings Africa’s second-most populous country to the brink of civil war.

COVID-19:  Official data show confirmed cases have risen to 47,555,607 worldwide, with 1,216,173 deaths.  In the United States, confirmed cases rose to 9,385,505, with 232,638 deaths.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• New confirmed U.S infections totaled more than 91,500 yesterday, lifting the seven-day moving average to 86,363 and the 14-day moving average to 79,124. New deaths related to the virus totaled 1,130, and the number of people hospitalized nationally for the disease topped 50,000.  Europe is also fighting an autumn wave of new infections, with mass economic lockdowns being imposed again in several countries.  Without a doubt, the new infections and restrictions will slow the current recovery from the first wave of infections, posing at least some headwind for risk assets.
• In France, shopkeepers are revolting against the government’s renewed lockdowns, complaining that closures make it impossible to compete against major online retailers that can still sell via the internet.

 Economic Impacts

• In Europe, the renewed lockdowns associated with the autumn infection wave have already shown up in service sector data. Spain’s October IHS Markit Purchasing Managers’ Index for services fell to a five-month low of 41.4, while Italy’s index fell to a four-month low of 46.7.  The overall services PMI for the Eurozone fell to 46.9 in October from 48.0 in September.  Like all major PMIs, the indexes are designed so that readings below 50 point to falling activity.
• The wave of new restrictions on service activities, like restaurant service, is creating surging demand and supply shortages for outdoor heaters.
• Saudi Arabia and other OPEC members are considering deeper oil production cuts as rebounding COVID-19 cases in the West and fresh economic lockdowns in Europe threaten to curb oil demand further.

U.S. Policy Response

• The Federal Reserve’s latest policy meeting starts today and will end tomorrow. No significant change is expected in the ultra-loose monetary policy put into place earlier this year to counter the economic impact of the pandemic, but officials have hinted they may start discussing adjustments to their asset purchase programs.

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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 what we know about the U.S. elections so far (naturally, it’s very little).  We also review a few key news items from overseas, including a terrorist attack in Vienna.  We wrap up with the latest coronavirus news.

U.S. Elections:  Well, we’ve finally made it to Election Day, with no major civil strife or surprise political bombshells (so far).  That probably comes as a relief to investors, many of whom were probably fearing the worst.  The relative calm in recent days helps explain the surging stock market yesterday and so far today.  However, the real test may well arise over the coming week or so.  As a reminder, the huge volume of mail-in voting will almost certainly make the counting process drag out longer than we’re all used to.  But then, it’s also not rocket science.  Mail-in voting is a common, well-established process across the country and has been used for years.  Disputes and recounts happen, and they’re manageable.  Take it from a former campaign manager who won an election on a recount (This is Patrick speaking: it was a Montana state senate race in 1980, just after I graduated from college, and my candidate won by seven votes!).  We will get through this.  We just hope people show patience in the coming days so that the worst-case scenarios don’t happen, and the financial markets can remain calm.

• As of yesterday evening, almost 99 million U.S. citizens had already cast ballots either in person or by mail, equivalent to 72% of the entire 2016 vote and enough to put the country on track for a record turnout.
• Despite the relative calm so far, many retailers have boarded up their stores to prepare for possible violence, and temporary fencing was erected around the White House.
• Several publications are offering guides to the voting process and what to watch for.  Here is one from Politico.
• Federal, state and local governments are on high alert for false narratives aimed at discrediting electoral outcomes if key states take days to tally votes. Election officials say they have spent recent weeks finalizing plans to monitor and combat such campaigns, while social media companies are shoring up policies to limit the spread of such disinformation.
• Even though investors are snapping up equities, they are also bracing themselves for sharp swings in major currencies in the immediate wake of the election.  Measures of hedging activity are soaring to their highest level on record for currencies like the euro, the yen, and the renminbi.

 India-Pakistan-China:  The Pakistani government said it would formally integrate the disputed Himalaya mountain territory of Gilgit Baltistan, which Pakistan controls but India claims.  The Pakistanis offered assurances that the territory would only be annexed provisionally until the broader territorial disputes in the Kashmir region are resolved, but the Indian government immediately decried the move.  The Pakistani initiative has long been urged by China, which has also been trying to seize disputed Kashmiri territory from India since early summer.

France-United Arab Emirates-Turkey:  The UAE’s Minister of State for Foreign Affairs, Anwar Gargash, slammed Turkish President Erdogan for his criticism of French President Macron and his complaints about “Islamic separatism” in French society.  The minister’s pushback underlines the friction Erdogan is causing with his sharp efforts to make Turkey a player in the Middle East and in global relations with Islam.

Austria:  One or more Islamic extremists have carried out a terrorist attack in Vienna that left at least four people dead and over a dozen wounded.  Police say they have cornered and killed one attacker in the shooting spree.  He was identified as an Austrian citizen of Macedonian background with a prior terrorism conviction.

COVID-19:  Official data show confirmed cases have risen to 46,997,320 worldwide, with 1,208,224 deaths.  In the United States, confirmed cases rose to 9,293,589, with 231,566 deaths.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• New confirmed U.S. infections totaled more than 89,000 yesterday, lifting the seven-day moving average of new infections to 78,738 and the 14-day moving average to 70,994.  Daily virus-related deaths also continue to trend higher, with 908 reported yesterday.  Just as important, hospitalizations are also rising to the point where some hospitals in the U.S. and abroad are starting to become overwhelmed.
  • One decent analogy for the pandemic is that it’s like a natural disaster, with all the unpredictability and confusion that implies.
  • However, another little-discussed analogy is that it’s like a biological weapon attack.  The biological weapon analogy isn’t meant to emphasize China’s role at the outset of the crisis.  Rather, the issue is that the goal of a biological weapon attack is to overwhelm the adversary’s health system in order to increase unnecessary death, sow discord, and undermine confidence.  In the crisis to date, overwhelmed health systems, or the threat thereof, did contribute to government decisions to impose harsh economic lockdowns.  In the new wave of infections, the threat of overwhelmed health systems again seems to be prompting new lockdowns.  Rising hospitalizations could be an early indicator of new lockdowns that might push down economic activity and financial markets once again.
• In a confidential memo to Trump administration officials, White House coronavirus response coordinator Deborah Birx has warned that, “We are entering the most concerning and most deadly phase of this pandemic.”
• European governments beset by an autumn wave of new infections are turning to Chinese-style mass testing to identify carriers who need to be quarantined.  In the Slovak Republic, Prime Minister Igor Matovič said the weekend’s mass testing exercise successfully tested a total of 3.6 million people over the age of nine, or 95% of the targeted population and two-thirds of all residents.
  • The swabs were officially taken on a voluntary basis, but without a negative result, people were banned from their workplaces.
  • The tests show 1.06% of the Slovak population is currently infected with the virus.
• As the world now approaches one year of the virus and tens of millions of infections, our understanding of the virus continues to evolve.  In contrast with the initial months of the pandemic, when COVID-19 was primarily seen as dangerous for older victims, it’s now becoming clear that males are especially susceptible to death from the virus across almost all ages and countries.  Scientists are now trying to figure out whether that’s because of uniquely male biological differences, greater comorbidities like obesity or high blood pressure among males, or differences in male behavior, like greater reluctance to practice good hygiene or wear a mask.
• According to a British study of 100 healthcare workers who got COVID-19 early in the pandemic, the coronavirus induces strong and long-lasting cellular immunity after infection.  The research suggests people are unlikely to quickly catch the disease more than once.  It also increases the likelihood that vaccines will be effective.

 Economic Impacts

• Although the pandemic has undermined demand for a range of refined petroleum products, adding important new headwinds to energy stocks, it’s now becoming more clear that things look relatively better for shale drillers focused on natural gas.

 U.S. Policy Response

• With the White House and Congress still at loggerheads over a new pandemic relief package, the Treasury Department has ratcheted down its estimate of federal government borrowing during the fourth quarter.  The department now estimates the government will borrow $617 billion from October through December, down from its $1.216 trillion estimate in early August. Senior officials said they continue to assume that Congress eventually will pass another economic relief package with about $1 trillion in new spending—the same assumption they made in August—but that much of that borrowing would likely be pushed back to early 2021.

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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.  It’s November, we have switched to standard time in much of the country, and tomorrow is election day.  Super Typhoon Goni passed through the Philippines over the weekend.  Global equities are higher this morning.  We start our coverage with the election.  Pandemic news is next.  The Fed meets this week; we look at what the central bank may be thinking.  We update China and close with odds and ends.  Here are the details:

 Election news:  Although we are seeing a recovery in risk assets this morning, equities have been under pressure for much of October.  Cash levels remain elevated and have risen in the past three weeks.

Our read on sentiment is that there is a high level of concern, which is not unreasonable.  We probably won’t know the outcome of the election with certainty when we go to bed tomorrow night.  It may be a week before we know for sure.  Disinformation will be circulating from a myriad of sources.  But, the levels of cash suggest that a good bit of fear has already been discounted.  If conditions turn out to be less than feared, a relief rally is likely.  We will continue to monitor the political situation in the coming days.

COVID-19:  The number of reported cases is 46,618,804 with 1,201,833 deaths.  In the U.S., there are 9,208,9544 confirmed cases with 231,833 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: 

• Europe is tightening its restrictions as infections increase. Germany has instituted a four-week partial shutdown.  U.K. lockdowns are spreading.  Across Europe, hospitals are estimating when they will face capacity constraints.  Compared to the spring, this cycle of lockdowns is facing a political backlash.  Spain was rocked with violence in response to new measures.  We suspect much of the backlash is due to the belief that the burden of lockdowns disproportionately affects less affluent groups.  This is especially true of service workers.
  • The lockdowns are affecting growth estimates. Forecasts for Q4 GDP are turning negative.
• On a positive note, Israel’s infections are falling rapidly, even though the recent lockdown was not as strict as the spring and compliance was poor. However, Israel did implement fines for not wearing masks, and this factor seems to be the primary reason for the sharp fall in infections.
• One of the mysteries of COVID-19 is the wide disparity of symptoms. Most of those infected have mild symptoms; others become very sick and don’t survive.  However, there is another trend that has researchers concerned—the so called “long COVID” cases.  Some of those infected who had only mild symptoms are plagued with long-term problems.  These include heart ailments, fatigue, and memory lapses that seem to linger for months or longer.  There is evidence COVID-19 triggers an autoimmune response that is similar to lupus.  There is another factor; with the exception of the oldest Americans, men tend to have higher fatality rates than women.
• A study of Regeneron on seriously ill COVID-19 patients has been halted after the drug was ineffective with this particular group.

The FOMC:  The Fed meets this week, with the meeting concluding on Wednesday.  We do not expect any change in policy, although a discussion about the maturity structure of purchases is likely.  The U.S. is enjoying a boom of sorts in durables purchases and housing investment.  Rising long-term interest rates could put these areas at risk.  However, the Fed could support the housing market by increasing their purchases of mortgages.

The spread of mortgage rates to the 10-year T-Note is elevated, so it’s 50 bps above average.  The Fed could try to narrow this spread by driving mortgage rates toward the current 10-year yield level.

China:  A couple items of note.  First, China’s PMI data confirms that the recovery remains in place.  All the major subcategories are above the 50-expansion line.  Not only has manufacturing shown improvement, but the services index is up to its highest level since 2013.  Second, Chinese officials are continuing to expand foreign access to its financial markets.  The most recent measure is to allow foreigners the ability to trade in China’s futures markets.  Opening up financial markets will reduce Beijing’s ability to control such markets, but it will make it more difficult for the U.S. to isolate China.  In addition, greater access will internationalize the CNY, improving its stature.

Odds and ends:  These were items we noted:

• Airlines, facing rising infections and lower travel, are going BOGO—buy one ticket, get one free! The airlines are cutting prices aggressively to try to lure a reluctant public back to air travel.  Cutting prices is always tricky, because in the short run, a firm is never sure what elasticity of demand it is facing.  If the demand curve is elastic, cutting prices is a good strategy; under such conditions, a 1% drop in prices should lead to a greater than 1% rise in demand.  But, more often, firms face an inelastic demand curve, which means that cutting prices only leads to falling revenue.
• Over the weekend, Moldova held presidential elections. No candidate won a majority, triggering a runoff election.  So far, the pro-EU challenger is leading.

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

[Posted: 9:30 AM EDT] | PDF

It’s Friday, the last one in October; have a safe Halloween, everyone!  Equity markets are back in the red, despite impressive earnings from the large tech firms.  China starts our coverage; the plenum session is over, and the next five-year plan is in place.  We take a second look at the GDP data from yesterday.  The pandemic update is next.  We close with a couple of news items from the EU.  Being Friday, we have a new Asset Allocation Weekly along with its related podcast and chart book.  In this report and episode, Patrick takes you inside the EU to show you where the real power resides.  N.B.  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 standalone report but will be linked within the Daily Comment.  Here are the details:

 The Five-Year Plan:  Marxist states have tended to create five-year plans.  Stalin created the first one in 1928.  Communist economics is based on central planning.  Thus, creating national “marching orders” is a logical path.  The latest one is China’s 14^th.  In one sense, there are no huge surprises in the documents.  China is facing technological restrictions from the U.S. so there was much talk about becoming self-reliant in this sector.  Although relations with the U.S. are not discussed overtly, opposition to the U.S. runs through the report.  The press release lacked detail, but that was expected.  The full report won’t be out until March.  The report did say China wants to be a “moderately-developed country” by 2035.  Although we tend to look at China as an economic powerhouse, in per capita terms, it’s a lightweight.  In terms of nominal GDP, using IMF data, China ranks 59, between Chile and Malaysia.  On a purchasing power parity basis, again using IMF data, it ranks 73, surrounded by Guyana and Turkmenistan.  Using this measure, China’s GDP per capita is 27.3% of America’s.  To reach the level of Portugal by 2035, at 52.6% of U.S. per capita GDP, Capital Economics estimates China will need to grow 7.3% per year.  That’s a stretch.  It could be especially difficult if China is turning inward.

The other interesting item to note is that in the title, 2035 is predominant and tied to Xi.  Perhaps this is a sign of how long he intends to remain in office.  It is not that we didn’t know that Xi was planning to stay in power.  But, this document is official evidence of that decision.

In other news from China:

• The U.S. has officially assured China that it has no plans to launch an attack on Chinese-held islands in the South China Sea. Although we haven’t seen anything on this issue, it was apparently a rumor in China.  According to reports, SoD Esper assured Chinese leaders that no such attack was being planned.  We have observed that military-to-military contacts between the U.S. and China have remained open and are sometimes used as a back channel when tensions are elevated.
• Navy Secretary Braithwaite has been quoted as saying, “China poses a greater threat to the U.S. than many Americans may realize.” For those in the foreign policy establishment, this lack of realization is a huge problem.  The Soviets were a clear foil with a much different economic system.  China’s political system is very different than the U.S., but the economic systems are not all that different.  In addition, economic ties between the U.S. and U.S.S.R. were few; that is not the case between the U.S. and China.  Thus, using the Cold War model may not be the best way to address the China threat, because it may be impossible to create a narrative that is believable to most Americans.  We discussed this issue in a recent Weekly Geopolitical Report.
• It isn’t just U.S. firms that complain about government regulation; Chinese firms are grumbling about new environmental regulations that are reducing supplies of rare earths.

About GDP:  A couple of charts about the latest GDP report.  First, in a recent AAW, we discussed the impact of the pandemic on the underlying data in the GDP report.  We noted that spending had shifted to goods and away from services.  The data released yesterday indicates that this pattern persists.

Since Q4 2019, the services share has declined from 69.1% to 66.3%, and the goods share has increased to 33.7% from 30.9%.

Second, although the q/q% rise was the strongest on record, the economy remains well below the cycle peak.

This chart shows the path of real GDP as a percentage of the recent maximum.  At the trough in Q2 2020, GDP was 10.1% below the 2019 Q4 peak.  We have recovered to 96.5% of the previous peak.  In relation to the cycle peak, the economy is now about where it was as the trough in Q2 2009.

Finally, the contribution from government to GDP was negative in Q3 2020.  Overall, a drop in government spending subtracted 68 bps from growth.  Governments are looking to raise taxes to rebuild unemployment insurance funds, which may act as a further drag on growth.

COVID-19:  The number of reported cases is 45,148,200 with 1,182,368 deaths.  In the U.S., there are 8,947,980 confirmed cases with 228,677 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.  New cases in the U.S. rose 88,500 yesterday, a new daily high.  The R_t data show only two states with readings of <1; a reading >1 suggests rising infection growth.  Mississippi is recording the lowest reading, with Wyoming showing the highest.

Virology: 

• One of the reasons for lockdowns is to slow infection rates and hospitalizations. Europe is returning to restrictions because hospitals are starting to hit capacity constraints.  So far, we are not seeing a similar situation in the U.S., but in the spring, Europe did act as a leading indicator for the U.S.  Thus, concerns are elevated and reflected in asset prices.
• Studies indicate that Regeneron has been effective in reducing viral loads. However, the cost of treatment is very high, and there are doubts that production could be scaled up enough to be a widespread treatment for COVID-19.

EU:  A couple of news items of note:

• The EU Parliament is continuing to make progress on approving the €750 billion Eurobond.
• We haven’t commented on the Wirecard (WCAGY, USD 0.35) scandal. The FT did a great job in reporting on this event.  A new development in the case has emerged.  Jan Marsalek, the COO of Wirecard, and currently an international fugitive, was an informant for the Austrian BVT, their spy agency.

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  It’s GDP day!  After two brutal down days, mostly driven by worsening infection rates and the lack of fiscal support, equity markets are trying to recover.  As expected, GDP had a historic recovery, up 33.1% (q/q% annualized).  This is the largest quarterly gain ever; of course, much of this is due to the “magic” of annualization.  Things were never as bad as Q2 looked or as robust as these numbers appear.  We detail the data below.  Hurricane Zeta has made landfall.

Market comments lead off our coverage.  Pandemic news follows.  China news comes next, including reports on an operation by Chinese operatives to bring back wanted nationals from within the U.S.  Next up are economic observations, including several central bank meetings.  Brexit follows.  We take note of the tech executives’ congressional testimonies.  Reports on Spain and Catalonia follow, and we close with comments on the WTO.  Being Thursday, the Weekly Energy Update is available.  This week, we take a look at the natural gas market.  And, the Q4 2020 Asset Allocation Rebalance Chart Book is also available, where we discuss recent allocation changes and provide the economic background for our decisions.  Lots going on; let’s get to it!

 The markets:  Yesterday was a tough day in the financial markets.  Not only did we see a swoon in equities, but Treasuries, the usual diversifier, also saw prices decline.  Gold prices fell too.  Equities and gold have been following a similar pattern recently, most likely because both have become dependent on policy liquidity.  Thus, the news that there wouldn’t be any fiscal package before the election hurt both.  Former NY FRB President Bill Dudley’s comments that the Fed may be out of tools probably didn’t help.  His comments are patently false; the Fed could engage in negative interest rates (like the ECB) or buy equities (like the BOJ), but it is arguable that these may not be all that effective.  We suspect Dudley’s goal was to highlight the need for fiscal support; however, the timing of his comments was not helpful.

So, what do we think?  The resurgence of the virus is clearly unwelcome.  As we note below, Europe is starting to lock down.  We don’t expect a nationwide lockdown here, but between local actions and a general reluctance of people to risk infection, the service sector is looking at a bleak winter.  Fiscal support would clearly help.  That won’t happen until after the election, and, even then, it may disappoint.  In the long run, immunity, either through widespread infections or a vaccine, is the best answer to growth.  Election jitters are also playing a role.  Although the potential for tail risk is elevated, much of that has been anticipated.  The slope of the VIX curve suggests an elevated level of fear as do high cash levels.  If the outcome of the election isn’t as dire as the worst-case scenario, we would not be surprised to see a relief rally.  We have not finished our 2021 Outlook, because publishing it before the election seemed imprudent.  We are not expecting a strong economy for at least the first half of next year.  That isn’t necessarily negative for equities as slow growth also means less inflation pressure.  At some point, though, we will need to see a new expansion emerge.

 COVID-19:  The number of reported cases is 44,583,829 with 1,175,684 deaths.  In the U.S., there are 8,895,432 confirmed cases with 227,703 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 weekly state chart is updated; infections are rising in most states.

Virology: 

• Germany and France announced national lockdowns. Both Chancellor Merkel and President Macron were trying to avoid this measure, but the surge in infections has not been curbed by partial measures.  Macron has warned his country that this winter wave may be worse than what we saw in the spring.  Meanwhile, the U.K. is also trying to avoid national measures, but infection rates are rising quickly, which may force PM Johnson to act.
• In the U.S., hospitalizations are rising rapidly; this will likely cause capacity issues in the coming weeks.
• European researchers have determined that this surge in infections appears to be a new variant of the virus. Mutations are normal.  In fact, sometimes they are favorable.  A virus can change into a form that is less virulent.  This variant of COVID-19 emerged among agricultural workers in northeastern Spain.  The characteristics of this mutation have not been determined.
• China has seen a modest rise in infections.
• A recent study from Tennessee concludes that mask wearing was effective in reducing hospitalization for COVID-19. Masks remain politically controversial, but this study does suggest that masks seem to have a protective effect.
• The U.S. has announced that Medicare and Medicaid will cover the cost of the COVID-19 vaccine. This decision will improve the distribution of the vaccine when it arrives.
• Egypt has become a proving ground for vaccines. The country has the capability to produce vaccines and has a large population.  Russian, Chinese, and Western nations are working on arrangements to test their vaccines on Egyptians.

China:  Here is the latest news:

• The DOJ has charged eight people tied to a case where Chinese operatives were engaged in trying to coerce two Chinese nationals living in the U.S. to return to China. Dubbed “operation Fox Hunt,” these eight, a mix of Americans and Chinese, were seen to be harassing this targeted couple.  The DOJ has indicated they were involved in illegal surveillance and making threats.  The U.S. action shows that the government is determined to provide a safe harbor for Chinese citizens who have fallen from favor with Beijing.
• The U.S. is basing Coast Guard cutters in American Samoa and allowing the vessels to counter Chinese activities in the region. This is further evidence of rising tensions in the region.
• SoS Pompeo is on a tour of Southeast Asia; his latest nation to tour is India. The U.S. is actively seeking to engage India to ally against Beijing.
• China remains well behind its targets for imports as part of the Phase I trade deal.
• The U.S. reiterated its commitment to Japan’s security, saying it would defend the Senkaku Islands if necessary. These islands have been a point of contention between China and Japan.
• In search of yield, foreign investors have been snapping up Chinese bank bonds. Purchases for the first eight months of 2020 exceeded those of the past three years combined.  Although China is actively seeking this investment (it has eased regulations to foster it), there is a downside.  It is becoming more difficult for China to manage its financial system and exchange rate.  This problem represents the tradeoff China is facing.  If it wants to internationalize the CNY and make it a competitor for the USD, it will be forced to give up control of its financial system.

Economic news:

• The ECB, as expected, has kept policy steady. As it faces another bout of deflation and pandemic issues, there was some speculation of further easing.  In its comment, the ECB sent a signal that further support is more likely at the December meeting.  We suspect the bank wants to see the impact of EU fiscal actions before adding to stimulus.
• The Bank of Canada left rates unchanged yesterday but also offered forward guidance, suggesting that rates will stay low through 2023.
• The Bank of Japan also left policy unchanged and suggested that the economy is gradually recovering.
• We have been warning for some time that state and local government spending could act as a drag on growth in future quarters. The evidence continues to mount that these governments are facing a severe challenge, and growth will be adversely affected if aid isn’t forthcoming.
• At the onset of the pandemic, there was a rent moratorium. As those measures end, the rental market is facing a crisis.  Renters can’t afford to pay their rent.  Landlords have no choice but to evict but probably face the prospects of lowering the rent to find new tenants.  All this suggests a spiral of problems developing. Again, fiscal support could stave off this problem.
• The Department of Homeland Security is proposing changing the H-1B visa program to have a bias toward filling higher-paid positions rather than a lottery. The idea is that by making this change, lower-paid workers would face less competition from foreign workers.

Brexit:  There does appear to be progress in talks, although fishing remains a sticking point.  The next two weeks are critical to progress.  The EU is taking steps to ensure dual equity listings will function after Brexit.

The curious case of Catalonia:  According to reports, a Russian group offered Catalonian officials 10,000 soldiers to support the province’s separation from Spain.  It appears Catalonian leaders declined the offer, although the existence of it is clearly odd.  Spain has arrested several people who are alleged to have funded the exile of Catalan President Carles Puigdemont.

Technology:  The leaders of several tech firms faced congressional questioning yesterday.  While there is bipartisan disapproval, the issues for the two sides are different.  The right-wing is afraid of social media censoring, and the left fear the growing power of the firms and their spreading of disinformation.

• The healthcare system is being hit with ransomware attacks.

WTO:  The WTO is in the process of selecting a new leader.  The 164 members, less the U.S., approved Ngozi Okonjo-Iweala to the post.  The U.S. opposes her because she has no background in trade.  Other nations criticized the U.S., suggesting Washington’s disapproval had more to do with undermining the organization.  The WTO works on consensus, so the U.S. rejection means, for now, that the WTO continues to operate without a new leader.

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

[Posted: 9:30 AM EDT] | PDF

Before turning to the daily news, we want to note that our Asset Allocation Rebalance Chart Book for the fourth quarter is now available on Vimeo.  In this video, we review our asset allocation process, detail our quarterly portfolio adjustments, and offer a deep dive into the macro-environment that underlies our decisions.

Our Daily Comment today focuses on the coronavirus pandemic since the recent resurgence in infections is having such a negative impact on investor sentiment.  Not only are increasing infections raising the threat of renewed economic lockdowns, but they’re even sparking violent protests in Europe.  Following our review of the coronavirus developments, we take a quick look at other news items, several of which revolve around U.S.-China tensions.

COVID-19:  Official data show confirmed cases have risen to 44,067,588 worldwide, with 1,168,693 deaths.  In the United States, confirmed cases rose to 8,779,993, with 226,733 deaths.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• New confirmed U.S. infections totaled more than 73,200 yesterday, lifting the seven-day moving average to another all-time high of 69,967.  Hospitalizations related to the coronavirus remained over 40,000 for the seventh day in a row, while daily deaths rose further to 985.  New infections and deaths continue to surge in Europe as well, putting its daily deaths-per-million count on par with the U.S.
  • The figures are further feeding fears that authorities across the developed world may be forced to re-impose mass economic lockdowns as they did in the spring, even though they’re trying hard to keep restrictions targeted and localized.
  • With a new U.S. pandemic relief bill off the table, possibly until early 2021, investors are becoming much more concerned about new, mass lockdowns that could undermine the weakening economic recovery and weigh further on corporate profits, all of which helps explain the renewed weakness in risk assets.
• As France emerges as the new epicenter of infections in Europe, its coronavirus-related deaths reached a six-month high of 523 yesterday.  Aides said President Macron is considering imposing earlier curfews in many parts of the country and weekend lockdowns that would sharply curtail individuals’ movements in hot spots such as Paris.  In Germany, local health authorities are also starting to become overwhelmed.  In the U.K., the government’s scientific advisors are warning that while peak deaths in that country’s new wave probably won’t exceed the first wave’s peak, deaths will remain high for much longer and result in a higher total death toll than in the first wave.  The analysis is raising fears of an England-wide lockdown by Christmas.
• The renewed restrictions have also sparked a wave of anti-lockdown protests across Europe.  Thousands of furious demonstrators clashed with police in cities in Italy and Spain as they urge their governments to abandon new restrictions on their freedom.
• Meanwhile, the Chinese government has issued a warning that handling imported frozen or refrigerated foods could increase the risk of contracting the virus.  The warning came after epidemiological investigators pinned down the outbreak in Beijing in June, involving 335 cases, to imported salmon sold from a booth in a wholesale food market.
• At the individual level, scientists and physicians are learning that a COVID-19 infection can leave people with a range of physical problems that last long after they’ve recovered.

 Economic Impacts

• Even though consumer spending has recovered more strongly than expected, and even though online purchases have surged throughout the pandemic, it turns out that they’ve still kept a lid on their credit card debt balances.

 Foreign Policy Response

• With infections surging again in Europe, and with Friday’s price data expected to show a third straight month of deflation in the Eurozone, the pressure is likely rising on ECB policymakers to launch new monetary stimulus measures.
  • Many officials and investors fear that Europe is becoming bogged down in a Japanese-style cycle of weak growth, negative interest rates, and sub-zero inflation.
  • It’s still probably too early to expect new measures after Thursday’s policy meeting, but the increasing prospects for new European stimulus measures and the surging case counts around the developed world are already giving at least a temporary boost to the dollar today.

 U.S. Property Taxes:  Even though next week’s elections have us all focused on the presidential and Senate races, it’s important to remember there are also important state-level issues to watch.  In California, for example, Proposition 15 would ease some restrictions on commercial property tax valuations.  Under the measure, assessments on private residential property would continue to be strictly limited, but local governments could begin assessing commercial property based on its current value, rather than capping increases from the last time it was sold.  If passed, the measure could be an additional blow to some REITs holding property in California, which have already faced declining occupancy and rent arrears because of the coronavirus pandemic.  The measure could also hurt non-REIT property owners and their tenants, since many leases require tenants to cover property taxes.

United States-China:  The U.S. and China have narrowly sidestepped a potentially major diplomatic dispute after four political dissidents entered the U.S. consulate in Hong Kong to request asylum but were refused.  The incident happened just hours after the Hong Kong police department’s national security unit arrested the former leader of a pro-independence group as he was planning a similar move.

United States-India:  The U.S. and India yesterday signed an agreement to share geospatial intelligence, paving the way for deeper military cooperation between the two countries as they confront an increasingly assertive China.

China-India:  New reporting reveals that after the China-India military scuffles over disputed borderlands in the Himalaya mountains this summer, New Delhi quietly sent one of its warships into the South China Sea to send the message: “Don’t mess around in my backyard or I’ll mess around in yours.”  Last week, India also invited Australia to join the U.S. and Japan in its annual Malabar naval exercises in the Indian Ocean.  The moves illustrate the surprising extent to which New Delhi is shedding its reticence to unleash India’s maritime power and strengthen its security partnerships as it seeks to counter what it considers Chinese aggressions on its land border.

China:  The China Foreign Exchange Trade System, an arm of the central bank, announced that a countercyclical factor is no longer being used to set the central value of the renminbi for purposes of domestic trading.  The factor made the renminbi’s value more stable than it otherwise would have been, so the move is seen as a liberalization designed to make the currency more appealing to investors.  All the same, as the renminbi continues to appreciate, its recent strength is probably being driven more by China’s early success in overcoming the coronavirus pandemic and its continuing recovery from it.

Nagorno-Karabakh:  Clashes between Armenian and Azeri forces continue despite the recent U.S.-brokered ceasefire.  Importantly, it now appears that Azerbaijan has taken control of significant territory that could allow it to cut a road linking Armenia to the ethnic Armenian-controlled enclave.  The Azeri success evidently owes much to high-tech drones provided to Azerbaijan by Turkey, which have devastated Armenia’s outdated tanks.  That success illustrates Turkey’s ability to make trouble throughout the region as President Erdogan works to increase his influence in the area.

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

[Posted: 9:30 AM EDT] | PDF

Before turning to the daily news, we want to mention that our latest Confluence of Ideas podcast is now available here.  This edition discusses our outlook for how U.S. foreign policy is likely to develop in the coming years depending on who wins the presidential election next month.

Our Daily Comment today opens with coronavirus news. Resurgent infections around the world have started to weigh on risk markets, as shown by the steep drop in the stock market yesterday.  We also cover items relating to U.S.-China trade and capital flows, followed by news on relations between Turkey and Russia.

COVID-19:  Official data show confirmed cases have risen to 43,587,563 worldwide, with 1,160,960 deaths.  In the United States, confirmed cases rose to 8,705,340, with 225,739 deaths.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• New confirmed U.S infections totaled more than 66,000 yesterday, while the seven-day moving average of new infections rose to an all-time high of 68,767.  In addition, the number of people hospitalized for COVID-19 in the U.S. topped 40,000 for the sixth straight day, pushing some hospitals closer to care rationing.  Daily deaths have started showing signs of rising again.  Overall, the data confirm that a third, autumn-related wave is now hitting with full force.  It’s still too early to know how this wave will affect the economy, but fears are beginning to solidify, which is probably a key reason for the big drop in risk assets on Monday.
• In Europe, newly confirmed infections are also surging, with the seven-day average of new infections in France now six times higher than at the previous peak last spring.  In French hospitals, half of all intensive care beds are now filled with COVID-19 patients.
  • Countries like the U.K., Spain, and Italy are also seeing big spikes, raising fears of increased hospitalizations and deaths.
  • Authorities are still trying to avoid mass economic lockdowns like those imposed earlier in the year, but as their more targeted restrictions expand, the distinction could get lost, and economic damage is likely to increase.  As targeted lockdowns expand and start to look more like the generalized lockdowns of the spring, investors are becoming increasingly concerned about the economic outlook. This goes far toward explaining the big drop in the stock market yesterday.
• Even in China, authorities have discovered more than 100 asymptomatic cases in the western province of Xinjiang.
• Officials at the European Medicines Agency said the regulator would approve a vaccine against the COVID-19, even if trials showed that it was effective in less than half the people who take it.  That’s lower than the minimum 50% “efficacy rate” the FDA is likely to apply in assessing vaccine candidates for the U.S. population.
• Federal health researchers halted clinical trials of an experimental COVID-19 treatment consisting of an antibody drug made by Eli Lilly (LLY, 141.70) and remdesivir, after an independent committee found a lack of benefit.  However, the halt doesn’t apply to other ongoing studies of the Lilly drug by itself.  The antibody drug is still up for authorization as a solitary treatment for patients with mild to moderate COVID-19 who are not hospitalized.
• Even more discouraging, a survey of 365,000 people in England who had tested positive for COVID-19 showed that the proportion testing positive for COVID-19 antibodies declined by more than a quarter between late June and late September.
  • The study suggests that even if antibodies confirm immunity to the disease, such immunity might deteriorate quickly in the months following someone’s illness, much as immunity to the common cold deteriorates quickly once the sniffling and sneezing end.
  • The study also suggests the prospect of widespread, long-term herd immunity to the virus will be difficult to achieve.
• A growing number of countries are trimming the length of time that people potentially exposed to the coronavirus need to self-quarantine to reduce the risk of spreading the disease. Their reasoning is that shorter spells might help manage the pandemic by encouraging greater compliance.

 Economic Impacts

• Economic statistics over the last few months have gradually made it clear that while the pandemic has shut down people’s ability to buy many services, such as tourism, they’ve channeled much of their funds into purchasing physical goods, including autos.  In fact, the CEO of Volkswagen (VWAGY, 16.94), Herbert Diess, now says European governments don’t need to implement any new auto purchase incentives.  Just last spring, Diess had been loudly lobbying for government subsidies to support auto manufacturers.
• In spite of increased business for some goods producers, however, the coronavirus resurgence this fall is already having economic impacts in Europe.  A new ECB survey shows that European banks tightened credit standards in the third quarter due to rising concern about the pandemic’s impact.  The survey showed the banks also plan to tighten credit further in the fourth quarter.
• In the U.S., the end of federal and local eviction moratoriums over the coming months is raising the risk that large numbers of people will lose their apartments, and many landlords will be stuck holding the bag.
  • A study of unemployed workers released last week by the Federal Reserve Bank of Philadelphia calculated outstanding rent debt would reach $7.2 billion before the close of 2020.
  • Moody’s Analytics estimates it could reach nearly $70 billion by year end if there is no additional stimulus spending. The firm calculated that 12.8 million Americans would then owe an average of $5,400 from missed payments.

 U.S. Supreme Court:  By a vote of 52 to 48, the Senate confirmed Amy Coney Barrett as a Supreme Court justice last evening.  The vote was almost entirely on party lines, with every Republican senator except Susan Collins of Maine voting to confirm and no Democrats voting yes.

U.S.-China Trade:  According to a new analysis by the Peterson Institute for International Economics, China accelerated purchases of U.S. farm products last month, and has now bought $58.8 billion of the U.S. agricultural, energy, and manufactured goods it committed to buying this year under the U.S.-China trade accord signed in January.  Unfortunately, China’s purchases should have reached $108 billion to be on track to reach its full-year target of approximately $140 billion.  Any failure to meet that commitment would likely be a risk for U.S. and China stocks because it would further exacerbate the deteriorating U.S.-China relationship.

U.S.-China Capital Flows:  Despite the rising military, economic, and diplomatic tensions between China and the U.S., new Chinese financial reforms are helping draw waves of new investment capital into the country.  According to Fitch Ratings, the amount of Chinese onshore bonds held by foreign institutional investors in the first eight months of 2020 was up more than 20% from the same period one year earlier.  In addition, Refinitiv calculates that foreign investors have accounted for about 12% of all purchases of Chinese government and policy bank bonds this year.

• Some of the inflows into China simply reflect market dynamics; Chinese stocks power ahead, and Chinese bond yields remain much higher than in most developed countries.
• However, China is also probably trying to increase its international financial integration in order to preempt any possible U.S. sanctions against it as U.S.-China tensions worsen.  Over the longer term, opening the financial system is also seen as key to making the renminbi a viable reserve currency.

Syria-Russia-Turkey:  Russian airstrikes reportedly killed dozens of Turkey-backed fighters in northwestern Syria yesterday, putting at risk a fragile cease-fire that has been in place since March.  The attack is being interpreted as a warning from Russia to Turkey that it must withdraw from the area as agreed in the truce.  It therefore highlights the rising tensions between the countries which have also taken opposing sides in the recent fighting in Nagorno-Karabakh.

Turkey-France:  Turkish President Erdogan has called for a boycott of French goods over French President Macron’s vow to crack down on Islamic extremism after terrorists beheaded a French teacher last week.  Several key European leaders immediately came to Macron’s defense, highlighting how Erdogan’s strong Islamism is worsening ties between Turkey and the broader EU.  Worsening Turkish-EU ties will likely be another hurdle for the Turkish economy and its currency.

Nagorno-Karabakh:  The latest U.S.-brokered ceasefire between Armenian and Azeri forces fighting over the enclave of Nagorno-Karabakh has broken down with each side blaming the other.  As noted above, Russia’s backing of the Armenians and Turkey’s backing of the Azeris ensures Russia-Turkey tensions will remain high, but Russian Foreign Minister Lavrov today insisted Russia will still seek to cooperate with Turkey on other international issues.

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