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

[Posted: 9:30 AM EDT] | PDF

Even if the U.S. opening is looking a bit soft today, investors should be encouraged by an apparent stabilization in new U.S. coronavirus cases and the release (after considerable delay) of Senate Republicans’ proposal for a new coronavirus relief bill.  We outline both news items and all the other key developments below.

COVID-19:  Official data show confirmed cases have risen to 16,495,309 worldwide, with 654,327 deaths and 9,590,929 recoveries.  In the United States, confirmed cases rose to 4,294,270, with 148,056 deaths and 1,325,804 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. coronavirus cases rose by just 55,000 yesterday, marking the slowest daily pace since July 7 and giving investors cause for cautious optimism.  The number of new deaths continued to rise, but at a surprisingly slow pace compared with the number of new cases.  Nevertheless, the figures show particular states, mostly in the West and South, are continuing to struggle with a rising number of infections, hospitalizations and fatalities.  State governments continue to take uncoordinated, idiosyncratic approaches when deciding on what lockdown measures to lift or reimpose.
• Despite the apparent slowdown in new U.S. infections, Google parent Alphabet, Inc. (GOOG, 1,530.20) announced that virtually all of its 200,000 full-time and contract employees will work from home until at least next July, making the search-engine giant the first major U.S. corporation to formalize such an extended timetable in the face of the pandemic.  The move underscores the lengthening time frame before firms expect the situation to normalize.
• Overseas, cases continue to surge in large developing countries such as India and Brazil.  In addition, China has reported a surge of cases in the far western province of Xinjiang, raising fears of another major breakout there.

Economic Impact:

• Consultants at Accenture (ACN, 223.32) estimate that U.S. bank profits will be hit twice as hard by coronavirus loan loss provisions than their European peers, in a study that upends the traditional wisdom of European banks’ relative weakness.  The consultants foresee $427 billion in loan loss charges for 58 top U.S. banks over the next three years, equal to about 10.2% of their average 2020 loan books.  The 50 top European banks in the study are expected to take loan loss charges of $455 billion over the same period, equal to just 4.6% of their 2020 loan balances.
• Adding to the various letter-designated scenarios for the post-crisis economic recovery, some people are now talking about a “K-shaped” rebound.  The idea is to capture the way that many people with white-collar jobs and financial investments are actually doing all right, while the many who work in low-paying service jobs and don’t have stocks or bonds are struggling to survive.

U.S. Policy Response:

• Late yesterday, Senate Republicans finally released their proposal for the next coronavirus relief bill.  In comparison with the $3.5 trillion proposal passed weeks ago by Democrats in the House, the Republican proposal would cost about $1.0 trillion, setting up what is likely to be weeks of negotiations with the House and raising the risk of a deadlock or severely watered down bill that would likely drive down equity markets.  Key elements of the Republican proposal would:
  • Send another $1,200 check to the same group that received cash this spring (with payments phasing out for individuals with income above $75,000 and married couples with income above $150,000);
  • Provide an additional payment of $500 for each child, defined more broadly than last spring to include dependents over the age of 16 (meaning a bigger payment for parents of college students and people who take care of their elderly parents);
  • Extend the supplemental federal unemployment benefit, but cut it from the current $600 per week as follows:
    • Through September, the benefit would be cut to $200 per week for each recipient;
    • From October to XXX, the benefit would be set so that the sum of federal and state benefits would replace 70% of the recipient’s previous wage;
  • Provide $105 billion to schools and universities to cover the costs of operating during the pandemic, with some of the aid only available to schools that plan to physically reopen;
  • Provide no additional aid to state and local governments, but provide more flexibility in using existing federal assistance;
  • Provide $16 billion for expanded coronavirus testing;
  • Expand a worker-retention tax credit created in March, allowing larger credits per worker and letting up to $30,000 of wages and benefits qualify instead of just $10,000;
  • Temporarily give businesses a 100% tax deduction for restaurant meals, up from the current 50% deduction;
  • Adjust liability rules to make it harder to successfully sue schools, businesses and healthcare providers in coronavirus-related cases;
  • Provide for a number of other initiatives, some of which cynics might call “porkbarrel” (no surprise there!).

Foreign Policy Response:

• To help ensure Eurozone banks can absorb losses and keep lending through the crisis, the ECB has called on lenders to keep foregoing dividend payments until at least January and be “extremely moderate” when setting staff bonuses.  The Bank of England said it would carry out a review in the fourth quarter over whether British lenders could resume paying dividends in 2021.

Financial Market Action:

• Gold prices briefly hit an intraday record of $1,974.70 per troy ounce, before paring gains to trade down 0.3% to $1,925.80.  Spot gold increased to an all-time high of $1,980.57 per troy ounce in Asia before falling back in the London session to $1,929.  Despite the ultimate pullback today, both gold and silver continue their recent uptrends, driven higher by factors such as the weakening dollar, falling real interest rates and soaring U.S. budget deficits.
• Meanwhile, the euro continues to trend upward on signs that Europe has gotten the coronavirus under control better than the U.S. and could be poised for a faster or more consistent economic recovery.

United States:  Citing concern that economist Judy Shelton isn’t committed to the Federal Reserve’s independence, Senator Susan Collins (R., Maine) said she would join with Senator Mitt Romney (R., Utah) in opposing Shelton’s nomination to the Fed board of governors.  Since the Republicans only have a 53-47 vote advantage in the Senate, Shelton can’t afford to lose more than three Republicans if all Democrats oppose her candidacy.  Separately, the Fed will begin its latest policy-setting meeting today.  The policymakers are widely expected to hold current policy steady, but their post-meeting statement tomorrow could hold some clues on how they expect policy to evolve in the future.

United States-China:  State governments and the Department of Agriculture are investigating reports that hundreds of U.S. residents have been mailed unsolicited seeds from China.  The seeds raise the specter of a deliberate effort to spread toxic, noxious or invasive plants or weeds in the U.S. (a mild form of biological warfare?), so officials have warned people not to plant them.

New Zealand-Hong Kong-China:  The New Zealand government announced that it would suspend its extradition treaty with Hong Kong, joining the U.S., the U.K., Canada and Australia in protesting Beijing’s draconian new security law for the city.  The move is more evidence that the “Five Eyes” intelligence-sharing alliance could be evolving into the leading coalition against Chinese expansionism.

Russia:  Thousands of demonstrators in the far eastern city of Khabarovsk yesterday continued to demand the release of their jailed governor, Sergei Furgal.  The protests suggest the city’s protestors haven’t been mollified by President Putin’s naming of a replacement governor from Furgal’s opposition party.

Russia-Ukraine:  Beginning yesterday, Ukrainian troops and Russian-backed rebels in eastern Ukraine implemented a new ceasefire.  However, frictions remain because of issues such as Russia’s annexation of the Crimean peninsula and Kiev’s plan to exclude rebel territory from an upcoming election.

Japan-South Korea:  The Japanese government has warned of another sharp deterioration in Japanese-South Korean relations because of recently erected statues in a South Korean park that depict a man resembling Prime Minister Shinzo Abe kneeling and bowing to a girl symbolizing South Korean “comfort women” in World War II.

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