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

[Posted: 9:30 AM EDT] | PDF

Good morning!  U.S. equity futures are a bit lower this morning.  Tropical Storm Eta is hitting Jacksonville, FL, today and is on its way up the Southern Atlantic Seaboard this weekend.  Although TS Theta won’t get anywhere near the U.S., it does mark the most active hurricane season since the U.S. began keeping records.  China news leads off our coverage this morning, with the pandemic update to follow. We look at real estate news, the U.K. and Brexit, the Fed, and close with market odds and ends.  Although we usually publish the Weekly Energy Update today, it is delayed due to the Veterans Day holiday.  It will be published tomorrow. Here are the details:

China:  

• Beijing decided to oust four pro-democracy legislators in Hong Kong on national security grounds, prompting the resignation of most of the remaining pro-democracy legislators. The Xi regime has been steadily moving to quell dissent in the former British colony, and this most recent move is additional evidence of this trend.  The decision to make this move and the subsequent resignations will further centralize power in Hong Kong’s executive.  Although it could be argued that China may be taking advantage of the distraction in Washington, in reality, Beijing has dominance over Hong Kong, and it is unlikely that any U.S. administration would be willing to make much of a sacrifice over the region.
• Remember TikTok? Today is the last day before a U.S. ban of the service unless the courts intervene.  The Committee on Foreign Investment in the U.S. (CIFUS) set today as the deadline for ByteDance to divest of its U.S. entity.  CIFUS can extend the deadline by 30 days but has not taken any action yet.  The company has asked the courts to intervene.  Given the level of distraction in the U.S., it is quite possible that the app closes today.
• November 11^th is Veterans Day in the U.S. and Armistice Day in Europe. In China, it’s “singles day,” one of the largest shopping days of the year.  Alibaba (BABA, USD 265.65) reported its sales hit $74 billion over the past 11 days.  You wouldn’t see these robust sales by looking at the stock chart; fears of regulation tied to the Ant Group’s IPO debacle have been a bearish event for several Chinese tech giants.

(Source:  Barchart.com)

• China Construction Bank Corp (CICHF, USD, 0.74) is issuing $3.0 billion of bonds that can be purchased with USD or bitcoin. The bond appears to be only available to foreign buyers.  Although bonds can be bought with bitcoin, it appears they pay in dollars.  Given the strength of bitcoin, we doubt many will purchase with the cryptocurrency, but the fact that it is being facilitated bears watching.

COVID-19:  The number of reported cases is 52,256,150 with 1,286,543 deaths.  In the U.S., there are 10,404,354 confirmed cases with 241,808 deaths.  New cases in the U.S. hit 144,000 yesterday, a new record.  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 weekly map shows that infections are rising across the country.

Virology: 

• The surge in cases is starting to strain hospital systems. Compared to the spring, the virus has spread further into rural areas, which have fewer resources to cope with the rise.  In addition, some hospitals are reporting a lack of staffing to handle the rise in cases.
• Sweden, which avoided the widespread lockdowns in the spring, is having a very difficult winter with the virus.
• Eli Lilly’s (LLY, 145.89) bamlanivimab, a monoclonal antibody, has become the first to receive FDA approval for emergency use.  The antibody will be used on patients deemed high risk due to their preexisting conditions.  However, it is not allowed for use on those who are already severely ill.
• The government is starting to plan for the distribution of a vaccine.  As we anticipated, health care workers are expected to be first in line, with nursing home residents probably high in the queue as well.  By the end of Q1, wider distribution is likely.
• Fauci predicts that Moderna (MRNA, USD, 82.44) will show strongly positive results with its vaccine.
• The mink cull in Denmark has been called off. Parliament would not pass legislation authorizing the action.  It is still unclear if the mutation of COVID-19, which apparently moved from humans to minks and back to humans, is any more deadly than that which is currently circulating.  The worry is that this mutation may reduce the effectiveness of current vaccines.
• Current COVID-19 testing relies on antibodies. There have been concerns about relying on these tests because antibodies tend to diminish over time.  This fact has led to speculation that immunity may not persist.  However, antibodies are not the body’s only defense.  T-cells also combat infection, and their presence could mean that immunity lasts beyond the time the antibodies fade.  New tests are being developed to determine whether T-cells are present against COVID-19.  These should give a better picture of a person’s immunity.

Real estate:  Parts of the commercial real estate market have been under pressure for some time, while other sectors have prospered.  Storage and warehouses have done rather well, while retail malls have been especially problematic.  The pandemic has accentuated these trends.  We are now starting to see a wave of mall bankruptcies.

• The exodus from urban centers has triggered a boost in housing activity. It is also leading more affluent households to trade up for more space, increasing demand and prices for more expensive homes.  This movement away from urban centers will further solidify the work from home trend accelerated by the pandemic.
• As Americans flee the cities, foreigners are taking a look. Major city realtors report a rise in interest from foreign buyers for both residences and commercial property in cities.

Brexit and the U.K.:  Although we expect a Brexit deal, it should be noted that even with an agreement, a good bit of “strategic ambiguity” will be part of any pact.  In other words, expect both sides to say the same thing but mean something different, leading to persistent conflict.

• Lee Cain, the communications director for PM Johnson, has resigned after there were reports he was tapped to become the new chief of staff. Cain is considered a hard Brexit supporter, and when reports emerged that he was going to be promoted, it caused a row among Johnson’s ministers.  Rather than risk a mass resignation event, the offer to Cain was apparently rescinded, and he has left the government.  This situation is further evidence of the divisions within Johnson’s administration and the difficulty he has had in managing them.

The Federal Reserve:  One part of unfinished business for the Trump administration has been filling Fed governor positions.  The FOMC has seven governors and 12 district presidents.  Voting members are the seven governors, the president of the NY FRB, and a rotating roster of four of the district bank presidents.  During Trump’s term, he filled three governor positions, Randall Qualls, Michelle Bowman, and Richard Clarida.  Clarida was named vice chairman and Governor Powell was elevated to Fed chair.  However, he was never able to fill the last two governor spots.  Chris Waller of the St. Louis FRB and Judy Shelton were nominated; although Waller was a conventional pick, Shelton was quite controversial and seemed to get little support from the Senate.  We suspect these spots won’t be filled during the lame-duck session.  Thus, if Biden does get the presidency, he will be able to fill two governor spots, and Clarida and Powell’s terms end in 2022.  We would not be surprised to see Waller get the nod, but Shelton would likely be quietly removed from consideration.  Waller would be considered rather dovish.  We would not be surprised to see either Neel Kashkari, president of the Minneapolis FRB, or Jim Bullard, president of the St. Louis FRB, fill these governor positions.  Given Bullard’s dovishness, he could be a candidate to replace Powell, although Governor Brainard, especially if she doesn’t get the nod for treasury secretary, would also be a favored candidate.  In any case, we expect hawks to become a rare species on the FOMC in the coming years, but filling these open governor positions with doves is critical to policy accommodation.

Market odds and ends:  Here are a couple of items we noticed.

• Greek sovereign yields have turned negative. Although the government did sell three-month notes at negative rates last month, two- and three-year notes already in the market have fallen below zero.
• U.S. bank deposit rates are falling fast, suggesting that, at some point, these idle balances will start to look for a higher income home. To receive higher yields, investors will be forced to take on more risk.

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