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

[Posted: 9:30 AM EDT]

The general uptrend in risk assets continues to stem mostly from the gradual easing of coronavirus lockdowns and progress on vaccines and treatments.  Today’s market action also reflects signs that the major oil-producing countries will extend their production cuts, which has boosted crude oil prices.  Those developments continue to outweigh the violent civil rights protests in the U.S., though we note that the demonstrations do carry political risks.

United States:  With civil rights protests continuing to devolve into violence across the country, President Trump yesterday said he would deploy military forces to take control of the situation in Washington, D.C. and other cities if state and local governments don’t “take the actions that are necessary to defend the life and property of their residents.”  The federal troops would be in addition to the 67,000 National Guard troops already called up by the states.

• It wasn’t immediately clear whether Mr. Trump had invoked the Insurrection Act, a law that allows a president to deploy the military in response to civil unrest. If he did invoke the law, it would be the first use of active duty military troops to quell civil disorder in nearly 30 years.
• Although the financial markets typically look past such protests in the U.S., as they’re generally short-lived, the current riots bear watching because they have implications for the November elections.  It’s easy to imagine the violence is a spontaneous outpouring of anger related to law enforcement practices, a perception of impunity for police brutality and the frustrations of the long coronavirus lockdown.  However, reports also suggest the violence is being further fueled by extremist groups on both the far right and the far left, which politicians are sure to try to exploit for their own gain.  Just as important, the deployment of National Guard and federal troops raises the risk that someone with a happy trigger finger could spark bloodshed.  In Kentucky, police and National Guard troops killed one man on Sunday night, and here in St. Louis, four police officers were hit by gunfire last night.  Any situation in which federal troops killed multiple protestors would likely morph into an even greater political controversy.
• The rioting also has implications for international politics.  Chinese officials and state media outlets have already savaged the Trump administration’s response to the protests, describing the president as a hypocrite after he supported Hong Kong’s demonstrations.  China’s foreign ministry sent a taunting tweet to the U.S. State Department simply saying, “I can’t breathe.”  Other reports say Russia and China are both flooding social media with content criticizing the U.S. for its handling of race issues.

COVID-19:  Official data show confirmed cases have risen to 6,294,222 worldwide, with 376,177 deaths and 2,714,922 recoveries.  In the United States, confirmed cases rose to 1,811,277, with 105,147 deaths and 458,231 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• There are concerns that mass civil rights protests across the U.S. could spark renewed coronavirus outbreaks that may require the re-imposition of lockdowns.
• Japan and South Korea both reported more than 30 new COVID-19 infections, with many cases found in people who had visited newly reopened restaurants, bars, and other entertainment venues.
• India has now reported 8,000 or more new infections for three straight days, underlining how it has become a major pandemic hotspot along with countries like Brazil and Russia.  Because of surging cases in large, less-developed countries such as these, along with increased testing in many developed countries, total global infections are now showing a distinct uptrend beginning in mid-May.

Real Economy

• The Congressional Budget Office said the sharp contraction triggered by the coronavirus caused it to mark down its 2020-30 forecast for U.S. economic output by a cumulative $7.9 trillion, or 3% of GDP, relative to its January projections. GDP isn’t expected to catch up to the previously forecast level until the fourth quarter of 2029.
• Although yesterday’s May ISM Manufacturing Index for the U.S. showed a modest rebound to 43.1, from 41.5 in April, the figure continues to be distorted by the sub-index on supplier deliveries.  The ISM indexes and sub-indexes are designed so that readings over 50 point to expanding activity.  The sub-index on supplier deliveries is higher when deliveries are slower, on the assumption that delivery delays reflect high activity and bottlenecks.  However, in the coronavirus crisis, deliveries are slow and the supplier delivery index is elevated in large part because of lockdowns.  Therefore, we think we can get a better feel for the true level of activity by looking at our own, proprietary estimate of the overall ISM index excluding supplier deliveries.  As shown in the charts below, that measure rebounded only to 36.9 in May from 33.0 in April, suggesting factory activity continues to contract sharply.

Financial Markets

• The OPEC+ alliance of oil-producing countries led by Saudi Arabia and Russia is nearing a deal to extend their coronavirus production cuts to September 1.  The current deal, which aims to cut the group’s total output by 9.7 million barrels per day, begins phasing out on July 1.  Delegates will meet to discuss the move on Thursday, sparking a notable rally in crude prices so far today.
• In less positive news, reports show the coronavirus crisis is disrupting Italy’s longstanding program to clean up the banking system’s pile of nonperforming loans by packaging them into securities and selling them to investors.
• According to the Institute of International Finance, foreign investors withdrew a record $11.8 billion from Brazil’s stock market in the four months from February to May, and $18.7 billion from its bond market between February and April (the most recent period for which data is available).  The capital outflows, which the IIF ascribed mostly to Brazil’s coronavirus crisis and political chaos surrounding President Bolsonaro, were in contrast with a modest recovery in inflows in many other developing countries.
• According to data provider Trepp, 7.4% of U.S. commercial property loans were delinquent in May, up from 2.3% in April.  Another 8.6% were in their 30-day grace period after initially missing a payment.  The figures underscore the growing threat to commercial mortgage-backed securities the longer the coronavirus disruptions last.

Democratic Republic of Congo:  The government has declared a new Ebola epidemic after it identified six cases in the west of the country, far from the previous outbreak in the east.  The outbreak is the country’s fourth in the last three years and the 11^th since the first cases were detected in 1976.

Russia: President Putin announced the vote on constitutional revisions that would allow him to remain in power for up to 16 more years will be held on July 1, after being postponed by the coronavirus crisis.  Actual voting will begin a week before the official ballot date.

Russia:  After three medical doctors mysteriously “fell” out of windows in recent months, raising suspicion that they were assassinated for resisting or exposing government missteps related to the coronavirus crisis, now a female police forensic officer has fallen out of a window at a hospital where she was being treated for the virus.

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