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

[Posted: 9:30 AM EDT]

Good morning, and happy Monday!  U.S. equity futures are currently pointing to a modest rise in a holiday-shortened week.  We update the COVID-19 news.  In foreign news, we cover the Poland elections and a new government in Ireland.  The end of stimulus measures is looming in the U.S.  We update weather news.  Here are the details:

COVID-19:   The number of reported cases is 10,154,984 with 502,048 deaths and 5,147,436 recoveries.  In the U.S., there are 2,549,069 confirmed cases with 125,803 deaths and 685,164 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases across nations using similar scaling metrics.  State infection rates are showing a definite rise.

Virology: 

• We have been monitoring reports that the virus may be mutating. A paper out of China suggests that COVID-19 has indeed mutated from its form in China to a more virulent form in Europe.  A mutation, named D614G, increases the number of spikes on the virus, enhancing its ability to infect.  The mutation has made the virus more contagious by increasing its shedding.   This development may explain why the virus initially seemed to be about as problematic as influenza and has become something worse.  There are also reports that the virus has developed in such a way that it sends out “fingers” that increase the pace of infection.
• Last week, in the face of rising infections, Texas and Florida took the aggressive actions to close bars, ban the sale of alcohol consumption and limit restaurant seating.   The population infected in the South does appear different than what we saw in the Northeast.  The current infections are hitting younger Americans and thus we are seeing fewer fatalities per infection.
• Doctors are finding that even asymptomatic patients with COVID-19 are showing signs of lung damage. How serious the damage is remains uncertain.
• Health officials are considering a new testing strategy, pool testing. In a pool test, a single test is administered to a group of people.  If all test negative, it is assumed the entire pool is infection free.   This method allows for a much larger testing base with the same level of resources, and, with careful sorting, can even increase the power of the testing.  It has two downsides.  First, a false negative means a much larger problem because it means the entire pool is considered safe, but it may not be.  Second, the process of pooling itself can dilute the sample, increasing the odds of a false negative.
• There is evidence that COVID-19 is causing psychiatric and neurological problems in patients. The symptoms include strokes, encephalitis, and encephalopathy.  Some patients exhibited evidence of dementia and psychosis.
• There remains hope that a vaccine will be developed by late 2020. We remain skeptical that it will occur in this short time frame.  However, a vaccine isn’t the only path to reducing the risk of the virus.  Antiviral treatments could also reduce the virulence of the disease; AIDS has been controlled by this path.  Three[1] new anti-viral drugs are being tested; all three are currently used in treating cancer, so if they work on COVID-19, they could be deployed rapidly.

Policy news:

• State and local governments who have seen their expenditures rise and revenue decline are searching for new sources of funds to make up for budget shortfalls. We consider this sector to be a risk factor for the economy.  Without aid from the Federal government, state and local governments will have no choice but to cut services and raise taxes which will act as a drag on growth.
• As households deferred loan payments, credit rating agencies have not been reporting their payment gaps as delinquent. Banks, worried that they can’t tell if a borrower is merely postponing payments or not intending to pay, have been tightening lending standards.   If this continues, it will tend to exacerbate the downturn.
• One of the worries that will likely begin to affect investor sentiment is if income support ends next month. The boost to unemployment insurance and the $1200 income checks are scheduled to end at the end of July.  If they are not extended, or at least adjusted, we could see a drop in economic activity.
• The Federal Reserve has listed the corporate bonds it purchased recently. It appears that automakers and tech firms made up the bulk of the buying.
• The Fed continues to be actively looking at yield curve control and is examining Australia’s experience.

China news:

• China has been aggressively building out its 5G network. Although the U.S. has been working to reduce Chinese tech firms’ ability to sell 5G products abroad, China also needs to import products for its domestic build out.  Apparently, Japanese firms have been aiding this effort.  We will be watching to see if Washington takes steps to end this practice.
• The PBOC is promising to take stronger measures to support the Chinese economy.

Technology news:

• Although we haven’t seen much of an impact yet, the EU’s increasing aggressive actions in regulating technology bears watching.  First, their actions may affect how these firms operate.  Second, they may become a model for U.S. regulators.

Foreign news:

• Andrzej Duda won a plurality in this weekend’s election in Poland but not a majority. A second round of elections will be held on July 12^th, where he will face Warsaw Mayor Rafał Trzaskowski, who won second place.
• Ireland has a new PM, Macheal Martin; he will govern a three-party coalition of Fianna Fail, Leo Varadkar’s Fine Gael and the Green Party. Sinn Fein, the political arm of the IRA, will be the official opposition.  The current PM, Varadkar, will be deputy PM and will take over the PM jog in 30 months.   This is a “grand coalition” of sorts; for the first time since the founding of the modern Irish republic, Fianna Fail and Fane Gael will form a coalition.  This is mostly because neither could agree to form a government with Sinn Fein.
• Russia is increasing its arms sales to Turkey and India. The former is a member of NATO and a long-time U.S. ally; the arms relationship with Russia has been an unwelcome development.  India, on the other hand, is a long-term client of Russia’s arms industry but is being courted by the U.S. in a bid to contain China.  The arms sales will likely not cause problems for New Delhi, but we would expect U.S. arms makers to try and encourage India to begin using U.S. platforms.  This will be especially the case if relations become closer.
• Despite U.S. opposition, it appears the EU will be moving ahead to implement digital taxes. The U.S. opposes this move because it is seen as a threat to the American tech firms.
• The EU has also slapped tariffs on an Egyptian fiberglass firm that was built in conjunction with the Chinese “one belt, one road” project.  This action will be seen as a snub to Beijing.
• Lebanon is in the midst of a debt and currency crisis. The currency has lost 75% of its value in the unofficial market and its external debt is over 186% of GDP and the country is in default.  Demonstrations took place late last week to protest declining living conditions.  Although the level of anger is palpable, it is not clear at all how the situation will be resolved.
• The State Department says Iran has become a haven for al Qaeda. Although we doubt much will come from this news, it could be used as a pretext for retaliation, either kinetic or financial, by the U.S.
• Late last year, Congress passed the Caesar Act, makes sanctions mandatory for anyone who facilitates the Assad regime’s acquisition of goods and services among other actions that support the current regime in Syria.  The U.S. has begun implementing that act, putting additional sanctions on Syria and could add more to Iran as well.  Lebanon will also face a sanction threat from the law. The other important characteristic of the Caesar Act is that it applies sanction pressure directly on Syrian Alawites, the base of Assad’s support.
• We are monitoring reports of elevated levels of radioactive particles in Northern Europe.  The current levels are not a health risk but the inability to pinpoint the source is a worry.  There are concerns that the elevated levels may signal a problem due to a Russian nuclear power facility, Russia claims that no problems exist.

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[1] https://xospata.com/, https://ascopubs.org/doi/abs/10.1200/JCO.2019.37.15_suppl.5537, https://www.prnewswire.com/news-releases/senhwa-biosciences-silmitasertib-named-as-potential-covid-19-therapy-301032362.html