Author: Donna O'Donnell

Daily Comment (September 29, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today provides a brief introduction to tonight’s presidential debate, the anticipation of which could keep a lid on the markets throughout the day.  We also discuss several geopolitical tensions involving Eastern Europe, as well as the latest developments related to the coronavirus epidemic.

U.S. Elections:  President Trump and Joe Biden will meet face to face tonight in the first of three scheduled debates before the presidential election.  The action starts at 9:00 pm ET and is scheduled to last an hour and a half.  With Biden narrowly leading in many key polls and prediction markets, we would expect him to work hard at maintaining a calm, presidential air while attacking Trump on issues like the coronavirus pandemic, income and social inequalities, and the president’s tax records.  We would expect Trump to hammer away at Biden’s age and the left wing of the Democratic Party.  If the result is perceived to be a draw, the event could have little or no discernible impact on the financial markets.  However, if one side or the other scores a body blow or suffers a major gaffe, markets could react significantly on Wednesday.  In fact, if that happens, the resulting market moves could indicate what to expect over the coming month as the election dynamics play out.

United States-Russia:  As talks over extending the last remaining U.S.-Russia strategic arms control agreement remain deadlocked, the Trump administration has reportedly asked the military to assess how quickly it could pull U.S. nuclear weapons out of storage and load them onto bombers and submarines if the treaty expires in February.  The request was part of a strategy to heap pressure on Russia in renegotiating the New START treaty ahead of the U.S. election.

European Union:  Amid negotiations over the EU’s long-term budget and its proposed new €750 billion pandemic relief fund, Germany proposed rules that, in some circumstances, would suspend disbursements to countries violating the bloc’s rules on judicial independence and respect for democracy.  However, several northern European member states criticized the move as too weak, even though it is likely to be too intrusive for eastern members like Hungary and Poland.  The prolonged impasse is important because it could undermine the relief fund’s massive new mutualized EU debt obligations backed by the full faith and credit of the member countries.

France-Belarus:  In his visit to the Baltic states of Latvia and Lithuania this week, French President Macron met with exiled Belarussian opposition leader Svetlana Tikhanovskaya and promised to help negotiate the release of other opposition leaders imprisoned by Belarussian President Aleksander Lukashenko.  The intervention into Belarus, which Russian President Putin considers to be in Russia’s rightful sphere of interest, is an additional sign that Macron may be giving up on his efforts to draw Europe closer to Moscow.

Azerbaijan-Armenia-Turkey:  New reporting indicates Turkey has been facilitating the Azeri government’s fight against rebels in its ethnic Armenian enclave of Nagorno-Karabakh.  According to the BBC, the Turkish assistance includes military equipment, military advisors, and transporting in Syrian mercenaries to help in the fight.  If so, it marks another aggressive, risky new international move by President Erdogan to assert Turkey into the region’s politics (for a fuller discussion of Erdogan’s policies, see our latest WGR, published yesterday).  That move is likely to irritate Russian President Putin, who considers both Armenia and Azerbaijan as important allies, and he prefers they maintain peaceful relations.  Even though the UN Security Council is scheduled to discuss the conflict later today, the fighting could also worry oil markets, as it could endanger supplies from the Caspian fields.

Precious Metals Market:  An article in today’s Wall Street Journal offers a nice overview of the forces pushing up gold prices this year.  Despite the recent pullback in precious metals prices, we continue to believe that factors like extremely low interest rates and expansive fiscal policy should be bullish for gold and silver in the coming years.

COVID-19:  Official data show confirmed cases have risen to 33,401,514 worldwide, with 1,002,676 deaths and 23,183,669 recoveries.  In the United States, confirmed cases rose to 7,150,165, with 205,091 deaths and 2,794,608 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

 Economic Impacts

 U.S. Policy Response

  • Democratic leaders in the House of Representatives unveiled a $2.2 trillion pandemic relief bill that could come to a vote as early as Thursday.  According to press reports, Speaker Pelosi and Treasury Secretary Mnuchin have already discussed the proposal last night, and they are scheduled to discuss it again this morning.  Even if the measure passes the House, it is likely to be blocked in the Senate by Republicans opposed to further big increases in the budget deficit.  The Democratic leadership in the House may not really want the bill passed into law anyway, as it would give President Trump the opportunity to claim a fiscal victory just before the election.
    • In any case, press reports indicate that key components of the new House bill would:
      • Provide a new round of direct stimulus checks in the amount of $1,200 per taxpayer and $500 per dependent;
      • Restore the supplemental federal unemployment benefit of $600 per week that expired at the end of July;
      • Increase food stamp benefits by 15%;
      • Extend the Paycheck Protection Program to encourage firms to keep employees on their payrolls;
      • Provide $436 billion in financial aid to state and local governments; and,
      • Provide $28 billion in funding for vaccinations.
    • Even though the proposal isn’t likely to become law, the fact that Speaker Pelosi and Secretary Mnuchin are actively in discussion may offer some encouragement that further fiscal support is possible.  That is likely to be positive for risk assets in the near term.

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Daily Comment (September 28, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

It’s Monday, the last week of September, and the end of Q3.  Equity markets are in full recovery mode this morning.  We start our coverage with a comment about the election situation.  World news comes next, with a focus on Nagorno-Karabakh.  China news is next, followed by the pandemic update.  We close with economic news.  Here are the details:

Election news:  Over the weekend, President Trump nominated Amy Barrett to the Supreme Court.  She has been on the “short list” for some time and will be controversial.  Although it appears that she will be approved by the Senate, the testimony could be newsworthy.  Tomorrow, the first presidential debate will be held.  Debates have the capacity to change elections; President Ford’s gaffe that communist Poland was free may have sealed his defeat.  President Reagan’s line against Carter stating “if you are better off now than you were four years ago, you should vote for him” was a key moment.  VP Gore’s insufferable huffing in the first debate with Bush did him no favors.  Tuesday night will be important.  Foreign interference in the U.S. election process is expected; one way this is done is by planting false stories and relying on the domestic media to repeat the narrative.  A deeply divided country increases the power of such disinformation.  Investors are building hedges for November.  Finally, the NYT has received multiple years of President Trump’s taxes.  That should be a topic for tomorrow night.

Nagorno-Karabakh:  This disputed region between Azerbaijan and Armenia is one of several “frozen conflicts” in the world; this one emerged after the end of the Soviet Union.  We wrote on this issue in 2016 during the last major flareup.  It isn’t clear how this weekend’s fighting started.  Both nations have declared that martial law and military mobilizations are underway.  Although border skirmishes are not unusual, this one has escalated rather quickly.  The U.S. has indicated it may try to end the violence, although Russia usually intervenes to end these confrontations.  Given the unsettled conditions of the region, however, this battle may have more “legs.”  A full-blown war could cut off oil from the Baku region, which might support oil prices.

World news:

 China news:

COVID-19:  The number of reported cases is 33,137,748 with 998,372 deaths and 22,952,164 recoveries.  In the U.S., there are 7,116,456 confirmed cases with 204,762 deaths and 2,766,280 recoveries.  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 facing rising infections, including Spain and the U.K. However, so far, hospitalizations are not tracking levels seen earlier this year.  It isn’t completely clear why.  It could be that the virus is mutating into a less virulent form.  If infections are mostly affecting the young, they tend to be more resilient.  As long as hospitalizations remain low, there is less need for extensive lockdowns.  Some restrictions are likely, and rising infections will lead some households to exercise greater caution, dampening economic growth.
  • China is rapidly expanding its vaccine distribution for vaccines that haven’t been tested to Western standards. This decision could boost immunity if they work, but if there is a problem with the vaccines, those injected could be harmed.
  • One of the mysteries of COVID-19 has been how children have generally been unaffected by the virus. Influenza, for example, tends to affect the youngest and oldest of those infected most adversely.  One clue may be in the immune system differences between children and adults.  Children’s immune systems are new, and their systems tend to react quickly and strongly.  Adult immune systems are more selective; after years of fending off various viruses and bacteria, adults tend to rely on less aggressive but more targeted responses.  Researchers are postulating that since COVID-19 is novel, the child’s immune response has been more effective than the adult system.  For this reason, children may be last in line for a vaccine.
  • Blood banks are mobilizing to encourage those who have recovered from COVID-19 to consider plasma donations in a bid to create antibody therapies.
  • And, sadly, an American tradition may be at risk; as school systems become more adept at online learning, the snow day may be lost.

Economic and market news: 

  • In March, the Fed took aggressive steps to backstop numerous markets, including high-yield bonds. It appears its actions have reduced the number of bonds expected to be downgraded to “junk” after they were initially rated investment grade.  However, risks remain, with the focus on commercial real estate.  New reports suggest commercial properties may have lost a quarter of their value.  We also note that there have been no loans forgiven as part of the PPP program.
  • There is a surge of new business formation. Some of this is probably due to necessity.  Many of the layoffs are occurring in industries that won’t be coming back soon, so workers are striking out on their own to build new careers.  In other cases, there is a bet that fundamental changes are occurring in the economy, and these budding entrepreneurs are trying to “ride the wave.”  The rise in business formations is a testament to the flexibility of the American economy; although most of these businesses will fail, some won’t, and those that survive will lay the groundwork for a stronger recovery.
  • In a reversal of “just in time” inventory management, grocers are building stockpiles before winter. Increased holiday purchases and the fear of disease (COVID-19, influenza) are raising concerns about the reliability of supply chains.  In fact, we suspect this is a broader issue for the economy going forward.
  • As the utility shutoff moratoriums end, a surge in shutoffs is likely.
  • Apple (APPL $112.28) and Alphabet (GOOG, $1444.96) are facing a lawsuit over antitrust regarding how they manage their app stores.

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Daily Comment (September 24, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

Good morning, all.  Equity markets are marking time this morning, but the market tone isn’t very good.  A general market comment leads our coverage this morning.  The virus update comes next.  China news follows.  We close with economic, policy, and Brexit news, with a bonus chart that caught our attention.  The Fed has released its Financial Accounts of the U.S., known by market veterans as the Flow of Funds.  There is a great deal of interesting data that comes from this report, and we will highlight different graphs over the next few days.  And, being Thursday, the Weekly Energy Update is available.  Let’s get to the details:

About this market:  After a remarkable recovery from the lows seen in March, several markets are showing signs of weakness.  Equities have clearly come off their highs and are struggling.  The star of the past several months, precious metals, is suddenly seeing weakness.  And Treasuries aren’t rallying very much.  There are a number of factors behind this broad weakness.  Here is the short list:

  • The political environment is becoming increasingly unsettled. At the start of the year, President Trump looked like he would probably get re-elected.  The economy was doing fine, equity markets were doing well, and the Democrats were still sorting through their candidate list.  These conditions were upended by COVID-19; the economy has suffered a historic decline in what may be the worst and shortest recession in our history (it may be over already).  It is rare for an incumbent to survive re-election if a recession occurs in the election year; polling data and prediction markets are all leaning toward a new president in November.
    • Widespread racial protests that developed over several police actions have further divided the country. Yesterday we saw another round.
    • The passing of Justice Ginsburg has turned this election into a zero-sum situation. The GOP is moving rapidly to fill the opening; the Democrats are trying their hardest to prevent this from occurring.
    • The president continues to suggest he may not concede if he loses. The U.S. has mostly had peaceful transfers of power.[1]  The most recent contested election was in 2000, which the Supreme Court resolved.  The worry is that the drive to fill the Ginsburg seat is an attempt to have a conservative majority on the Supreme Court in case the election ends up in the courts.
    • We closely monitor politics; our stance is that we try to address two questions—who will win and what will they do when they are given power? However, the current situation is different; we are now trying to handicap what happens if the outcome of the election is in dispute.  And for that, we have little precedent.  We still consider the disputed election as a tail risk, but that risk is growing, and the dispersion of outcomes is widening.
  • Next up is the Fed. We have seen a virtual parade of FOMC members call on Congress for more fiscal stimulus, which isn’t likely due to the uproar over the Supreme Court.  The underlying message is that the Fed has done about all it can do; if Congress doesn’t act, the Fed’s tools are limited.  There is a deep misunderstanding about Fed policy at present.  First, it is clear the public has little understanding of the Fed’s new inflation policy.  This is understandable, because the Fed, in its drive to maintain flexibility, has not given a clear picture of how it will respond to rising inflation.  VP Clarida was on Tom Keane’s podcast yesterday; his comments were a muddle.  What this tells us is that Chair Powell either (a) hasn’t been able to create a model for the future path of policy, or (b) he hasn’t really swayed the rest of the committee to abandon the path Paul Volcker put the Fed on since 1978, which was to pre-empt inflation by tightening when the labor market loses slack.  It is quite possible the “or” in the above sentence should be replaced with an “and” and the word “either” eliminated.
    • There is also a second element. There is a profound misunderstanding of how the Fed backstopped the shadow banking system in March.  The markets generally thought the Fed was simply buying everything.  That wasn’t really true.  What the Fed was doing was following a version of Bagehot’s Rule, which is that in a crisis, the central bank should lend freely on good collateral at a penalty rate.  The Fed established a rate where it would act as dealer of last resort in a broad spectrum of markets to create a bid, so the shadow banking system would function (as an aside, the shadow banking system is, for the most part, the actual banking system).  The markets thought they had a Fed that would purposely narrow credit spreads.  What Fed was really doing was preventing them from “blowing out,” an event that tends to cause the system to seize.  Thus, there have been some complaints that the Fed’s balance sheet has stopped expanding, and therefore, the Fed is failing to support the markets.  This fear is misguided; the fact that the balance sheet hasn’t expanded all that much is a sign the Fed’s policy is working, because the policy goal was market stabilization, not stimulus. 
    • The financial markets want a Fed that forcibly narrows credit spreads. We will be watching to see is if the Fed is eventually required to do so.
  • In all this, Treasuries haven’t really rallied all that much. We have been worried for some time that Treasury rates have declined to a point where they would cease to act as a hedge to risk assets.  We may have reached that point.
  • And what about gold and precious metals? They have fallen with the drop in equities.  To some extent, both equities and precious metals have been pricing off the same narrative—the Fed was flooding the economy with money.  Now that there are concerns the Fed can’t or won’t do much more, there is a repricing underway.  Comparing gold to breakeven inflation from TIPS, fair value for gold is around $1,800; gold prices have gotten a bit ahead of themselves.  That being said, we do expect the Fed to allow real yields to fall further and view this pullback as normal.  It appears to us that currency debasement is becoming the policy of all central banks, which is gold friendly.
  • In conclusion, it looks like conditions are going to be unsettled for the next 6-12 weeks. Beyond that, the situation should improve.  The recovery should continue, the Fed should keep rates low indefinitely, and earnings should get better.  In the meantime, volatility is the order of the day.

COVID-19:  The number of reported cases is 31,920,652 with 977,311 deaths and 22,002,729 recoveries.  In the U.S., there are 6,935,414 confirmed cases with 201,920 deaths and 2,670,256 recoveries.  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.  And the weekly Axios state chart is out; infections are rising, mostly in the Rockies.

Virology: 

  • A new study has indicated that COVID-19 is mutating. This isn’t a huge surprise; viruses tend to do this, some more than others.  For example, we have to get a flu shot every year because the virus that is likely to affect us changes over time.  Some viruses don’t change all that much, so (a) getting the disease once confers lifetime immunity, and (b) one vaccine will also tend to confer immunity.  Thus, the news of this mutation, which seems to make the virus more contagious, is a complicating factor for vaccine production (which is why we still think anti-viral treatments are more important than a vaccine).  However, mutating isn’t all bad news; it is not unusual for the virus to mutate into a less virulent form over time.
  • On the vaccine front, the K. is planning “challenge” trials, where a vaccine recipient is deliberately exposed to the virus. Such trails are ethically challenging, but they do offer rapid proof of success or failure.  Johnson and Johnson’s (JNJ, 144.44) vaccine, which is in its final stage of clinical trials, has some very attractive features; it doesn’t require a follow-up booster shot, and it doesn’t need to be kept frozen.  The AstraZeneca (AZNCF, 112.00) trial in the U.S. remains on hold due to safety concerns but has restarted elsewhere.  This division has raised concerns among medical researchers.  Here is a recap of the current vaccine candidates.
  • As we have noted, COVID-19 has generated a broad set of effects, from asymptomatic infections to those with lingering health issues. The latest is that in some patients, damage to the heart has resulted from infection, even if the initial symptoms were not severe.
  • As infections around the world rise, it looks unlikely that widespread lockdowns will be implemented. Instead, we are seeing localized responses.  This trend should mitigate some of the economic damage from the virus.  Younger people are now the largest contingent of infections.
  • And finally, Finland is using dogs to “sniff” out COVID-19 infections at the Helsinki airport.

China news: 

Economy and policy news:

  • Insurance works on the idea of non-systemic risk; in other words, actuaries can use statistics to model the risk of certain events as long as they are not widespread. Thus, one can insure against the risk of losing a house to fire, but not from a broad wildfire.  Therefore, homeowners and business owners often find that they are not covered in a mass event (earthquake, hurricane, wildfire), because it is a systemic risk, and thus excluded from most policies.  The pandemic is leading some trade-credit providers to stop providing coverage on insuring against trade risk from default.
  • Financial firms are increasing their activity in the single-family rental business. This situation may actually lead to increased homebuilding.
  • The DOJ is seeking Congressional curbs on immunity for social media firms.

Brexit:

Bonus Chart:

This chart shows household debt compared to after tax income.  We have seen a downtrend in debt relative to income since 2007, but in Q2 it fell sharply.  This is because of the massive level of transfers due to the CARES Act.  Although we do expect households to eventually spend down their savings, what this does show is that it is possible to improve household balance sheets by effectively moving the debt to the public balance sheet.  Our belief is that if we saw this ratio fall below 80%, the chance of a stronger, more durable recovery is likely.

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[1] The election of 1876 is a notable exception.  We will have more to say on that in an upcoming AAW and WGR.

Daily Comment (September 23, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today discusses the state-of-play on Supreme Court politics in the U.S. and the initial passage of a vote that is keeping the federal government funded through December.  Those developments are positive and are probably helping to give risk markets a boost so far this morning.  However, we also note several continued risks, such as a potential problem for the TikTok deal and worsening coronavirus infections around the world.

U.S. Supreme Court:  After Senator Romney’s commitment yesterday to immediately consider and vote for President Trump’s next Supreme Court nominee, it appears the Democrats won’t be able to stop a quick vote on the pick.  In fact, many Republicans are now pushing to vet and vote on Trump’s eventual nominee before the election on November 3.  Trump is expected to name his nominee on Saturday.  Even though such a quick confirmation process has the potential to anger and energize Democratic voters more than Republicans, the White House may have decided the risk was worth it. This will put an additional conservative judge on the panel in case a disputed election has to be decided by the Supreme Court.  In any event, the moves highlight the growing risk of disruptive, confidence-sapping political disputes and delayed election results that the markets will have to contend with over the next few months.  It should not be a surprise if the financial markets remain volatile until things get sorted out.

U.S. Fiscal Policy:  The House of Representatives last night passed a short-term spending bill keeping the federal government funded through December 11.  The Senate is now expected to approve the bill next week, averting a partial shutdown when the government’s funding expires on September 30.  Given that the economic recovery from the coronavirus has been losing steam, a government shutdown could have been a crippling blow to confidence.  We therefore consider the likely passage of the bill to be a notable positive for the markets.

U.S.-China Relations:  Critical editorials published by several Chinese state-media outlets suggest Beijing might not approve last weekend’s deal to sell a stake in Chinese social media app TikTok to U.S. investors in an effort to avoid a Trump administration ban on the app due to data security concerns.  Coupled with apparent disagreements over the deal’s ownership and control provisions, it looks like TikTok is not out of the woods yet.  If the deal fails, it would further add to U.S.-China frictions that have unnerved financial markets over the last couple of years.  Separately, in his video speech to the U.N. General Assembly yesterday, President Trump again called out China for its role in allowing the coronavirus pandemic to start, and he demanded that Beijing be “held accountable” for its actions.

Russia:  Opposition activist Alexei Navalny has been discharged from the German hospital where he was treated for poisoning by the Russian chemical weapon Novichok.  According to officials at the hospital, Navalny has a chance of “complete recovery,” which suggests he will be able to carry on as a political thorn in President Putin’s side once he returns to Russia.

Global auto industry:  Tesla (TSLA, 424.23) held its big “Battery Day” event yesterday, with CEO Elon Musk predicting that advances in cell manufacturing and chemistry would allow the firm to slash battery costs and eliminate the price advantage of gasoline-powered cars in about three years.  Investors were evidently disappointed in that timeline, but that shouldn’t detract from the major impact electric vehicles are likely to have on the world economy if Musk is right.  Given the auto industry’s huge economic footprint, the implied switchover to electric vehicles could portend a major restructuring of the world’s industrial sector and labor market.

COVID-19:  Official data show confirmed cases have risen to 31,647,930 worldwide, with 971,711 deaths and 21,776,599 recoveries.  In the United States, confirmed cases rose to 6,897,661, with 200,818 deaths and 2,646,959 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

  • Confirmed U.S. infections rose by only about 39,000 yesterday, but the seven-day moving average of new infections remained on its recent uptrend and topped 43,000.  New deaths linked to the virus remain at approximately 750 per day.  Elsewhere, major European countries continue to face resurgent infections, raising the risk of targeted new lockdowns and financial market disruptions.
  • Johnson & Johnson (JNJ, 144.21) said it has started a 60,000 person clinical trial of its single-dose COVID-19 vaccine on three continents.  That means Johnson & Johnson has the fourth experimental vaccine to enter final-stage testing in the U.S., further increasing the odds that a viable vaccine will be available, at least in limited quantities, in the coming months.  The company’s single-dose format could be especially important in easing logistics for getting people vaccinated and increasing uptake of the shot.
  • The Food and Drug Administration has reportedly developed draft guidelines that would require any new COVID-19 vaccine to meet strict safety and effectiveness standards before it could gain quick use authorization.  Among the proposed requirements is that a coronavirus shot reduce the rate of infections by 50% compared with a placebo, which the regulators have already required for regular approval of any COVID-19 vaccines.
    • The White House must sign off on the plan, but if it does so, it would make it difficult for a vaccine to be authorized for emergency use before Election Day.
    • Some observers have accused the federal government of politicizing its virus policy and guidelines.  We take no position on that issue, but we do note that if quickly approved vaccines are seen as having been rushed to market without proper testing, many people might be reluctant to get the shot.
    • If uptake of the vaccine is low, the virus could continue to spread and disrupt economic activity longer than would otherwise be the case, with negative implications for risk assets.

 Economic Impacts

  • The IHS Markit flash composite purchasing managers index for the Eurozone unexpectedly declined to a seasonally adjusted 50.1 in September, only slightly above the 50-level that signifies increasing economic activity (see data tables below).  The figure for September was a significant decline from the 51.9 reading for August.  On the bright side, the sub-index on manufacturing rose to a two-year high of 53.7 from 51.7 in the previous month.  The problem was that the sub-index on the service sector, which has been hit especially hard by the pandemic, fell all the way to 47.6 from 50.5.
    • In the U.K., the IHS Markit/CIPS flash PMI fell to 55.7, from a 72-month high of 59.1 in August, as business leaders reported a fall in optimism and consumer confidence.  Some flash PMIs in Asia also pointed to a faltering recovery.
    • Taken together, the data appear to reflect the negative impact from Europe’s resurgent coronavirus cases, in addition to the natural moderation in growth following the big bounce after severe restrictions were lifted over the summer.

 U.S. Policy Response

 Foreign Policy Response

  • The European Central Bank has urged the EU to consider making its new €750 billion pandemic recovery fund permanent in order to ensure “stronger economic support for more vulnerable countries.”
    • Not even including the loans in the program, ECB economists estimated the €390 billion in grants would provide a net benefit worth more than 10% of the pre-crisis Croatian and Bulgarian GDP and almost 9% for Greece.  Other net beneficiaries of the grants include Portugal, which would gain 5.4% of its pre-crisis economy, Spain with a gain of 3.4%, and Italy with a gain of 1.9%.
    • As we’ve argued before, the introduction of common EU debt backed by the full faith and credit of the bloc’s member states, which is how the recovery fund is to be financed, would go far toward making the euro a more viable reserve currency.  If making the fund permanent implies continued large-scale borrowing over time, the impact would be even greater, and the euro could start to appreciate even further compared with the greenback.

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Daily Comment (September 22, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

In our Daily Comment today, we discuss the latest new sources of tension between the U.S. and China.  That tension remains one of the key risks for global markets, ranking right up there with the economic impact of the coronavirus pandemic, faltering prospects for more pandemic relief from the federal government, and, now, tumult over President Trump‘s new nominee to the Supreme Court.  We discuss the China developments and many of those other risks below.

China:  As we noted in our Daily Comment yesterday, the Chinese government has issued guidance on how it will punish foreign firms named to its new “unreliable entities” list, designed as a way to retaliate against U.S. initiatives against China.  However, Chinese officials are reportedly locked in an internal debate on whether to actually name companies to the list before the U.S. election.  Some officials fear that naming U.S. firms to the list could enflame popular U.S. sentiment against China and prompt even tougher anti-Chinese action by the Trump administration.  Even with the temporary restraint, however, we think the momentum toward publishing the list is a risk to global equities, as those firms named to the list could have their Chinese sales or production processes seriously crimped.  In other key China news today:

Italy:  The populist, anti-immigrant League Party failed to pull off its expected win in the Tuscany regional elections, leaving the center-left Democratic Party in control of the government, just as it has been for the last 50 years.  The League’s failure signals further political challenges for Italian populists, but they scored a win in the constitutional referendum on cutting the size of Italy’s government.  According to preliminary results, some 70% of voters approved a constitutional change to cut the number of national legislators by about one third.

  • The referendum result suggests that while European populists may be losing some support, their ideas still have to be reckoned with.
  • All the same, the combined results strengthened Italy’s current governing coalition, whose main members are the Democratic Party and the Five Star Movement, and reduced the likelihood of early elections that could favor right-wing, EU-skeptic parties. Italian bonds are therefore rallying so far today.

Global meat and dairy industries:  Now that opponents of global warming have gotten traction in their years-long campaign to divest from fossil fuel companies, they are increasingly turning their sights on the meat and dairy industries.  Since those industries also produce a high amount of carbon dioxide and other greenhouse gases, and global warming opponents now have a well-developed playbook to push through divestment, their new focus has the potential to undermine asset values in the food-producing sector.

COVID-19:  Official data show confirmed cases have risen to 31,358,115 worldwide, with 965,575 deaths and 21,525,887 recoveries.  In the United States, confirmed cases rose to 6,858,212, with 199,890 deaths and 2,615,949 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

 U.S. Policy Response

  • Federal Reserve Chairman Powell and Treasury Secretary Mnuchin will testify before the House Financial Services Committee today and the Senate Banking Committee on Thursday, with Powell also making a solo appearance before a special House committee on the federal coronavirus response on Wednesday.
    • In prepared remarks for his testimony today, Powell said much of the rebound in consumer spending since the end of mass virus lockdowns has come from the federal government’s stimulative fiscal and monetary policy.  Going forward, Powell suggested that further progress on the economic recovery would require more fiscal support for both consumer spending and state and local government budgets.  Separately, incoming anecdotal evidence suggests workers who lost the supplemental federal unemployment benefit of $600 per week when it expired in July are now sharply cutting their spending, raising a risk that the rebound in consumer demand could soon peter out.  We continue to believe that weakening consumer demand and/or sharp spending cuts by state and local governments could seriously slow the economy and present a challenge for the equity market.
    • In answer to criticism that the Fed’s emergency lending programs haven’t helped small and medium-sized businesses very much, Powell will say that those firms may be better helped by “direct fiscal support.”

 Foreign Policy Response

  • In a speech to the British Chambers of Commerce, Bank of England Governor Bailey said that even though the BOE has been investigating how it would use negative interest rates if needed, it in no way implies that the policy will be implemented anytime soon.  The statement helped reverse an earlier slide in sterling, leaving the British currency up at $1.2796 in mid-morning trading (London time).

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Daily Comment (September 21, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  It’s Monday and there is a lot going on.  Equity markets are down sharply across the world; we suspect fears of political turmoil are adversely affecting financial markets.  We lead off with comments surrounding the death of Justice Ruth Bader Ginsburg and the political firestorm her passing has triggered.  China news is next, with the latest on TikTok.  We recap economic news, including questions about the unemployment claims data, a resignation at the NY FRB and a look at housing.  The pandemic update follows.  We close with world news.  Let’s get to the details:

Ginsburg and the election:  On Friday, Supreme Court Justice Ruth Bader Ginsburg died from cancer.  The justice was 87 and part of the court’s liberal minority.  Her passing has accentuated an already tense electoral season.  There will be a lot written in the media in the coming weeks, but here is our initial take:

  • We fully expect Senate Majority Leader McConnell to lead a vote on whomever President Trump nominates for the open position. However, we lean toward a vote in the post-election “lame duck” period for a couple of reasons.  First, there are only 43 days before the election.  Getting a vote before the election would be unusually fast.  As the table below shows, the average time to confirmation is 71 days.  The last justice to be confirmed in under 43 days was Ginsburg herself.  Second, there are several vulnerable GOP senators, and being forced to vote before the election could swing the Senate to the Democrats.  By postponing the vote, those vulnerable GOP candidates and incumbents can avoid a polarizing vote.  There is a risk to this strategy, though; if the GOP loses both the White House and the Senate, pushing through a new justice would appear unseemly and would taint that new member.  In addition, it would further politicize the Supreme Court and invite a radical reaction.  McConnell will have to weigh all these risks in determining how to proceed.  But, his life’s work, to much extent, has been to reshape the judicial branch, and a commanding majority on the Supreme Court is clearly his goal.  So, one way or another, we expect him to make this happen, regardless of the consequences.

  • There will be much made of applying the same policy that McConnell applied when Justice Scalia died. McConnell argued that the next president should be able to fill that position.  Of course, he is now suggesting that this time is different because both the Senate and White House are held by the same party.  Although this argument might sway GOP partisans, it is being viewed as hypocrisy by the Democrats.  In the end, this decision is all about power; for now, McConnell has it and he intends to use it.
  • If McConnell and Trump do fill the vacancy, the court will have a strong 6-3 conservative majority. Chief Justice Roberts was playing the role of centrist in voting, in an attempt to keep the court above the political fray.  With a 6-3 court, he won’t be able to play that role.
  • This election was already highly contentious. Now, with the Supreme Court in the balance, the stakes are much higher.  Both sides appear to believe this situation will work toward their favor.  For President Trump, this issue will overshadow the economy and the pandemic; for Vice President Biden, it will stir the populist left to support him.  Prior to this event, enthusiasm for Biden was modest at best.  But with the Supreme Court in the balance, the view that losing is catastrophic will dominate.
  • The populist left is pushing for very aggressive policies to gain power, including adding members to the Supreme Court, something that Franklin Roosevelt considered. There is also talk of statehood for the District of Columbia and Puerto Rico.  Assuming these would be Democratic states, it would add four reliable Senate seats to their rosters.  Our concern is that these “scorched earth” tactics will ensure retaliation, meaning that every four to eight years, policy could shift widely when administrations or congressional power changes.  That will create a situation making it almost impossible for business to make long-term investments.  So far, Biden has not adopted these strategies, which is probably wise, but the groundswell from the populist left will be difficult to fend off indefinitely.
  • There are short-term policy ramifications. The vacancy does put the ACA in jeopardy.  If the bill is killed, at some point, a replacement will likely be necessary.  Ultimately, the issue is whether health care is just another good or is critical; in other words, is it like elementary education or grocery stores?  If it’s the former, then some sort of government support is necessary.  If it’s the latter, nothing needs to be done.  It may also complicate getting a spending bill and a second stimulus package through Congress.
  • In the short run, equity markets were growing increasingly skittish about political stability. The high level of money market holdings is evidence of that fear.  The passing of Ginsburg will add to these worries significantly and will likely lead to risk-off market behavior.

Ricin:  There are reports that envelopes of ricin, a poison derived from castor beans, were mailed to the White House and local law enforcement offices in Texas.  The letters were sent from Canada, and a woman has been arrested.

China news: 

 COVID-19:  The number of reported cases is 31,089,558 with 961,273 deaths and 21,272,259 recoveries.  In the U.S., there are 6,812,332 confirmed cases with 199,513 deaths and 2,590,671 recoveries.  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: 

  • As the likelihood of a vaccine rises, the focus is now shifting to the distribution. The logistics of distribution are going to be complicated.  Several of the current candidates have to be kept at -112o Fahrenheit until dispensed.  That will require a supply chain based on special refrigerators and lots of dry ice.  Unfortunately, the U.S. gets most of its dry ice through the CO2 created in processing corn for ethanol.  Falling gasoline demand has reduced ethanol demand too, leading to a lack of CO2  The shipping companies are leasing warehouse space for fridge farms to house the vaccines.  Complicating matters further is the glass vial issue; all vaccine glass is specialized but being able to handle super cold temperatures raises yet another problem.  All these issues will be resolved, but it will also slow the distribution.
  • Russia is selling its vaccine outside of the country, even though adoption in Russia has been slow.
  • As temperatures begin to cool in the northern areas of the U.S., there are concerns about another surge of cases.
  • Getting the world to herd immunity against this virus is difficult, even with a vaccine. This article discusses the issue.
  • In Europe, Spain has implemented localized lockdowns to try to contain a new round of infections. And, vaccine skepticism isn’t just an issue in the U.S.  In France, 40% polled suggest they won’t take a vaccine injection.

Economy and policy news:

World news:

The U.S. is reinstituting sanctions on Iran.  The snapback provisions were initially designed to include several other nations, but this time around, the U.S. is mostly going alone, reducing some of the effectiveness.  Specifically, look for China and Russia to sell weapons to Tehran.

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Daily Comment (September 18, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Friday!  It’s a quadruple “witching day,” the day when stock index futures, single stock futures and their associated options expire.  It is not unusual to see heightened volatility on such days.  Equity markets are mostly stable, so far, this morning.  We begin our coverage with yesterday’s Bank of England meeting, which ended after we wrote yesterday’s report.  China comes next, with more on TikTok.  We update the pandemic news, followed by the latest on Brexit.  A wrap-up of world news comes next and we close with economic news.  Being Friday, there is a new Asset Allocation Weekly, along with the associated podcast and chart book.  Here are the details:

Bank of England:  Normally, we don’t comment on the proceedings of this particular bank; although the U.K. financial system is important to the world, the British economy doesn’t have an enormous impact any longer.  On the other hand, the U.K. is sometimes a harbinger of trends that affect the U.S.  For example, the rise of Tony Blair coincided with a similar figure, Bill Clinton.  And, Brexit itself was a reflection of the rise of American populism.  Although policy didn’t change, the Monetary Policy Committee warned that a return of the virus could trigger another downturn, which led the leadership to hint that the bank was “exploring” negative nominal policy rates.  The GBP fell on the news.  The BoE has, up until now, followed the Fed path, using QE and forward guidance in lieu of negative rates.  The idea that the BoE appears to be preparing the markets for negative policy rates is new.  Although we don’t expect the Fed to follow this path (negative nominal rates bring havoc to the shadow banking system by effectively making money market funds untenable), the fact that the BoE is considering it raises the idea that this may become a trend here as well.

China news: 

 COVID-19:  The number of reported cases is 30,205,226 with 946,673 deaths and 20,548,561 recoveries.  In the U.S., there are 6,676,410 confirmed cases with 197,655 deaths and 2,540,334 recoveries.  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 Rt data show that 22 states have a reading less than one (infections are not spreading) while 28 are showing the opposite condition.  Hawaii has the lowest reading, Delaware the highest.

Virology: 

 Brexit:  The U.S., on a bipartisan basis, is warning PM Johnson not to create a border crisis in Northern Ireland.  One of the more interesting facets of the U.K.’s recent Internal Market Bill is that it may not have been necessary.  There is a mechanism in the Withdrawal Bill for making adjustments.  In fact, the EU has made several changes to which the U.K. has already agreed.  The Johnson government could have raised its concerns within the current arrangement.  The fact it didn’t may mean the U.K. didn’t think the EU would agree or Johnson may have simply made a mistake.  British creditability has taken a hit, and its behavior may make it more difficult to make future trade agreements.

World news:  Belarus is planning  to close its border with Poland and Lithuania, although reports from the frontiers suggest it hasn’t occurred yet.  It isn’t clear why the borders are being closed, although we suspect Lukashenko is worried about activists fleeing the country.  This announcement may be a precursor for a crackdown.  Peru’s president is facing an impeachment vote; Martin Vizcarra has been under scrutiny over an influence-peddling scandal.  Aleksei Navalny was poisoned in his hotel by a water bottle testing positive for Novichok.  A rare hurricane level storm has formed in the Mediterranean; it is expected to make landfall in Greece.

Economy and policy news:

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Daily Comment (September 17, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

Good morning!  Equity markets are sharply lower this morning; the Fed is being blamed.  We begin our comments today with the Fed; the U.S. central bank held its usual meeting.  Second, we offer a few thoughts about the historic Abraham Accord.  Brexit follows, with China news next.  The regular pandemic update is next in line.  We follow with some commentary on the EU state of the union address and close with economic news.  Being Thursday, a new Weekly Energy Update is available.  Here are the details:

Federal Reserve:  In some sense, it will be difficult for the Fed to surprise us given all that was done.  The statement and the following press conference made it clear that the policy rate will stay on hold, probably through 2023.

The dots plot above shows no rate changes through 2021 and only one vote (our wager is KC FRB President George) for 2022.  We do have four looking at rate hikes in 2023, but it is clear that the preponderance of members is looking at no rate hikes until we reach the mythical “long run.”  There were two dissenters.  Minneapolis FRB President Kashkari wants a clear rule—no rate hikes until the inflation target is achieved.  Dallas FRB President Kaplan’s dissent was a bit difficult to follow—he wants greater policy flexibility in the long run, perhaps to keep the Fed from being tied to keeping rates low indefinitely.  The inflation projections don’t even see achieving the target until 2023, so it doesn’t make sense to raise rates in 2022 if preemption is no longer the basis of monetary policy.

The press conference was fairly standard, although Bloomberg’s Mike McKee raised a bit of a concern when he suggested the Fed was out of tools.  Powell dissented from that view but the remaining tools, balance sheet expansion and forward guidance, are probably less effective than rate cuts.  And there was the matter of the improved economic projections; although the economy isn’t expected to be overly strong, there was a notable uptick in forecasts, which tends to undermine the forward guidance.  There was also a comment about the Main Street lending program, which has been modest up to this point.  Powell did acknowledge the slow start and did admit the program is dependent on banks doing the lending.  He suggested that as banks become more comfortable with the program, its use will likely improve.  There were also questions about commercial real estate.  In general, the Fed is getting close to specific aid to individual sectors, an area in which the bank does not like to be.  But, in the absence of fiscal action, the Fed may have no alternative.

So, in the end, what disappointed financial markets?  The reaction of equities and precious metals would suggest this was a hawkish outcome.  This is hard to square; if keeping rates steady through 2023 at zero is a hawkish outcome, we are in an odd place.  The best explanation of why we are seeing risk off this morning is the realization that the Fed isn’t out of tools to prevent further weakness but is probably powerless to actually stimulate the economy.  For that, we would likely need to see either (a) renewed “animal spirits,” i.e., private sector investment and activity, or (b) fiscal stimulus.  On that front, the president appeared to triangulate the Senate GOP, suggesting that his party should support a larger economic stimulus package.  We are not surprised to see the White House press for such action; after all, this is an election year and American history is full of examples of presidents pushing for “pump priming” the economy to improve re-election chances.  And, we are not surprised to the Senate GOP oppose such measures; this wing of the GOP is establishment oriented and prefers slower growth with higher profits.  We are surprised at how long it has taken the White House to recognize that fiscal stimulus is in its interest.

The Abraham Accords:  Israel, the UAE and Bahrain signed an important peace accord earlier this week, with Arab states giving formal diplomatic recognition.  In return, Israel agreed to not annex various parts of the West Bank as allowed by the U.S. peace proposal.  We expect other nations to follow at some point; Oman, Qatar and Sudan are likely candidates to join the accord.  The KSA won’t as long as King Salman is in power, but we believe his son, Crown Prince Salman, will likely agree once he becomes king.

  • What is behind all this? The U.S. is making it unambiguously clear that it is reducing its footprint in the region.  Troop levels in both Afghanistan and Iraq are down to the point where it is becoming dangerous to keep them in place (too small to retaliate or intimidate, but too large of a target), and it is obvious that the U.S. actions since the Bush administration have less to do with the region.  That doesn’t mean complete withdrawal, but it does mean the U.S. will have less involvement.  Whenever a hegemon leaves, it raises the question of how the area will function.  Optimists argue that when the hegemon leaves, the remaining nations must figure out how to get along.  Pessimists simply wait for the region to deteriorate.  To some extent, we are seeing both; Iraq remains unsettled and Syria is very unstable.  The Arab states, facing a hostile Iran and a disinterested U.S., have concluded that making peace with Israel and forming alliances is the best way to protect themselves.  Israel has a formidable military; alliances with the Arab states give Israel strategic depth.
  • It’s not just Iran. Turkey has shown signs of wanting to expand its influence.  For the Arab states, Turkey is a problem.  It is pushing for a form of democratic Islam and has been supportive of the Muslim Brotherhood, an anathema to the royalist Arab nations.  Although Israel and Turkey were once allies, relations have deteriorated; thus, Israel and the Arab states can make common cause to contain Turkey’s influence.
  • The Arab states have already made it clear they want improved weapons systems. The U.S. has always given Israel technological advantages in arms, selling systems to others in the region that are not the “latest and greatest.”  Israel is not all that comfortable with this part of a deal, but this may be its “give up.”
  • Israel has not promised to never annex parts of the West Bank but will refrain for now. Essentially, by teaming up with Israel, the UAE traded a possible short-term postponement of annexation for improved security.  Simply put, with a less involved U.S., the Palestinians and their cause were secondary to the security needs of the Arab states.
  • In the end, we see this agreement as part of the evolution of the region as the U.S. begins to shift its focus to the Far East. Ironically, integrating Israel into the region seems to have required the U.S. to show less interest; as long as the U.S. was there to manage security, the Arab nations could hold up the symbol of the Palestinian cause.  But, left to their own devices, the Arab nations have come to realize that Israel as an ally is probably necessary.  The Trump administration did achieve a breakthrough here by making the parties realize their own interests.  We will have more to say on this topic in a future WGR; if you are interested in further background, we would recommend this podcast.

Brexit:  PM Johnson conceded some power in the controversial withdrawal bill, agreeing that MPs must approve additional powers to override the treaty with the EU.  This concession would create an “emergency power box” that only MPs could open if they wanted to break the EU withdrawal treaty.  It is unlikely this concession will be enough to satisfy the EU.  In a long interview with the Sun, Johnson argued that the EU was being “abusive” to the U.K. and thus needed this new legislation.  Meanwhile, the EU appears it will extend access to London clearing houses until mid-2022 to prevent financial market disruption.

China News:

COVID-19:  The number of reported cases is 29,897,412 with 941,363 deaths and 20,337,872 recoveries.  In the U.S., there are 6,631,568 confirmed cases with 196,831 deaths and 2,525,573 recoveries.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high frequency data on various factors.  The weekly state Axios chart has been updated.

Virology: 

EU state of the union:  EU President von der Leyen delivered her first state of the EU speech yesterday.  The talk was generally well received; she warned Russia about its actions against the EU.  She also criticized China for its human rights abuses.  The problem with EU/China relations, to a great extent, comes down to Germany’s deep ties to China.  Berlin is clearly trying to avoid a confrontation with Beijing, fearing it will lose its investments in China.

Economy and Markets:

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Daily Comment (September 16, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today focuses on the Federal Reserve, highlighting what to expect from its policymaking meeting today, discussing one key result of its ultra-loose policy, and describing the latest developments regarding Judy Shelton’s nomination to the Fed’s board.  We also discuss the latest U.S.-China tensions as well as other key news this morning.

U.S. Monetary Policy:  The Federal Open Market Committee is meeting today, but it is not expected to make any change to its target interest rate or its asset-buying programs.  Rather, investors will be looking for the FOMC to revise its economic forecasts upward and provide additional detail on its new approach to setting monetary policy; this would allow inflation to run above target temporarily in order to spur employment gains and make up for periods of below-target inflation.

  • The Fed’s ultra-low interest rate policy since the onset of the coronavirus pandemic has encouraged a boom in mortgage refinancing, which in turn has spurred a boom in new mortgage-backed security issuance.  According to an analysis by industry research firm Inside Mortgage Finance, the value of single-family mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac totaled almost $322 billion in August, setting a new monthly record.  Still, yields for the securities have held relatively steady in recent months, and even declined slightly, reflecting continued tremendous demand for them.
  • Separately, President Trump’s attempt to place Judy Shelton on the Fed’s board of governors appeared to be in danger after senior Republican Senator John Thune said she lacked enough support in the Senate to win confirmation.  Shelton’s nomination as a governor of the US central bank has been controversial because of her sympathy for the gold standard, her fierce criticism of the Fed as an institution, and questions about her independence from President Trump.

U.S. Regulatory Policy:  According to the Wall Street Journal, the Federal Trade Commission is gearing up to file a possible antitrust lawsuit against Facebook (FB, 272.42) by the end of December, based on its year-long investigation into concerns that the company has been using its powerful market position to stifle competition in the social media market.  The FTC hasn’t yet made a final decision to bring the case, but if it does, it would highlight the increasing regulatory risk faced by high-flying technology companies.

United States-China:  The World Trade Organization ruled that some U.S. tariffs imposed against China in 2018 as retaliation for its theft of U.S. technology are invalid because they apply only to it and not to other countries, in contravention of WTO requirements.  The Office of U.S. Trade Representative Lighthizer criticized the ruling as evidence of the WTO’s inability to adapt to China’s rise and prevent Chinese trade abuses. The ruling likely will have no consequence, because the U.S. has blocked the WTO’s appellate system from functioning.  Nevertheless, the ruling serves as a reminder of the administration’s no-holds-barred pushback against China and the global trading system.  Separately, we now have details on the shotgun marriage between Oracle (ORCL, 60.94) and the Chinese social media app TikTok.  Under the proposal, the Chinese media firm Bytedance would put its entire global TikTok business into a new U.S. headquartered company, with Oracle investing as a minority shareholder.  Other U.S. investors, including Walmart (WMT, 137.36), could also take a minority stake.  Bytedance would remain the majority shareholder, retain control of its powerful algorithms, and continue to collaborate with TikTok, but otherwise would theoretically be a silent stakeholder.  Data on American users of TikTok would be managed and stored strictly in the U.S.  It is unclear whether the arrangement would address President Trump’s concerns about TikTok’s U.S. user data being sent to China.  If not, the president has threatened to ban TikTok from the U.S. market by September 20.

United States-Canada:  In contrast to its criticism of the WTO decision, the administration moved to drop the 10% tariffs it just reimposed last month against Canadian aluminum.  Those tariffs were roundly criticized by U.S. businesses and Canadian officials, but their reversal appeared to be prompted by Canada’s unveiling of counter-tariffs it planned to impose on U.S. goods as early as today.

European Union-Russia:  In her annual State of the Union speech today, European Commission President Ursula von der Leyen warned against closer ties with Russia and said she would put forward proposals for a U.S.-style Magnitsky Act to sanctions people involved in human rights abuses worldwide.

Russia:  Opposition leader Alexei Navalny, after regaining consciousness in the German hospital where he has been undergoing treatment since being poisoned in Siberia last month, promised he would soon return to Russia to continue his fight against the Putin government.  His return will likely make Navalny a continuing thorn in President Putin’s side.

Japan:  As widely expected, the Diet approved Yoshihide Suga, the newly elected chief of the Liberal Democratic Party, as the country’s new prime minister.  To emphasize his commitment to political stability and continuity with former Prime Minister Shinzo Abe’s policies, Suga immediately appointed a new cabinet that included several key ministers from the Abe administration.  For example, Finance Minister Taro Aso, Economy Minister Yasutoshi Nishimura, and Foreign Minister Toshimitsu Motegi will all keep their jobs, while the defense minister’s post will go to Abe’s younger brother, Nobuo Kishi.  We currently plan to provide a biography and an analysis of Suga in our Weekly Geopolitical Report next Monday.

COVID-19:  Official data show confirmed cases have risen to 29,611,845 worldwide, with 935,929 deaths and 20,105,101 recoveries.  In the United States, confirmed cases rose to 6,606,859, with 195,961 deaths and 2,495,127 recoveries.  Here is the interactive chart from the Financial Times that lets you compare cases and deaths among countries, scaled by population.

Virology

  • Confirmed U.S. infections jumped by more than 52,000 yesterday, but the seven-day moving average of newly confirmed infections remained well below 40,000, and the seven-day moving average of deaths remained at approximately 750.
  • In Ireland, Prime Minister Micheál Martin, his entire cabinet, and all of parliament were thrown into chaos for several hours on Tuesday after the health minister fell ill with symptoms suggesting he might have COVID-19.  A test on the health minister later came out negative; nevertheless, the ordeal posed a serious disruption on the very day that Martin set out his master plan to tackle the pandemic.

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