Author: Donna O'Donnell

Daily Comment (September 15, 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 some positive coronavirus developments, including further progress on vaccines and treatments, policymakers’ reluctance to reimpose mass lockdowns, and a broadening economic recovery in China.  Those developments go far toward explaining the solid bid for risk assets so far today.  However, we also review new developments in the global pushback against the rising Chinese global profile, which remains a risk for the markets.

COVID-19:  Official data show confirmed cases have risen to 29,315,282 worldwide, with 929,171 deaths and 19,882,900 recoveries.  In the United States, confirmed cases rose to 6,555,384, with 194,547 deaths and 2,474,570 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

  • Newly confirmed U.S. infections again fell slightly yesterday, bringing the seven-day moving average down to approximately 34,500.  The seven-day moving average of coronavirus-related deaths has now fallen to approximately 750.  However, authorities remain concerned that infections and deaths could be boosted again following the likely required evacuations as Hurricane Sally makes its landfall early tomorrow.
  • Reflecting global policymakers’ reluctance to reimpose mass lockdowns, French Prime Minister Castex said he won’t impose a new nationwide lockdown despite the new resurgence of infections in France.  Instead, cities including Marseilles and Bordeaux announced several targeted restrictions, including limits on partying and large events.
  • Rapid coronavirus testing machines manufactured by Becton Dickinson (BDX, 235.90) have reportedly produced a significant number of false positives in about a dozen nursing homes.  False positive test results are a risk in nursing homes because a resident wrongly believed to have COVID-19 might be placed in an area dedicated to infected patients, potentially exposing an uninfected person to the coronavirus.
  • Eli Lilly (LLY, 149.00) and Incyte (INCY, 93.15) said they will seek emergency-use authorization for their rheumatoid arthritis drug Olumiant to treat COVID-19, after a study showed that it helped hospitalized patients recover sooner.  When given in conjunction with Remdesivir, a drug from Gilead Sciences (GILD, 66.34), Olumiant shaved about one day off the median recovery time for patients compared with patients who received Remdesivir but not Olumiant.
  • The United Arab Emirates has become the first country outside China to approve emergency usage of a Chinese coronavirus vaccine candidate, in a vote of confidence for state-backed drugmaker Sinopharm (SHTDY, 12.58).
  • With the winter cold and flu season soon approaching, this article may help you distinguish them from COVID-19.  An important takeaway:  get your flu shot.  Now.

 Economic Impact

  • In a sign that China’s recovery from the pandemic continues to broaden and strengthen, Chinese retail sales in August were up 0.5% year-over-year, marking their first annual gain of 2020 (see data tables below).  Retail sales year-to-date are still down 8.6% from the same period one year earlier, but the strengthening trend suggests the Chinese recovery, which initially came from government support for business and public investment, has now started to encompass consumer demand as well.
    • Separately, the data showed August industrial production was up 5.6% on the year.
    • The continuing Chinese recovery could help pull along the rest of the world unless U.S.-China tensions intervene.  Because of Germany’s strong exports to China, the German stock market has recently been performing especially well compared to other European markets.

 U.S. Policy Response

  • With the White House and congressional Democrats still at loggerheads over a new round of pandemic relief spending, economists are increasingly warning that the U.S. rebound could lose steam in later 2020 or early 2021, creating a drag on the global economy as it tries to recover from the coronavirus.
    • It appears that many people have been lulled into a false sense of security by policymakers’ apparent reluctance to reimpose mass lockdowns, the continued economic reopening, huge job gains in recent months, and only limited signs that the current rebound is petering out. However, it’s important to remember that incoming data through the autumn could show a marked slowdown in the recovery.
    • The summer resurgence in the virus in some places and the expiration of the federal supplementary unemployment insurance of $600 per week at the end of July has probably just started to weigh on demand in August.  The drag from those developments was probably offset, to some extent, by continued economic reopening. However, a key test will be when we start to see the major economic reports for August and September.  We’re especially focused on the August retail sales data coming out tomorrow and the University of Michigan’s preliminary September Consumer Sentiment Index on Friday.
    • As we’ve argued before (see our Asset Allocation Weekly from August 7, for example), the lack of significant financial aid to state and local governments also creates a risk that they will have to slash their payrolls and spending plans in the coming months, which could offset much of the other economic stimulus being provided by the federal government.
    • Of course, a sudden worsening in the economic data could conceivably spur quick action on a new spending bill, but there is limited time before Congress takes a break for the election.  In addition, any delay in providing new support runs the risk that many firms will have to close their doors for good, and many workers will drop out of the labor force permanently.

 Foreign Policy Response

 United States-China:  The Trump administration yesterday banned cotton apparel, computer parts, and other imports from several companies and suppliers that allegedly use forced and imprisoned labor in China’s Xinjiang region.  The targeted entities include four commercial firms, one training center, and an industrial park.

  • The move builds on the bans imposed against four other entities over the last year; it is in response to concerns about Chinese repression of its Uighur minority in Xinjiang.
  • Coupled with other recent U.S. moves in the geopolitical, military, trade, and technology spheres, the new bans illustrate increasing U.S. pushback against Chinese policies around the world.  We continue to believe that rising U.S.-Chinese tensions are a significant risk to global equity markets.

European Union-China:  In yesterday’s four-way video summit between European Commission President von der Leyen, European Council President Michel, German Chancellor Merkel, and Chinese President Xi, the European side delivered a pointed message that China should not see the EU as any easier of a rival than the U.S.  The Europeans also stressed that Beijing still has a long list of commitments to fulfill if it wants to complete a long-planned investment agreement.  In other words, the summit provided more evidence that other major democracies besides the U.S. are also starting to push back against China.

Germany:  Chancellor Angela Merkel and Interior Minister Horst Seehofer have proposed that Germany take in 1,500 stranded asylum seekers after last week’s devastating fire at the Greek refugee camp of Moria.  The proposal threatens to reignite the vexing political debate over how the EU should deal with migrants knocking at its doors.

United Kingdom:  Parliament last night gave second-reading approval to Prime Minister Johnson’s “internal market” bill by a vote of 340 to 263, despite a rebellion by many in Johnson’s own Conservative Party.  Registering their opposition to provisions allowing the government to abrogate its Brexit treaty with the EU in contravention of international law, two Tories voted against the bill outright, while 30 abstained from voting, including former Chancellor Sajid Javid, two former attorneys general, and two former Northern Ireland secretaries.  That presents some risk that the government will have to make concessions when the next key votes on the bill are held next week.

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Daily Comment (September 14, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

Happy Monday!  U.S. equity futures are recovering strongly this morning.  The Fed meets this week; although no new policy measures are expected, we look for the press conference to push for additional fiscal spending.  Tropical Storm Sally (we are on the “S” names!) is bearing down on Louisiana.  This is usually around the peak of hurricane activity; Sally is the 18th named storm this year, the fastest we have reached this level on record.  We lead off with news about TikTok.  China news is next, with coverage of the China/EU summit.  The latest on Brexit follows.  International news is next, including reports on Iran, Russian elections, Taliban talks and discussions between Turkey and Greece.  The COVID-19 update follows, and we close with market news.  Here are the details:

TikTok:  And the winner is…Oracle (ORCL, 57.00) which is up around 7% in premarket trading.  The company won over Microsoft (MSFT, 204.03), which is off modestly in the early market activity.  The deal structure appears complicated; it may be a sort of partnership rather than an outright purchase.  And it isn’t finished either.  The Committee on Foreign Investment in the U.S. (CFIUS) still must approve whatever is decided.  Data security issues will need to be resolved.  In addition, it isn’t clear whether the Bytedance algorithms, the real value in the company, are part of the agreement (the reason it may be structured as a partnership).

China news:

  • The EU/China summit will be held virtually due to the pandemic. The two key topics are economic ties and human rights.  Regarding the latter, the Uighur suppression and the security law in Hong Kong are issues.  The economic issue is that the EU and Chinese economies have become so entwined that the costs of standing up to China over rights have become prohibitive.  The biggest problem is arguably Germany; German investment in China is large, making the country vulnerable to expropriation.  Like the U.S., the EU is also unhappy with China’s trade policy, accusing Beijing of restricting imports.  In a show of power, China has banned pork imports from Germany on the grounds of disease control.  Although Germany has reported a case of African Swine Fever, the disease that has decimated the Chinese pork industry, the more likely reason is a warning shot to Berlin that China is willing to take adverse trade actions.
  • In related news, in the wake of the African Swine Fever, China’s agricultural industry is looking to rebuild its herds. The problem is that farmers lack the financing to buy piglets to get restarted.  China’s banks are being encouraged to lend against the livestock itself, a risky proposition due to the uncertainty surrounding the collateral for the loan (even if the hogs are healthy, what banker would want to actually claim such collateral?).  Without a financing mechanism, the rebuild in hog herds will be slow, dampening grain demand.
  • The problem with China’s dominance of the rare earths industry has been an issue for about a decade. Rare earths are a bit of a misnomer; they are far from rare.  However, mining and processing these metals are an environmental problem.  Some 25 years ago, China realized that its willingness to tolerate the environmental degradation was a powerful feature, and it came to dominate the industry.  These metals are used in critical components of high technology and defense, and the West is dependent on China for these metals.  In light of this threat, the U.S. government is helping to fund a rebuilding of the U.S. rare earths industry.  It will be difficult to do; U.S. environmental regulations are stricter.  In addition, there is a tort bar in the U.S.  At the same time, without a reliable supply of these metals, the U.S. and the West could be at risk.
  • Terry Branstad, former governor of Iowa and current Ambassador to China, is stepping down.

Brexit:  Parliament begins an open debate on the proposed internal market bill, and opposition is growing.  Two former PMs, John Major and Tony Blair, have come out against the proposal.  Twenty Tory MPs are opposed to the measure; that isn’t enough to scuttle it, but the bill might not make it through the House of Lords.  In an interesting note about trade talks with Japan, the U.K. has agreed to a stricter state aid curb than would be required by the EU.  We note that the GBP is strengthening this morning; it is possible that the financial markets are leaning toward a failure of Johnson’s measure.

International news:

COVID-19:  The number of reported cases is 29,030,058 with 924,814 deaths and 19,648,306 recoveries.  In the U.S., there are 6,520,606 confirmed cases with 194,084 deaths and 2,451,406 recoveries.  WHO reports 307,930 new infections, the highest single-day total for the world.  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: 

Economic and market news:  Canada is preparing retaliatory tariffs on U.S. goods in response to American tariffs on aluminum.   Turkish investors are buying gold as the lira weakens.  They are also purchasing home safes for storing it.  South African miners are thriving as high gold prices and a weak SAR are improving margins.  Redfin (RDFN, 48.36) reports its calculation of median home prices is up 13%, and housing activity is strong.  Working from home has encouraged households to seek larger homes in more affordable areas.  One interesting development is that some tech firms are considering cutting pay to workers who leave high-cost areas, such as the Bay area.  We will watch to see if there is a pushback on this idea.  Although adjusting pay to local costs is clear in the wage data, that isn’t how workers view their pay.  Most of us view our pay as a measure of our work value.  Finding out that some of it is attributed to where we live will likely prove to be unpopular.  One of the issues we are watching is the availability of credit to smaller agricultural entities. In general, banks tend to feel more comfortable lending to larger firms; if financing to small farms and food processors dries up, it could lead to further industry consolidation.

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Daily Comment (September 10, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

Equity markets were mostly flat to higher this morning, generally holding yesterday’s recovery. The ECB meets this morning; there was pre-meeting speculation that the ECB may try to weaken the EUR.  As we note below, this didn’t occur.  We lead off with Brexit. The Johnson government is facing a growing reaction to its plans to jettison its earlier agreement with the EU.  China news is next, followed by an update on the pandemic.  We discuss recent problems in North Korea.  Tech and business news close the report.  Due to the Labor Day holiday, the DOE energy data was delayed, so the Weekly Energy Update will be published tomorrow.  Here are the details:

ECB:  In initial comments, ECB President Lagarde said that there was no need to overreact to the EUR’s recent appreciation.  Given that, at least based on our valuation analysis, the EUR is still undervalued (fair value being just above $1.30), her position makes sense.  However, the EUR has appreciated on the news.

Brexit:  We continue to closely monitor trade negotiations between the EU and Westminster.  As we discussed yesterday, former members of the Johnson government viewed recent legislation being proposed by the U.K. as violating international law.  The FT editorial board questioned the wisdom of circumventing previously passed legislation.  Ireland, which would be at the frontier of the dispute, spoke out against the Johnson government’s proposals.  The EU is also expressing “concern.”  The Johnson administration is arguing that the PM didn’t fully understand what he was signing and thus should be able to rewrite it.  Although both sides are putting up a brave face, no trade arrangement would be hard on both sides.  Last year, 43% of U.K. exports went to the EU and 51% of U.K. imports came from the EU.  We still expect an arrangement to be struck at some point.  There is a growing chance that a hard Brexit may occur, which would be a bearish event for U.K. financial assets.  However, we doubt it would be very deep or long-lasting; in our experience, bad events that are well known in advance rarely cause lasting disruptions.  Thus, a drop in values may be an opportunity.

China news:

  • As the U.S. slowly removes itself from hegemony, we continue to monitor how other nations react. For example, in the eastern Mediterranean, France recently committed to supporting Greece against Turkey’s actions around Cyprus.  In Afghanistan, as the U.S. withdraws troops, China is increasing infrastructure investment in return for the Taliban and other groups cooperating to maintain order.  The U.S. experience would suggest that mere public investment alone won’t be enough, but it is notable that China is taking these steps.  Conditions in Afghanistan are deteriorating; the vice president narrowly escaped an assassination attempt.  Apparently, Beijing is worried about civil conflict disrupting the “road” part of the “one belt, one road” project.
  • The “visa wars” continue. Australia has revoked the visas of two Chinese scholars in retaliation to China’s harassment of Australian journalists.  The U.S. has cancelled over one thousand visas issued to Chinese nationals over security concerns.  The fallout from these actions remains unclear.  Australia is dependent on Chinese demand for its commodity products, although given the relative fungibility of such goods, commodity import restrictions don’t end up causing a loss of sales but an adjustment of trade flows.  If China doesn’t buy Australian iron ore, it will probably buy it from Brazil.  But the Brazilian customer who loses out to China will likely purchase the Australian iron ore China refused to buy.  The change isn’t costless; it increases inefficiency, at least at first, but it doesn’t mean the permanent loss of sales.
  • Brad Setzer, one of the best analysts on trade and investment flows, notes that despite the rhetoric the U.S. and China are falling into familiar patterns—China is oversaving and thus boosting exports and the U.S. is absorbing them. The basic problem isn’t really trade, it’s macroeconomic policy.  Tariffs don’t change those factors by themselves.  To fix the trade deficit, the U.S. needs to boost saving and China needs to increase spending.  Both actions would be disruptive, so they tend not to occur.
  • TikTok is trying to work out a plan to avoid selling its overseas operations.
  • Hong Kong stock exchanges are winning more listings of firms that have listed in the U.S. We suspect these are a backup in the event that the financial relationship with the U.S ruptures.  On a related note, despite a clear policy direction of reduced relations with China, financial firms continue to deepen their relations with Beijing.  Some of this is a divergence between the views of populists and establishment ideals.  For nearly four decades, U.S. firms have moved operations to China and U.S. policymakers have been mostly encouraging this action.  The policy appears to be changing but old habits die hard.
  • On a related note, Germany is struggling to respond to China’s human rights violations due to deep economic ties to Beijing. The economies have become so deeply entwined that it may be nearly impossible to break them absent of a kinetic war.
  • U. S. surveillance of Chinese naval exercises continues. China has been expanding these war games, and the U.S. is clearly interested in seeing what they are up to.  Needless to say, China would prefer to operate without observation.
  • Reports suggest that Chinese farmers are hoarding their wheat harvest, expecting higher prices because of recent flooding.

COVID-19:  The number of reported cases is 27,897,904 with 904,364 deaths and 18,797,729 recoveries.  In the U.S., there are 6,363,437 confirmed cases with 190,885 deaths and 2,387,479 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 Axios state map shows a continued downtrend in infections.

Virology: 

 North Korea:  As we noted earlier, the Hermit Kingdom was hit with two typhoons, Haishen and Maysak.  The two struck North Korea hard, causing serious infrastructure damage and destroying an estimated two thousand residences.  Kim Jong Un admitted that the storms will upend the country’s development plans for the year and is pressing on party members to help the country recover from the damage.  The country was struggling before the typhoons due to COVID-19 and sanctions.  These storms will increase its dependence on China.

 Tech policy:  Although there isn’t much chance it will be passed, three GOP senators have introduced legislation that would narrow the scope of Section 230 of the Communications Decency Act.  The proposed change would reduce the immunity that social media firms currently enjoy from the content appearing on their websites.  Although this effort will probably fail, we do expect that, at some point, the social media firms will have to choose between either accepting less immunity or being broken up.  It is difficult to reconcile the market concentration these firms enjoy with the protection they receive.  Meanwhile, across the pond, Facebook (FB, 273.72, +2.56) may no longer be able to send EU data back to the U.S. due to privacy concerns.

Economic and market news:  There are increasing reports of softness in the apartment market.  In New York, the COVID-19 exodus has led to a jump in apartment vacancies.  Some new apartment projects are offering two months of free rent to entice new tenants.  Reports indicate that renters are, for the most part, maintaining the rent payments.  As of September 6, 76.4% of renters made some form of payment.  The percentage is declining, but slowly.  We continue to monitor this data because it is looking less likely that Congress can come up with another round of stimulus.  Forecasters are lifting their expectations for Q3 GDP.  However, there are concerns (which we share) that the recovery will be very slow.  Finally, France says the U.S. is blocking talks on a global digital tax.  This is no surprise; the incidence of such a tax would fall heavily on American tech firms.  Although there are clear concerns about tech firms in the U.S. (see above), Washington has no real interest in having foreign governments implement taxes that would adversely affect U.S. companies.

 Odds and ends:  London bridge(s) is falling down.  Who knew?

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Daily Comment (September 9, 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 includes a discussion of the recent rout in large cap tech stocks and where we go from here, as well as an update on the latest coronavirus news.  As always, we also discuss the day’s key geopolitical developments, particularly those involving China, India, and the U.K.

United States:  Large cap technology equities are rebounding so far this morning, after the NASDAQ index fell into correction territory yesterday, but we still want to say a few words about their recent rout and where we go from here.  Reporting over the last few days suggests the runup in large cap tech during the spring and summer stemmed largely from a massive purchase of call options by Japan’s SoftBank Group (SOBKY, 12.58) and other investors.  Those purchases forced the trading counterparties to hedge their positions by buying the underlying equities.  According to the Wall Street Journal, SoftBank alone bought billions of dollars of the calls and the underlying stocks as well.  It also sold call options at far higher prices, which would allow SoftBank to profit from a near-term runup in stocks and then reap those profits by unloading its position to willing counterparties.  In a word, it’s possible to sniff a bit of market manipulation in the air.  That goes far toward explaining the quick sell-off in large cap tech stocks and other risk assets once some investors started to head for the exits.  All the same, looking at the longer term, we still think the impact of continued ultra-low interest rates and expansive fiscal policy is profoundly bullish for risk assets.  Once the markets reach a support level (for the S&P 500, yesterday’s close near the previous market peak would be one candidate, while another potential support level might be at about 3,215), we would not be surprised to see the beginning of a new uptrend, even if it might be more disciplined than the one that ended last week.

COVID-19:  Official data show confirmed cases have risen to 27,610,660 worldwide, with 898,297 deaths and 18,567,842 recoveries.  In the United States, confirmed cases rose to 6,328,154, with 189,699 deaths and 2,359,111 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 26,000 yesterday, helping drag the rolling seven-day moving average below 40,000 for the first time since late June.  The U.S. death toll related to the virus also declined, bringing its rolling seven-day average farther below 1,000.  Abroad, India continues to show some of the worst virus dynamics, with new infections yesterday rising by almost 90,000 and deaths topping 1,100.  In the U.K., the government banned social gatherings of more than six people as a surge in new cases suggested the country could be on the verge of a second wave of the pandemic.
  • British drug giant AstraZeneca (AZN, 54.71), which is developing one of the leading candidates for a coronavirus vaccine with researchers from Oxford University, said it is temporarily suspending its Phase III trial of the substance because of an unexplained illness in one of the participants.  Despite the setback, the stock is down only moderately so far this morning, even though the disappointment could favor one of the competing vaccines under development.  Amid the heightened geopolitical competition to come out with a workable vaccine, it’s even possible that a state actor like China or Russia could have sabotaged the British project in order to make their own candidate look better.  In any case, a key risk is that the news could feed into public distrust regarding the safety of any quickly developed vaccine.  That could reduce the public’s willingness to get vaccinated and prolong the pandemic to the detriment of the global economy and financial markets.
  • In an effort to assure the public that they’re not compromising safety to get a vaccine out quickly, the CEOs of AstraZeneca and eight other major drug firms signed a pledge promising not to file for regulatory approval or authorization of their experimental vaccines until the shots have been shown to work safely through late-stage clinical testing.
    • In the pledge, the companies say that the safety and well-being of vaccinated individuals would always be their priority.
    • The firms also say they will keep following scientific and ethical standards in clinical trials and manufacturing.
  • In contrast with the effort to demonstrate caution by U.S. and European drug firms, the Russian health ministry said the first batch of the country’s Sputnik V vaccine has been released for civil distribution.  According to the ministry, a countrywide vaccination campaign will begin next month following post-registration tests, even though more than half of the doctors surveyed by the polling agency Doctor’s Manual said they did not trust the new vaccine.

 U.S. Policy Response

  • Senate Republicans proposed a new “skinny” pandemic relief bill with a total cost of around $650 billion (and a net cost of $300 billion after taking into account the use of $350 billion in unspent funds from earlier coronavirus packages).
    • The bill includes supplemental federal unemployment benefits of $300 per week through December 27, liability protections for businesses, and new funding for schools, among other measures. It also adds new tax credits for private school scholarships and homeschooling expenses.
    • Notably, the bill doesn’t include funding for a new round of stimulus checks to be sent directly to individuals, and it includes no broad aid for state and local governments.  The bill would also eliminate $200 billion in funding to support the Fed’s emergency lending programs.
    • In sum, the package remains far below the levels demanded by congressional Democrats, suggesting the bill is no more likely to pass than the $3.5-trillion bill being pushed by House Democrats.  The stalemate continues.

 China-India:  The Chinese and Indian armed forces accused each other of firing warning shots in a new skirmish along the countries’ disputed border in the Himalaya mountains, marking a dangerous new escalation in the border crisis.  If any of the accusations are true, it would mark the first use of firearms between the countries since an agreement was signed decades ago to outlaw them in the region.  Moreover, the Indian military said it would station thousands more troops in the region during the brutal winter than it normally would, which is likely to keep alive the risk of further escalation and a potential geopolitical crisis.

United States-China:  We often talk about the long-term pressures pushing back against globalization and the U.S. pullback from its traditional role as global hegemon, but it’s important to remember that these trends can proceed slowly, in fits and starts.  As evidence of that, the American Chamber of Commerce in Shanghai has published a survey showing that fewer than 4% of its members were relocating some production capacity back to the U.S.  More than 70% said they had no plans to relocate any manufacturing out of China despite higher tariffs from President Trump’s long-running trade war with the world’s second-largest economy.

United Kingdom-European Union:  Confirming what we reported in yesterday’s Comment, the U.K.’s Northern Ireland Secretary admitted in parliament that the government will abrogate its Brexit agreement with the EU regarding Northern Ireland customs procedures and state aid to private companies.  However, in a failed effort to mollify the MPs, the official assured them that the action would only “break international law in a very specific and limited way.”

Belarus:  Police have apparently arrested yet another member of the Coordination Council, which is leading the political opposition against President Lukashenko after his apparently fraudulent reelection.  That means five of the seven members of the council have now been detained as Lukashenko cracks down on his opponents.

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Daily Comment (September 8, 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 Comment today opens with a discussion of the weekend’s big developments in the U.K.-EU trade negotiations.  We also discuss the latest new tensions between the U.S. and China, and, as always, we provide a recap of the latest coronavirus news.

United Kingdom-European Union:  Just ahead of the next U.K.-EU negotiating session regarding a post-Brexit trade deal today, top British negotiator David Frost insisted on Sunday that Britain would not blink on the remaining key stumbling blocks of fishing rights and state aid.  On top of that, Prime Minister Johnson warned yesterday that if a deal isn’t reached by October 15, the U.K. will simply walk away from the negotiations.  Finally, the Financial Times reported over the weekend that the government is preparing to “override” portions of the Brexit agreement that the U.K. and the EU signed just eight months ago.  Specifically, the U.K. government would cease to abide by the provisions in the agreement governing Northern Ireland customs and prohibiting state subsidies to private firms.  That would essentially put the U.K. in the position of breaching a formal pact and violating international law, even as it castigates China for breaching its commitments to the “one nation, two systems” arrangement for Hong Kong, and as it tries to negotiate new trade deals with the U.S. and other countries following its exit from the EU.  As evidence of how dramatic the move is, the permanent secretary of the British government’s legal department even resigned to protest the move.  One wonders whether the British officials involved in the move might have ancestors who assisted in the U.S. government’s breaking of its treaties with American Indian tribes!  In any case, the British posturing is further raising the risk that the interim U.K.-EU trade deal currently in place could soon expire, leading to a sudden rupture in U.K.-EU trade.  As a result, the British pound has depreciated significantly in recent days.

European Union:  European Commission President Ursula von der Leyen said she has chosen Valdis Dombrovskis, the former Latvian prime minister and current EU executive vice president for economic policy, to take on the additional key role of trade policy chief.  Dombrovskis will replace Phil Hogan of Ireland, who was forced to resign the trade position after breaking coronavirus protocols.  As consolation, Ireland’s replacement EU commissioner, Mairead McGuinness, will instead be in charge of financial services and financial stability.

Germany-Russia:  As Russian opposition leader Alexei Navalny came out of the coma doctors had put him into after his recent poisoning, German Chancellor Merkel said she couldn’t rule out including the Russia-Germany Nord Stream 2 gas pipeline in possible sanctions against Russia for the poisoning.

Belarus:  The Coordination Council leading the opposition against President Lukashenko said Maria Kalesnikava and two other members of the panel were kidnapped by unknown people in the center of Minsk.  Eventually, it appears that the three were taken to the Ukrainian border to kick them out of the country, but Kalesnikava tore up her passport to prevent the move.  Her situation is unclear at the moment.  In any case, the bizarre events suggest Lukashenko is cracking down on the political opposition after nearly a month of protests against his own apparently fraudulent reelection.

China:  Seeking to change its reputation for digital spying and theft of intellectual property, the Chinese government today plans to start pushing a new “Global Initiative on Data Security” that calls on all countries to upgrade data security and maintain an open, secure and stable market for information and communication services.  Of special interest to China, the plan would also urge governments to respect other countries’ sovereignty regarding how they handle data—in line with Beijing’s vision of “cyber sovereignty,” whereby countries exercise full control over their own corners of the internet.  The plan would also oppose “mass surveillance against other states,” and call on tech companies not to install “backdoors in their products and services to illegally obtain users’ data, control or manipulate users’ systems and devices,” although those are some of the most worrisome activities that the major democracies say Beijing itself is guilty of.

United States-China:  President Trump said in a Monday press conference that he is considering “decoupling” the U.S. economy from China, and he threatened to block companies that outsource jobs to China from bidding on U.S. government contracts.  Separately, U.S. apparel groups are expecting a Trump administration decision as early as this week, blocking imports of Chinese-made textile and apparel products because they are the products of forced labor in the Xinjiang region of China.

United States:  The main electricity utility serving northern and central California said it has started cutting power to about 172,000 people in 22 counties to reduce wildfire risks. This comes a day after the state narrowly averted rolling blackouts to relieve strain on its electric grid during a heat-wave.

COVID-19:  Official data show confirmed cases have risen to 27,364,931 worldwide, with 893,219 deaths and 18,358,489 recoveries.  In the United States, confirmed cases rose to 6,301,649, with 189,226 deaths and 2,333,551 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

  • Newly confirmed U.S. infections fell to a nearly 12-week low of less than 25,000 yesterday, while the seven-day moving average of new infections declined to just above 40,000.  Reported deaths from COVID-19 remain slightly below 1,000 per day and continue to trend modestly downward.  However, outbreaks associated with college and university re-openings also continue to be a problem.  That has prompted some schools to temporarily revert to online-only classes, raising the specter that owners of student housing properties could face more pain, and that students sent back home will carry the disease along with them.
  • Even though coronavirus infections seem to be moderating, new reporting suggests the crisis to date has worsened the nation’s opioid crisis.  Counties in states spanning the country, from Washington to Arizona and Florida, are reporting rising drug fatalities.
  • International Olympic Committee Vice President John Coates, who heads the IOC’s coordination commission for the Tokyo Olympics, told French news agency AFP on Monday that the Games “will take place with or without COVID,” and Japanese Olympics Minister Seiko Hashimoto insisted the games will be held in 2021 no matter what.

 Economic Impact

  • Oil prices fell to their lowest level in more than two months Tuesday, under pressure from a stalling recovery in demand that has prompted Saudi Arabia to discount its crude exports.  Saudi Arabia’s national oil company, commonly known as Saudi Aramco, cut most of its prices this weekend for crude exports to the U.S., Asia and northwest Europe for October.

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Daily Comment (September 4, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

Happy employment Friday!  We cover the data below, but the quick take is that it was stronger than forecast.  Well, after a steady rise, equity markets took a hit yesterday.  They are recovering this morning, although tech remains under pressure.  China is cracking down on Inner Mongolia; the locals aren’t taking it well.  We cover other China news, too.  Up next is policy news, followed by pandemic updates.  Economic and foreign updates close today’s comments.  And, being Friday, a new Asset Allocation Weekly is available, in the below section and also on our website.  The corresponding podcast and chart book are also available.  Due to the Labor Day holiday, the next Daily Comment will be out on Tuesday of next week and the next Asset Allocation Weekly reports will be published on September 18.  Here are the details:

About yesterday:  As noted above, there doesn’t appear to be any particular news item that triggered the market decline; equity markets do experience occasional inexplicable swings.  The most likely culprit was that equities were frothy, and options market behavior was suggesting excessive speculation.  The rally in tech stocks, and growth in general, had caused market internals to become unbalanced, so the decline was mostly centered in that space.  But, with the Fed continuing to be accommodative, yesterday probably doesn’t signal any changes in direction.  At the same time, we may be seeing a better internal balance.  Value and non-tech may be seeing some flows in the near term.

Inner Mongolia and Beijing:  At the start of the school year, Beijing decided that Inner Mongolian schools would conduct classes in Mandarin instead of the native language.  The locals didn’t take the news well.  Students vacated classrooms (despite attempts by local officials to lock them inside) and haven’t returned.  China’s geopolitics require that the Han core be protected by controlling the outer regions.  Those regions act as buffers to outside invaders.  Stabilizing these areas is critical; ideally, the CPC wants to suppress non-Han culture to prevent any groups from either being wooed by outsiders or acting as an internal threat.  Thus, over the years, Tibetan culture has been suppressed.  Recently, the Uighurs have faced extreme measures to undermine their culture.  Apparently, Mongolians are next.

The exact threat Beijing is facing from Tibet, Xingang or Inner Mongolia is difficult to see.  However, it is clear that General Secretary Xi won’t tolerate anything that smacks of alternatives to the party.  Religion, in general, has been suppressed; Christian churches have been closed.  Falun Gong has been suppressed.  The actions against Hong Kong appear designed to eradicate the very idea of being a “Hong Konger.”  Such behavior doesn’t sound like confident leadership.

Other China news:

  • China’s drive to develop an indigenous semiconductor business appears to be facing some headwinds. A plant in Wuhan is struggling to develop due to the lack of funding.  Another in Chengdu closed for the same reason.  It isn’t clear why the funding isn’t being provided by the government, but it is clear that private investors are not confident in China’s ability to develop this industry.
  • The Global Times, an organ of the Chinese government, is trotting out the old threat not to buy U.S. Treasuries. The report argues that the risk of U.S. credit is rising (which is patently ridiculous; as long as the debt is in the dollar, there is no credit risk) due to the expanding deficit.  There was also the usual “watch out, if you push us, we will dump our bonds,” which is an idle threat, too.  One of two outcomes would occur.  Either the Fed would buy the bonds, keeping U.S. rates steady, or the prices would fall, hurting China’s return.  However, we report this story because there is another possibility.  China’s trade surplus with the U.S. remains large but is narrowing; on a goods basis, year-to-date through July, this year’s deficit is $117.3 billion compared to last year’s $213.4 billion over the same period.  So, it is likely that China will not accumulate as many dollars this year.  It is possible China may decide to hold the reserves in EUR due to the new Eurobond.  We have been seeing the dollar weaken against the CNY for the past few weeks.  This trend may accelerate.
  • China is denominating some of its commodity trade in CNY. Iron ore is being purchased at CNY prices instead of dollars.  For the Brazilian and Australian companies taking CNY as payment, they either must (a) hold the CNY in Chinese financial assets, or (b) buy Chinese goods with the funds.  Of course, an individual company can easily swap the CNY for local currency or dollars, but somebody ends up with CNY from these transactions.  This sort of news does suggest a fracturing of global finance and is a negative for the dollar.

Government shutdown news:  Funding for the government will expire at month’s end.  Amid the continued inability to agree on another stimulus package, there have been worries that Congress would fail to pass an overall spending bill.  This would cause the government to close.  Reports indicate that Speaker Pelosi and Treasury Secretary Mnuchin have agreed on a short-term spending package to avoid this outcome.  Although it would need to pass both houses in Congress, the agreement appears non-controversial and will likely be adopted.

COVID-19:  The number of reported cases is 26,333,573 with 869,306 deaths and 17,543,692 recoveries.  In the U.S., there are 6,151,101 confirmed cases with 186,806 deaths and 2,266,957 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.  Half the states have a Rt below 1%; Massachusetts had the lowest infection rate, while South Dakota had the highest.

Virology: 

  • There is nothing simple about COVID-19. Researchers at the Oak Ridge National Laboratory in Tennessee set the Summit supercomputer to work this summer processing data on 17,000 genetic samples.  This computer is a beast—it was the world’s fastest until last June.  Even with this computing power, it took a bit over a week to process the data.  The research suggests that COVID-19 triggers a “Bradykinin storm”[1] instead of a cytokine storm.  Excess Bradykinin leads to leaky blood vessels and may explain many of the cardio issues reported with COVID-19.  In addition, a rise in this factor can also lead to an overproduction of hyaluronic acid, which acts as a fluid absorber.  In the lungs, it can cause the often-reported effect of people “drowning,” even when on ventilators.  Treatment for a Bradykinin storm includes anti-inflammatory drugs and a whole host of steroids.  Interestingly enough, Vitamin D should also be helpful.  This research is still preliminary, but it does offer potential insights and treatment.
  • A new symptom has emerged from COVID-19―insomnia. It doesn’t seem to be directly tied to the virus itself, but to a psychological response to the stress it causes.
  • It is possible the vaccine that emerges will require cooling. This report discusses the efforts to build a cold storage supply chain.

Economic and Market news:

Foreign news:  In Venezuela, President Maduro has pardoned more than 100 political prisoners ahead of elections.  At the same time, the opposition is splintering, meaning it is possible Maduro could win the upcoming elections fairly.  Meanwhile, in Libya, forces that prevented the eastern region strongman, Khalifa Hifter, from gaining power in the country’s west are breaking into factions and fighting among themselves.  If this continues, we would look for Hifter to make another drive at taking control.

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[1] What’s a Bradykinin?  Here you go!

Daily Comment (September 3, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

Perhaps the biggest news this morning is that equity markets are set to open lower.  Equities have continued to rally in an orderly fashion, with the major indices setting new record highs.  Stocks have been lifted by improving earnings, low interest rates, moderate inflation and expectations of accommodative policy.  We lead off with specific comments about the EUR and other reports about the economy and markets.  Policy news is next; we cover the Beige Book and ongoing negotiations (or lack thereof) over new stimulus.  Foreign news is next, focusing on the fallout from the Navalny poisoning.  China news follows, and we close with the pandemic update.  Being Thursday, a new Weekly Energy Update is available.  Here are the details:

The Eurozone strikes back:  In a recent WGR (and podcast) on the prospects for a Eurobond, we argued that the issuance of such a bond, which would be backed by the full faith and credit of the member states of the EU, could be a catalyst for a new bear market for the dollar.  Given that the dollar is overvalued in terms of purchasing power, the greenback has been ripe for a few years of depreciation, something that should be welcomed by U.S. policymakers.  The EUR has seen a “summer of appreciation”; in May, the EUR was trading around $1.08.  A couple days ago, it touched $1.20.  The move has caught the attention of ECB officials, who worry that the stronger currency will reduce already depressed inflation.  But, it often takes a retired official to really say what is worrying governments—in a Bloomberg interview, Jean-Claude Trichet accused the Trump administration of “beggar thy neighbor” currency policies and suggested that the EUR should be at its levels seen earlier in the summer.  Trichet’s comments are self-serving; the EUR is still well below our fair value estimate of $1.29 and locking in the EUR below that level gives Europe a competitive advantage over U.S. exporters.  Current officials cannot be so candid, but we suspect Trichet is saying what the EU believes.  It wants to remain an export promoter, and a stronger EUR will force Europe to change.

This chart shows the current account relative to GDP for Germany and the Eurozone.  Since the Eurozone crises of the last decade, Germany has used the Eurozone to increase its current account surplus and has turned the entire Eurozone into a “Germany at large.”  A stronger EUR is a threat to this situation.  Will these comments change the trend?  We doubt it.  The EUR is undervalued, and the Eurobond reduces America’s ability to apply economic sanctions.  We view yesterday’s commens as an attempt to slow the appreciation, but not enough to reverse it.

  • The bounce in the dollar hit precious metals prices yesterday. In general, a stronger dollar is bearish for gold.  But, if the U.S. is determined to weaken the dollar and the EU resists, we could create a “race to the bottom” in terms of trying to pull domestic demand from each trading bloc, which should be quite favorable for gold.  In other words, if no one wants a strong currency, a non-liability backed one, like gold, should benefit.

Other economic and market news:

The Beige Book: The Beige Book is an overview of the economy compiled by the regional Fed districts.  It offers a disaggregated view of the economy and can offer some geographic insights about the state of the economy.  In general, the report suggests the recovery continues from the troughs seen in Q2, but the pace does appear to be slowing in most districts.  The labor market conditions described above, where some workers are getting back to work while others are facing layoffs, is shown in this report as well.

Navalny and other foreign news:  Germany has confirmed that traces of Novichok, a nerve agent produced by Russia, has been found in Alexei Navalny, the Russian opposition leader.  German doctors have determined that it was a military-grade agent, suggesting that elements of the Russian security apparatus are probably behind the poisoning.  The key question now is, “What does the West do about it?”  One possibility is that Germany could cancel the Nord Stream 2 project; that outcome would delight Washington and be a blow to Moscow.  Such a move would certainly harm relations between Germany and Russia, but it would send a signal to Putin that his actions do carry consequences.  We could see U.S. natural gas benefit from the cancellation as it would likely increase demand for American LNG.

  • Unrest continues in Belarus. The U.S. is backing an EU proposal for new elections.  One potential problem for Lukashenko is that the tech sector, which has been an area of growth for the country, is considering relocation.  If the companies move, their skilled workers will probably follow.
  • Bulgaria is also facing civil unrest as protestors have been out in force for the past two months opposing the government of Boyko Borissov. The protests are all about high levels of corruption in this Eastern European nation.
  • The Brexit negotiations are at loggerheads; the GBP has eased on concerns. The EU is accusing British negotiators of bad faith, but the EU wants to put Britain in a position where it faces all the restrictions of a member without voting rights.  A hard Brexit is an increasing possibility; the issue for markets is whether a hard Brexit would matter all that much.  There is no doubt the U.K. economy would suffer from a break with the EU.  It would see its trade with Europe plummet and the adjustment would be difficult.  However, in the long run, the kingdom could develop a new policy course.  That would look like the great unknown.  But, for the time being, the odds of a hard break are rising.

China news:

COVID-19:  The number of reported cases is 26,062,946 with 863,741 deaths and 17,316,206 recoveries.  In the U.S., there are 6,115,184 confirmed cases with 185,752 deaths and 2,231,757 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.   Axios has updated its state map; the reopening of colleges has led to a rise of infections in several states.

Virology: 

  • Although vaccines continue to dominate the news, we have paid close attention to treatment options. It is possible we will never get a vaccine that works, or if we do, it may only offer limited immunity, similar to influenza.  However, treatments that reduce the lethality of the disease would reduce the risk of infection and perhaps the costs of natural herd immunity.  It appears that common steroids improve the outcomes for people with severe cases of the disease.
  • Meanwhile, the vaccine debate continues. The CDC has asked states to prepare for distribution of a vaccine by November, and the FDA appears ready to grant emergency use before year’s end.  The political overtones are hard to miss, but our concern is twofold.  First, it will take a while before we know the longer-term effects of any vaccine.  If it turns out the early candidates have flaws (e.g., require multiple doses, cause unexpected side effects), it could dampen the acceptance of future, perhaps more effective, vaccines.  Second, it’s possible that demand overwhelms supply, leading to concerns about distribution, or that the rush makes adoption slow (we are leaning toward the second outcome).  The third item to remember is that vaccines have complicated supply chains.  Getting a vaccine and getting production to scale are two different things.  In other words, the announcement effect may not last once the hurdles of distribution are revealed.
  • Silvio Berlusconi, the former PM of Italy, has an asymptomatic case of COVID-19.

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Daily Comment (September 2, 2020)

Posted on by Donna O'Donnell

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

[Posted: 9:30 AM EDT] | PDF

Today, on the 75th anniversary of the end of World War II, we discuss the latest signs of new fiscal and monetary stimulus in the U.S. and indications that policymakers in Europe may take steps to weaken the euro. We begin with a focus on the coronavirus pandemic and the various policy responses to it. After that, we discuss several broader international developments that serve as a reminder of rising geopolitical risks.

COVID-19: Official data show confirmed cases have risen to 25,785,890 worldwide, with 857,821 deaths and 17,095,825 recoveries. In the United States, confirmed cases rose to 6,076,425, with 184,697 deaths and 2,202,623 recoveries. Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

  • Newly confirmed U.S. infections increased by more than 43,000 yesterday, but that was still slightly below the rolling seven-day average. Reported deaths remain far below their seven-day average of approximately 1,000.
    • Still, educational institutions like universities, community colleges, and local schools are often facing outbreaks, or find themselves at the center of infection surges. This is forcing an increasing number to delay in-person instruction or return to a totally virtual environment. To avert a threatened teachers’ strike over safety concerns, New York City Mayor Bill de Blasio said municipal schools will delay the start of in-person learning by more than a week, which has been pushed to September 21.
  • For a look at Russia’s efforts to fast-track the development of a vaccine to burnish its geopolitical power, even if that means cutting corners on safety, check out this article from the Wall Street Journal.

 Economic Impact

 U.S. Policy Response

  • In testimony before a congressional committee yesterday, Treasury Secretary Mnuchin urged Congress to appropriate more money to combat the effects of the coronavirus pandemic, saying he was ready to sit down with Democratic leaders to resume negotiations at any time.
    • Mnuchin suggested the gap between the two sides may be narrowing, and mentioned a new, higher number for the administration’s proposed ceiling for a follow-on bill: $1.5 trillion.
      • He also indicated the administration has softened its opposition to a Democratic proposal for more aid to state and local governments.
      • In addition, Mnuchin announced a new, complex moratorium on renter evictions through the end of 2020, based on CDC authorities to fight the pandemic.
    • Though it’s too early to know if Mnuchin’s statements will help get the ball rolling again, they do seem to be moving in the right direction. A significant new pandemic relief bill could be instrumental in keeping the current recovery going and allowing further gains in risk assets.
  • FRB Richmond President Tom Barkin said the Fed will need to continue providing significant and sustained support to the economy, since controlling the coronavirus has proven harder than anticipated, and the labor market recovery is weakening earlier than expected. Barkin also said he was optimistic that elevated personal saving rates would create the potential for a significant boost in spending once people feel safer leaving their homes and spend money on goods and services.

 Foreign Policy Response

 Financial Market Developments

  • The euro is depreciating far today, after briefly surpassing $1.20 on Tuesday for the first time since May 2018. The currency weakened after ECB Chief Economist Philip Lane said the euro’s strength would influence policymakers’ forecasts for the region’s growth and have an impact on monetary policy decisions. Analysts expect the ECB will aim to limit the strength of the euro.

 United States-China:  Global geopolitics continue to be dominated by the rise of China and its challenge to the U.S., which in turn is unsure it wants to maintain its traditional role as the global hegemon. There are various developments related to U.S.-China tensions today:

  • U.S. Space Command Deputy Director of Operations Shawn Bratton warned that the U.S. needs to develop space-based weapons to counter a range of such weapons being developed by China, including its own GPS system known as BeiDou. At potential risk are the military and civilian satellites that play a crucial role in U.S. defense and the global economy.
    • Military planners are particularly worried that with its own GPS, China could seek to disable the U.S. satellite navigation system in the event of a conflict. According to Bratton, “We have so much capability on orbit that we have to be able to defend it.”
    • The warning from Bratton came on the same day the Department of Defense released its latest report on Chinese military power, which also emphasized China’s ongoing effort to rapidly expand its nuclear arsenal and delivery systems.
  • Negotiations to sell the U.S. business of Chinese social media firm TikTok to U.S. investors before President Trump’s threatened ban on September 15 have reportedly hit a snag. The problem is the Chinese government’s decision to require a license to export certain Chinese technologies. At issue is TikTok’s proprietary artificial intelligence algorithms that determine what videos to show users. Some insiders say Chinese officials don’t believe Trump’s stated concern about TikTok transferring information on its U.S. users to the Chinese government; rather, they believe his threatened ban is a way to grab valuable Chinese technology at a fire sale price. Others say the Chinese action is to express Beijing’s displeasure with U.S. moves to unwind past Chinese acquisitions. In any event, if the Chinese government scuttles the deal, the move would be a significant step toward further dividing the global internet into separate Chinese and U.S. spheres, with negative implications for both Chinese and U.S. technology stocks.
  • On a more positive note, China continues to take small steps to open its financial market to foreign firms. Citigroup (C, 51.20) today said the China Securities Regulatory Commission granted it a license to act as a custodian bank in China. That makes Citi the first major U.S. financial firm to receive such a license.

 China-India:  Chinese and Indian troops have had yet another confrontation along the countries’ disputed border in the Himalaya mountains, following a similar incident over the weekend and a fatal clash in June (discussed in our Weekly Geopolitical Report from July 13, 2020). No firm details have been released about the latest confrontation, but each government has issued strong demands that the other side control and discipline their frontline troops. The incident highlights the continued risk of escalation, as both China and India pursue aggressively nationalist policies.

Japan:  Prime Minister Abe’s right-hand man, Chief Cabinet Secretary Yoshihide Suga, confirmed his candidacy to succeed Abe as leader of the Liberal Democratic Party and Japan’s next prime minister. Having gained the backing of key LDP factions, Suga is now widely seen as the frontrunner in the race to succeed Abe. He could become prime minister in the next two weeks or so. In his announcement, Suga promised to continue Abe’s key policies, including low interest rates, a weak yen, and loose fiscal policy. All the same, the transition to a new leader has the potential to shift Japanese policies into new directions and even touch off a rebound in the yen.

France-Lebanon:  In a visit to Beirut, French President Macron pressed Lebanese leaders to form a government within two weeks and deliver long-delayed reforms. He warned that he otherwise wouldn’t support international aid to help the country deal with last month’s catastrophic explosion in the city’s port. By all accounts, however, Macron’s pressure wasn’t totally for the benefit of Lebanon’s citizens. Rather, one of his key goals was to avert a new wave of refugees fleeing into the EU as happened in 2015.

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Daily Comment (September 1, 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 today’s Comment, we discuss the latest example of renewed U.S.-Russia military tensions, as well as recent developments in the race to succeed Japanese Prime Minister Abe.  Today’s purchasing managers’ indexes out of China and Europe were generally positive, suggesting continued economic recovery from the coronavirus pandemic and helping give a lift to risk assets. However, broader virus news was a bit mixed.  We review all the key news below.

United States-Russia:  In the second U.S.-Russia military confrontation of the last week, Russian Su-27 fighter jets harassed a U.S. B-52 bomber flying in international airspace over the Black Sea on Friday.  The fighters crossed within 100 feet of the bomber’s path and forced it to fly through dangerous turbulence (for Department of Defense video of the encounter click here).  Last Tuesday, several American troops operating in northeast Syria were injured when a Russian military vehicle rammed its own.

Japan:  The ruling Liberal Democratic Party said the election to select a replacement for Prime Minister Abe will utilize an emergency ballot procedure that excludes rank-and-file members.  The new party leader will be chosen only by LDP members of parliament and regional party chiefs.  That’s likely to be a disadvantage for Shigeru Ishiba, a former minister of defense and regional revitalization, who is popular with the public because of his calls for more income equality, but he is unpopular with national party leaders for his past criticisms of Abe.  The frontrunner in the election now is probably Abe’s chief cabinet secretary, Yoshihide Suga, an experienced and unobjectionable political player with little foreign policy expertise.

Argentina:  The Argentine government announced it has successfully restructured almost all of its $65 billion debt with private creditors, potentially ending the country’s ninth sovereign debt default.  According to Economy Minister Martin Guzmán, 99% of the country’s creditors have accepted the government’s offer, which extends maturities on the debt and lowers interest rate payments from an average of 7% to about 3%.

COVID-19:  Official data show confirmed cases have risen to 25,511,385 worldwide, with 851,154 deaths and 16,850,044 recoveries.  In the United States, confirmed cases rose to 6,031,525, with 183,602 deaths and 2,184,825 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 Impact

 U.S. Policy Response

 Financial Market Response

  • Reflecting the mantra of “lower for longer” regarding U.S. interest rates and the prospect that mutual EU bonds could make the euro a more viable reserve currency, the U.S. dollar continues to weaken.  Early today, the euro rose to within a whisker of $1.20, a level the common European currency hasn’t reached since May 2018.  As we’ve been arguing, the falling dollar should be particularly bullish for foreign assets and precious metals.
  • Along with consumers’ continued caution about venturing out, delayed office and school re-openings are weighing on crude oil demand.  As a result, crude prices per barrel remain stuck in the low $40s.

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