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

[Posted: 9:30 AM EDT] | PDF

It’s Monday, the last week of October.  U.S. equity futures are weaker this morning.  A big reason has been a global resurgence of the virus.  It leads off our coverage this morning.  Next up is international news.  In this week’s Asset Allocation Weekly, we discussed how the economy has been shaped by the pandemic; the bottom line is that there has been a definite shift to goods and away from face-to-face services.  We update the economy next.  And finally, we close with China news, where leaders are meeting to discuss the 14^th 5-year plan.  Here are the details:

COVID-19:  The number of reported cases is 43,117,883 with 1,154,703.  In the U.S., there are 8,636,995 confirmed cases with 225,239 deaths.  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.

Virology: 

• Europe is reeling from a surge in new cases—here are the details:
  • Spain has declared a national emergency and a nationwide curfew.
  • Italy has adopted new measures, including early closing hours for restaurants and the closure of gyms and cinemas.
  • Brussels has extended its curfew and closed arenas and cultural venues. It has also banned trick or treating.
  • Sweden, who famously avoided national lockdowns, isn’t completely immune; the region of Uppsala has instituted a voluntary lockdown.
• Meanwhile, the U.S. is also seeing an upswing in cases. The majority of new cases are occurring away from the coasts, for the most part.
  • VP Pence’s office has reported that several members have tested positive.
  • In an interview over the weekend, Chief of Staff Meadows indicated that the Federal government is not planning any new national measures. To a great extent, his comments likely reflect the fact that there is widespread fatigue over new measures.
• The Oxford/AstraZeneca (AXNCF, USD, 105.21) vaccine trial reports a robust response from its vaccine on the elderly, which is good news. Those over 60 are particularly vulnerable to the disease, so triggering an immune response from this age group would tend to reduce fatalities from COVID-19.

International news:  There was a plethora of international news over the weekend.  Here is the latest:

• The U.S. has brokered a ceasefire between Azerbaijan and Armenia; although one earlier this month failed almost immediately, so far, this one does appear to be holding for now. We view this ceasefire as a temporary halt in hostilities.
• President Erdogan of Turkey has suggested that President Marcon of France may need “mental” treatment after the latter supported measures to uphold France’s secularist laws, which allow for actions that Muslims view as offensive. France recalled its ambassador in response to the remarks.  Erdogan has called for a boycott of French goods.
• Last week, DEA agents arrested the former defense minister of Mexico on drug charges. The U.S. has evidence that General Salvador Cienfuegos aided drug cartels operating in Mexico.  Despite this evidence, State and Justice Department officials worry that the arrest may severely damage relations and undermine future U.S./Mexican cooperation on illicit drugs.
• Although Sudan did not give Israel full diplomatic recognition, it indicated it was willing to have talks with Israel on improving economic relations. The U.S. took Sudan off the State Sponsors of Terrorism list.  Still, issues surrounding the bombing of the USS Cole and Sudan’s role in supporting Osama bin Laden in the attacks of 9/11 have not been fully resolved.  Thus, there was some movement toward greater recognition of Israel in the Middle East, but the one with Sudan remains complicated.
  • The UAE will be able to purchase the F-35.
• Chile has voted overwhelmingly to write a new constitution. However, it is still unknown what will change in the new set of laws.  We do believe this action increases the risk of investing in Chile.
• The opposition in Venezuela continues to fray. One of its main leaders, Leopoldo Lopez, who has been holed up on the Spain’s embassy for over 18 months, has left the country and joined the rest of his family in Spain.  His departure makes it clear that President Maduro maintains his hold on the country.
• Protests continue in Belarus; the next move is a general strike.

China:  Communist governments have set out their economic plans in five-year increments.  The Soviets implemented their first one in 1928.  Interestingly enough, the Gorbachev government set the 13^th one in place in 1990, but it lasted only one year, as the U.S.S.R. dissolved in 1991.  China’s first 5-year plan was established in 1953 under Mao, adopting the Soviet structure.  Despite the reliance on market structures since 1979, China continues to establish 5-year plans.  Leaders are meeting to discuss China’s 14^th 5-year plan (note that this one would exceed the Soviet number); a couple of ideas have been circulating.  First, General Secretary Xi has discussed a “dual circulation” plan that would maintain exports but try to lift domestic consumption.  Such a policy is in direct contradiction to the macroeconomic identities, as lifting domestic consumption will tend to reduce exports.  We suspect Xi doesn’t want to suffer the drop in growth as the economy transitions from exports to domestic demand.  Thus, he wants a bit of both, which probably means he will end up with a bit of neither.  Second, the U.S. threat to cut off China’s semiconductor supply will likely trigger a goal of tech self-reliance.

Keeping up with the shift:  In this week’s AAW, we noted the historic reversal in the long-standing trend of goods and services consumption.  Since the end of WWII, there has been a steady increase in relative services consumption to goods consumption.  The pandemic has led to what is probably a temporary, but still notable, increase in relative goods consumption.  There are increasing reports that goods producers are scrambling to boost production to meet this new demand.  This situation is leading to a disconnect; services, such as restaurants, travel, etc.  continue to struggle while factories are looking for workers.  Although we do expect the long-term trends to eventually return, in the meantime, the economy will tend to find support from goods production.

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