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

[Posted: 9:30 AM EDT] | PDF

We open today’s Comment with U.S. news related to fiscal policy and potential new regulatory risks for the technology sector.  Next is a discussion regarding the Chinese debt crisis and a range of other foreign news that could affect the financial markets today.  We conclude with the latest developments related to the coronavirus pandemic.

U.S. Fiscal Policy:  Key Democratic Senators yesterday proposed a minimum corporate income tax of 15% to help pay for President Biden’s planned social-spending and climate-change program.  Although details were not provided, the sponsors said the plan would apply to about 200 large companies and raise hundreds of billions of dollars without raising the corporate income tax rate above the current 21%.

• Manufacturers and technology companies could be among those hit hardest by the plan since the tax breaks they currently benefit from (such as expensing capital investments or stock options) would effectively be limited.
• The proposed levy differs from the 15% global minimum tax the U.S. has been pushing in international negotiations. That plan, which is also likely to be included in the Democrats’ tax-and-spending bill, focuses on U.S. companies’ foreign income, and it would require them to pay at least 15% in each foreign country where they operate. Some companies could be affected by both taxes.
• In any case, the proposed minimum corporate tax and billionaire’s levy show that higher taxes on corporations and wealthy families remain a risk, even though some Democratic Senators have opposed them.  Investors may not be too worried at the moment, as experience has taught that tax proposals can morph dramatically at the last minute, and it doesn’t necessarily pay to react early.  However, if a bill ultimately passes with these types of tax hikes, the markets would be at risk of a quick adjustment.

U.S. Technology Regulation:  As major news outlets continue to publish exposés about operating practices at Facebook (FB, $315.81), Federal Trade Commission staffers have begun looking into disclosures that the company’s internal company research had identified ill effects from its products.

• Specifically, the officials are looking into whether Facebook’s research documents indicate it might have violated a 2019 settlement with the agency over privacy concerns, for which the company paid a record $5 billion penalty.
• The FTC investigation shows how the exposés could lead to new regulatory risks for Facebook and other technology companies, even beyond the alleged abuses they aim to highlight.

Chinese Debt Crisis:  China’s National Development and Reform Commission, the state’s economic planning agency, issued a statement this morning that companies should prepare to pay the principal and interest on their offshore bonds to maintain their reputation and calm the market.  The statement comes days ahead of another big payment deadline for major real estate developer Evergrande (EGRNY, $8.26).  Multiple defaults by smaller real estate firms likely represent the government’s effort to maintain the reputation of Chinese firms and calm international markets as it tries to get control over excess investment and debt in the country’s real estate sector.  As we’ve described many times previously, that effort presents three key risks for investors:

• Even if the government successfully reduces real estate investment and debt levels to more reasonable levels without sparking a financial crisis, the result will be slower economic growth.  Since so many countries around the world depend on China as a major export market, that would likely have some negative impact on global economic activity and take some of the wind out of commodity prices.
• If the government clamps down too hard on new investment projects or new borrowing, it risks touching off a whole series of defaults even beyond what we’ve seen so far.  If that happened, the domestic and international economic impacts discussed above could be more severe, which goes far toward explaining why global investors have been so worried about the travails at Evergrande.
• Of course, based on historical experience, there is also some chance that Chinese officials will get cold feet as they come to appreciate how a clampdown could slow the economy and potentially spark a wave of financial problems.  That’s especially true against the backdrop of President Xi’s crackdown on Chinese technology companies, which could also weigh on economic activity.  The big problem, in this case, is that by kicking the can down the road, the officials could be setting China up for even more bad investment, higher debt levels, and a potentially worse crisis in the future.

Japan Elections:  According to a new Kyodo News poll on voter plans for the general election on Sunday, the ruling Liberal Democratic Party may lose seats in the House of Representatives but should retain a comfortable majority with its coalition partner Komeito.  The LDP and Komeito together could win more than 261 of the 465 seats in the chamber, which would be enough to effectively control all standing committees and push their legislative agenda forward.

Japan Stock Market:  The Tokyo Stock Exchange (TSE) said it plans to extend its trading day by 30 minutes.  With the change, trading in Tokyo will run from 9:00 am to 3:30 pm local time, with a lunch break from 11:30 am to 12:30 pm (in the U.S., the new end time will be equivalent to 2:30 am ET).  The extension of trading is expected to make the Japanese somewhat more competitive with other major Asian markets with longer trading days.

Russia-European Union:  Natural gas storage at European facilities is generally low for the period heading into winter.  Contributing to the EU’s skyrocketing gas prices, new industry analysis indicates that storage at facilities owned or controlled by Russian state-backed gas monopoly Gazprom is especially low.

• The figures will feed concerns that the Russian government is deliberately withholding gas from the EU in order to drive up prices and pressure its leaders to grant final approval for the Nord Stream 2 gas pipeline from Russia to Germany.
• As further evidence that Russia is leveraging its position as Europe’s top gas source for its own geopolitical goals, another report indicates Gazprom offered Moldova lower gas prices if the country amended its tariff-free trade deal with the EU and delayed the implementation of EU rules that require gas markets to be more competitive.

Iran:  An apparent cyberattack that officials ascribed to a “foreign country” has disrupted the sale of fuel across Iran by targeting its electronic card payment system.  The shutdown of the system has forced motorists to form long queues at gas stations nationwide and sparked sharp criticism of the government, which, of course, may have been the intent of the attack.

Afghanistan:  Despite a Taliban pledge that it would not allow Afghanistan to be used as a springboard for jihadi groups, U.S. intelligence officials believe Isis-K would have the capability to conduct external strikes, including on U.S. soil, within six to 12 months. The officials believe it would take al-Qaeda one to two years to reach a similar capability.

COVID-19:  Official data show confirmed cases have risen to 244,662,153 worldwide, with 4,966,122 deaths.  In the United States, confirmed cases rose to 45,616,157, with 738,883 deaths.  Vaccine doses delivered in the U.S. now total 504,584,715, while the number of people who have received at least their first shot totals 220,648,845.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

• According to the latest CDC data, 66.5% of the U.S. population has now received at least one dose of a vaccine, and 57.5% of the population is fully vaccinated.
• Yesterday, an FDA advisory panel of outside experts recommended authorizing the vaccine developed by Pfizer (PFE, $43.56) and BioNTech (BNTX, $292.39) for children aged 5 to 11.
  • The FDA is expected to decide in the coming days or weeks to authorize the shots for young children.  Health officials have said the shots are likely to become available in November.
  • Since the U.S. has approximately 28 million children in that age group, vaccinating a substantial number of them could have a big impact on boosting the country’s overall vaccination rate.
• A new study by the National Bureau of Economic Research indicates that financial incentives, public-health messages, and other tactics used by state and local governments and employers to encourage people to get vaccinated didn’t have a noticeable impact on vaccination rates among those who already were hesitant about getting the shot.
• Merck (MRK, $82.25) has signed a landmark voluntary licensing deal with the UN-backed Medicines Patent Pool to expand access to its COVID-19 antiviral pill throughout the developing world.  By licensing generic manufacturing of the pill, the deal promises to make it available at low cost in poorer countries.
• In Britain, the government is considering imposing a set of new “Plan B” restrictions, including mandatory mask-wearing, but officials are holding out hope that a recent decline in new infections could allow them to avoid the politically unpopular step.

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