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

[Posted: 9:30 AM EDT] | PDF

Good morning, all!  U.S. equities appear to be headed for a higher open this morning. Today’s Comment begins with a discussion about Chinese President Xi Jinping’s speech.  International news follows, with an update on the global minimum tax proposal and the EU’s decision to end caged farming. U.S. Economics and policy news are next, including an update on the infrastructure package.  China news follows, and we end with our pandemic coverage.

China will not be bullied:  Thursday marked the 100-year anniversary of the Chinese Communist Party. During the celebration, President Xi gave a speech that alluded to a possible war over Taiwan.  In the speech, he stated that an attempt by “foreign forces” to bully China would result in “heads bashed bloody against a Great Wall of steel forged by 1.4 billion Chinese people.”  He went on to pledge that China would regain full control over Taiwan. The speech comes within weeks of China flying fighter jets and bombers through Taiwan’s air space.

His latest remarks were in steep contrast with comments he made to diplomats a month ago.  In June, Xi advised officials to create a “trustworthy, lovable and respectable” image of the country abroad.  So far, markets have not responded well to the sudden change in tone.  We note that investors sold Chinese equities in the wake of Xi’s speech.  Although the sell-off may be short-lived, as China’s economy appears to be stable, the probability of war between the West and China, though remote, is elevated.

On Wednesday, Japanese officials warned that Russia and China were coordinating military exercises to threaten not only Taiwan but also Hawaii.  Although simulated attacks are quite common during military exercises, it shows that as China ramps up its rhetoric about a possible takeover of Taiwan, it is also preparing for a U.S. response.  The U.S. and Japan, who have also been coordinating military exercises, appear to be growing more concerned about the increase in China’s assertiveness over the last few years.  Although it appears Japan will likely retaliate if China follows through on its threat to invade Taiwan, the U.S. has been noticeably ambiguous on the matter.  President Biden himself appears to be conflicted.  People within his administration, such as Secretary of State Antony Blinken, would likely support a retaliation.  In the past, Blinken has argued that the U.S. shouldn’t shy away from its role as hegemon and was once quoted as saying “superpowers don’t bluff.”  However, it doesn’t appear that Biden believes he could persuade the American public to back a war with China over Taiwan.  A survey conducted by the Chicago Council on Global Affairs shows that if China invaded Taiwan, only 41% of Americans would support a U.S. military response. The lack of support could make retaliation politically risky, and given the blowback Biden received after supporting the invasion of Iraq, he may be keen to play it safe.

One of the biggest takeaways from Xi’s speech is that the U.S.-China decoupling appears to be inevitable.  Given the rise in tensions, the U.S. has taken a tougher stance against China and some of its labor practices.  Earlier this year, the U.S. issued sanctions against China in response to allegations of forced labor being used in Xinjiang cotton fields.  Although U.S. companies issued statements expressing their concerns about the use of forced labor, it doesn’t appear that these companies were willing to sever ties with China over the matter.  During a call with Wall Street analysts, Nike (NKE, $158.00) CEO John Donahue claimed that “Nike is a brand that is of China and for China.”  In response, Commerce Secretary Gina Raimondo hinted that U.S. companies should take a more active role in speaking out against human rights violations.  Although we don’t expect laws to deter companies from working with China to be forthcoming, we are starting to see this administration hint that companies may want to consider other options first.

International news: Protests in Myanmar, support for a global minimum tax, and a ban on raising farm animals in cages.

• Since taking power in February, the Myanmar army has struggled to contain the nationwide protests. On Thursday, protesters set fire to army uniforms and chanted pro-democracy hymns.
• Over 130 countries have signed on to the 15% global minimum corporate tax on multinational corporations. Following heavy lobbying by the U.S., all G20 countries have backed the plan. There are a few holdouts, including Ireland, who claimed that it isn’t in a position to back the proposal.  Ireland’s corporate tax rate is 12.5%.
• Venezuela is preparing to slash six zeroes from the bolivar, its national currency, as the country has struggled to contain the rampant inflation. Although the country has adopted the dollar for many of its transactions, the bolivar is still needed for everyday items such as bus fare.
• The European Union has decided to back a ban on raising farm animals in cages. The new regulation is expected to be introduced in 2023 and will likely not be put into place until 2027.

Economics and policy:  The House passes a spending bill, the International Monetary Fund revises U.S. growth expectations, and U.S. plains maintain air strike capabilities in Afghanistan.

• On Thursday, the House passed a bill that would approve $715 billion of spending on transportation and drinking water. The bill would likely need to meld with the infrastructure deal struck by a bipartisan group of Senators.
• The Biden Administration warned 17 countries for not doing enough to combat human trafficking. The list included major countries, such as Russia, Iran, and China. Failing to act on human trafficking could result in sanctions.
• The Congressional Budget Office (CBO) projected that the U.S. deficit would expand to $3 trillion in 2021 and average $1 trillion over the next ten years. This deficit reached its second-highest level since 1945.
• The International Monetary Fund raised its U.S. growth projections to 7.0% in 2021, up from 4.6%. The projection assumes that Congress passes the infrastructure spending bill. The supranational organization also stated that the Fed would likely need to raise rates by late 2022 or early 2023, as it believes spending will keep inflation above its long-term trajectory.
• The Federal Trade Commission has announced it will begin to crack down on companies that inaccurately use the “Made in the U.S.A.” Violators will be fined as much as $43,280.
• The U.S. plans to keep airstrike capabilities in Afghanistan following its withdrawal from the country. The U.S. will keep some of its troops and artillery at the Hamid Karzai International Airport in Kabul.  The U.S. decision to maintain airstrike capabilities within the region is in response to an increase in attacks and reports that the government could fall within six months of its withdrawal.

China:  Students are harassed, and there’s a change in electricity prices

• Pro-democracy Chinese students who are attending Australian universities have been harassed and threatened by the Chinese government.
• In response to declining utilization rates at coal-fired plants, Chinese state planners have decided to change the way it sets residential electricity prices. The change will make household electricity more expensive.

COVID-19:  The number of reported cases is 182,653,642 with 3,955,835 fatalities.  In the U.S., there are 33,679,489 confirmed cases with 605,019 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.  The CDC reports that 382,283,990 doses of the vaccine have been distributed, with 328,152,304 doses injected.  The number receiving at least one dose is 181,339,416, while the number of second doses, which would grant the highest level of immunity, is 155,884,601.  The FT has a page on global vaccine distribution.

• A new mass testing technique has improved the efficiency of COVID testing. In a paper published in Nature Biotechnology, this new technique can detect about 100 times lower amounts of the virus than the traditional test.  The new method should help pave the way for school reopening in the fall.
• The digital COVID-19 certification went into effect in the European Union on Thursday. The certificate allows for people who have received vaccines made by Pfizer-BioNTech (PFE, $39.48), Moderna (MRNA, $234.73), Johnson & Johnson (JNJ,$165.50 ), and AstraZeneca(AZN, $60.30) to travel throughout the bloc without restrictions.
• Although the Delta variant has emerged as the dominant strain in England, it has not led to a surge in hospitalizations. This is a welcoming sign as there have been growing fears the variants could be immune to vaccines.
• The World Health Organization has stated that gatherings to watch the UEFA EURO 2020 in stadiums and bars contribute to the increase in infections. Although this is an unwelcome sign, we would like to remind our clients that it is safe to root for “La Roja” from the comfort of their own homes.

The Biden Administration will send “surge teams” to communities with low vaccination rates to help combat the spread of the Delta variant of the coronavirus.

 View PDF