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

[Posted: 9:30 AM EDT] | PDF

It’s Monday! Welcome back from the weekend.  Equity markets are mixed.  Foreign news leads off this morning as we cover the rise in unrest in Belarus, Lebanon, and Bulgaria.  Policy news comes next, where we touch on the executive orders.  China is third, economic and market news bats fourth, and we close with the pandemic.  Here are the details.

Foreign news:

• According to the Central Election Commission, Belarus President Aleksander Lukashenko captured 80.23% (yes, that degree of precision) of the vote, with the leading opposition candidate getting 9.9%. Civil unrest emerged shortly after the polls closed with over 20 cities reporting protests; riot police were dispatched.  Internet service was disrupted.  Widespread voting irregularities have been reported.  The outcome of the election was not a surprise; Lukashenko controls the voting apparatus and, in a fair vote, probably would have won.  But, the problem for dictators is legitimacy.  They crave the approval of the masses even though they won’t step down if the election results are adverse.  Thus, a 55%-45% win probably would have been accepted, whereas 80%-10% is unrealistic in almost any case.  What Lukashenko wanted was a nearly unanimous vote, which is only likely by ballot manipulation.
  • So, what happens next? Although there were rumors that Lukashenko had fled, there is no confirmation that he has departed.  Instead, it does appear various opposition leaders have left the country.  Lukashenko will likely maintain power but will be damaged by this vote.  His biggest threat will be within his own power structure.  His second biggest threat is that President Putin tires of him and supports a replacement.
• Bulgaria is seeing rising civil unrest as protestors push back against widespread corruption. It’s not that the corruption is anything new; Transparency International ranks Bulgaria as the most corrupt nation in the EU.  However, it appears the degree of corruption has reached a point where citizens are pushing back.  We will be watching to see how the EU reacts to these developments.
• There were widespread protests in Lebanon in the wake of last week’s port disaster. Key ministers resigned over the weekend and the government appears adrift.  It is not obvious how the situation in Lebanon will be resolved but it is becoming clear that (a) a power vacuum is developing, and (b) the country is in such a mess that there may not be any power center willing to take control.
• The U.K. and Japan are near a trade deal.
• As we warned in our WGR election series, the U.S. intelligence community confirmed that various nations are trying to sway our election.

Policy news: 

• After the impasse in Congress, President Trump took unilateral action over the weekend and issued a set of executive orders to maintain stimulus. The orders themselves are controversial; after all, if presidents could legislate by executive order, why bother with a legislature?  President Trump isn’t the first president to take such actions.  George W. Bush was prone to issue statements after signing bills that indicated how he would execute the law, which was often in opposition to what Congress intended.  President Obama aggressively used executive orders.  Our primary worry about executive orders is that they bring wide vacillation on policy.  The beauty of legislation is that most bills are crafted by consensus, which means the policy that emerges stays in place, allowing households and businesses to adjust.  Executive orders tend to favor a certain outcome that can easily be reversed by the next president, leading to uncertainty that could impede the investment process.  Here are the details of what the president signed:
  • The first order creates a special unemployment benefit of $400 per week. Because the president can’t fund orders (funding is done by Congress), the benefit will be paid out of the Disaster Relief Fund.  Here’s the catch—only 75% of the new benefit will be paid by the federal government.  The states will need to provide the rest.  Some states may simply not have the funding and thus won’t participate.  In addition, the new program will require some administration by the states whose budgets are already stretched.  It remains to be seen if this order will actually bring funds to the unemployed.
  • The second order defers payroll taxes until year’s end. Under disaster declarations (which we are under due to COVID-19), the Treasury can defer taxes.  This is how taxes were delayed until July this year.  This action is also controversial.  Although it does act as a potent tax cut to the lowest paid workers (Social Security payroll taxes are regressive; see the chart below), the deferral means that employers will be required to make up the tax when the order expires and thus they will be unlikely to do anything with the funds other than save them.

However, the most interesting item was that the president suggested he wants to do away with the payroll tax system altogether.  In one sense, this would address a longstanding fiction that Social Security is a pension.[1]  It’s not; it’s more like basic income for the elderly.  In the absence of a payroll tax, Social Security will be funded out of general revenue.  Franklin Roosevelt, in a political sleight-of-hand, created the payroll tax system to give the impression to Americans that they were paying into a pension fund.  Every year, we receive lists of what we paid in and our future benefits.  We will probably get the benefits, but not because we paid in.  We get them by benefit of being an older American.  By creating this mechanism, it made it impossible for subsequent administrations and Congress to get rid of Social Security, which was Roosevelt’s goal.  If workers believed that the taxes were funding their individual pensions, it would limit the ability of future governments to change the benefit.  Over the weekend, the Twittersphere went batty with comments about the end of Social Security.  This isn’t going to happen.  But, if there is a break in the payroll tax and the pension benefit, it will make it easier in the future to begin changing the benefit structure because the narrative of “I pay into the fund and get my money out” will be broken.

• There is limited deferral of student loan payment; private borrowing was not included.
• There is a limited eviction ban. The ban forbids evictions for federal guaranteed mortgages but not private ones.

China news:

• In retaliation for applying sanctions on leaders in Hong Kong and Xingang, Beijing has levied sanctions on 11 Americans. There were no specific actions tied to the sanctions.
• In Hong Kong, Jimmy Lai, a prominent media mogul and democracy activist, was arrested overnight under the new national security law. This is a very high-profile arrest and will certainly generate global reaction.
• Health and Human Services Secretary Azar visited Taiwan over the weekend. The fact that a cabinet secretary visited the island was not lost on Beijing, which greeted his visit by sending two military aircraft toward Taiwan.
• The “five-eyes” coalition of the U.S., U.K., Australia, New Zealand, and Canada are increasingly looking like the basis for an anti-China coalition. China appears to be recognizing that threat.
• Japan warned China about its naval activities in the South China Sea. Although rarely recognized, Japan has a potent navy and if its constitution relaxes restrictions on direct military activity, Beijing would have a problem.
• Flooding in China has affected rice growing regions and could lift food prices, always a politically dangerous issue for Chinese leaders.

Market and Economic news:

• All that empty mall space could be converted to fulfillment centers.
• Although price rallies in precious metals have been duly noted, industrial metals have been strong as well. Chinese stimulus efforts are a factor behind the rally, but dollar weakness plays a role too.
• The millennial generation is being scarred by economic turmoil. The oldest millennial, who is 39 years old, has seen a major bear market (2000-03), the Great Financial Crisis, and the pandemic.  The Depression generation tended to be frugal to the point of excess; if the millennials follow that path, inflation worries are probably overstated.

COVID-19:  The number of reported cases is 19,877,261 with 731,570 deaths and 12,127,638 recoveries.  In the U.S., there are 5,045,564 confirmed cases with 162,938 deaths and 1,656,864 recoveries.  For illustration purposes, the FT has created a nifty 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.  There is evidence that infections in the U.S. are falling, which is good news.  Perhaps the best way of thinking about COVID-19 in the U.S. is that we are completing the first wave.  The wave began on the coasts and eventually moved inland and south, following the trend to move inside as summer temperatures rose.

• One of the most frustrating elements of COVID-19 is its novelty. It’s new and we don’t know exactly what we are dealing with.  But humans, being prone to inductive thinking, tend to leap to conclusions.
  • Initially, it appeared the virus spread on surfaces, so disinfecting and handwashing became the primary way to combat the spread. Now, it appears that virus aerosols are probably the primary transmission factor.  Social distancing, meeting outside, and mask-wearing are thought to be the best way to slow the spread.[2]
  • The data showed that children seemed to be mostly unaffected by the disease. That didn’t mean they couldn’t get it or get sick from it, but their morbidity was low compared to the elderly.  However, new studies suggest that children can contract the disease and may be vectors in its spread.
  • Another frustrating element of the virus is the dispersion of symptoms. Some people are deathly affected with long recoveries, while others have it and never know it.  New research is focusing on the asymptomatic carriers to see if they might be a clue to counteracting the disease.  One idea is that asymptomatic infections may reflect native immunity due to earlier coronavirus infections as this family of viruses includes common colds.
• Sweden has been a test case all along—it never implemented aggressive lockdowns or closed schools. It did have widespread nursing home deaths, but so did other countries.  It is still unclear if Sweden has achieved herd immunity, but if it has, it would suggest another path toward living with the virus.
• There is great hope that everything gets better when a vaccine is released.  However, recent polling suggests adoption may be slow.

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[1] No real pension would only allow investment in one asset class, guarantee a payment level, and offer inflation protection.  That’s not a pension, that’s basic income.

[2] As an aside, as we watch the Cardinals leadership struggle to manage the outbreak on the team, we note that European football has managed the disease rather well without a bubble, the preferred method of the NHL and NBA.  We note that substitutes in soccer are kept apart, unlike MLB dugouts.  We wonder if MLB might be better off following soccer’s protocols on substitutes.

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

[Posted: 9:30 AM EDT] | PDF

It’s employment Friday!  We cover the data in detail below, but the quick view is that the data came in better than forecast.  It’s a modest risk-off morning, with weaker Chinese stocks.  Our leadoff this morning is China as tensions rise further.  Policy coverage is next as Congress looks like it won’t get a deal done.  We update the market and economic news followed by our foreign update.  The pandemic “bats ninth.”  We have a new Asset Allocation Weekly, with accompanying podcast and chart book.  Let’s get to work!

China news:

• President Trump has issued an executive order that targets Chinese social media apps. The order limits the ability of these firms to operate in the U.S. and gives Microsoft (MSFT, 216.35) 45 days to complete its purchase of the American operations of TikTok.  The order also targets Tencent Holdings (TCEHY, 72.57).
  • Microsoft is apparently considering buying all of TikToK.
• The administration is also considering measures that would force Chinese-listed firms to either comply with U.S. audit requirements or lose their listings in the U.S. It would also require any firms who want to list in the U.S. to comply before they can issue securities on U.S. markets.  The actions being considered will further weaken U.S./China relations and most likely boost Hong Kong stock markets, which would be the likely destination for Chinese firms that delist from the U.S.
• In another executive order, the U.S. is requiring the government to purchase “essential” drugs from American manufacturers.
• Interestingly enough, despite U.S. actions against Chinese companies, Beijing has mostly left American companies operating in China alone and they are benefiting from the recovery in China’s economy. Two items to consider: first, Beijing has tended to use American companies to weaken the case of the China hawks, and second, U.S. firms already face a less open environment in China.
• Google (GOOGL, 1504.95) has pulled more than 2,500 channels tied to China which were thought to be conduits of disinformation.
• Despite continued deterioration of relations, Beijing continues to try to diffuse the situation. China’s foreign minister Wang Yi indicated he is willing to restart talks.  That doesn’t apply to Canada, which continues to bear the brunt of Beijing’s anger.  A second Canadian citizen has been condemned to death for alleged drug trafficking.
• Gold is considered the safest of safe havens. However, to be safe, a holder must have it in a safe place.  Hong Kongers are increasingly moving their gold out of the former colony on confiscation fears.

Policy news: 

• It doesn’t look like a stimulus bill is going to be passed today. Both sides are at an impasse and positions have hardened.  Negotiators did meet for three hours yesterday but were unable to resolve anything.  Clearly, there are political angles being spun; we won’t go into those but there is potentially negative fallout to the economy from the lack of an agreement.  We do expect executive orders to offset some of the potential losses.

Market and Economic news:

• The U.S. has applied tariffs on Canadian aluminum. We note that the Beer Institute has criticized the decision.
• Despite Federal aid, farm bankruptcies have hit a new record. The pandemic has disrupted supply chains (processors who service restaurants saw demand plummet, while retail demand soared) and the trade conflict with China has hurt as well.
• Over the years, we have noted that coastal real estate markets have benefited from foreign capital flight. Recent data suggests this source of buying has diminished.  Not surprisingly, the largest decline in foreign buying came from China.
• That loss of foreigners isn’t hurting the housing market all that much. Lumber prices are soaring on strong building demand.
• It was expected that U.S. economic weakness would lead to a decline in foreign remittances. These are flows that foreigners working in America send home.  At least for Mexico and Central America, that has not been the case.  The most likely reason is that these workers are heavily represented in jobs considered essential and thus stayed employed during the downturn.  At the same time, outflows to Asia appear to have declined.
• As retailers enter bankruptcies, landlords are bracing for the widespread breaking of leases.
• The drop in electric vehicle sales has weakened lithium demand.

Foreign news:

• The Turkish lira has fallen to new lows. The Turkish central bank has been cutting interest rates despite elevated inflation.  Turkey’s CPI is 11.7%, while the benchmark policy rate is 8.25%, meaning the real policy rate is negative.  President Erdogan has pressed the central bank to cut rates, but it appears the financial markets are passing their judgement.
• Over the last couple of days we have discussed the tragic explosion in Lebanon. The next issue will likely be a surge in refugee flows from the country to Europe.  It should be noted that Syrians have emigrated to Lebanon to escape the Syrian civil war.  The current collapse in Lebanon will likely lead those Syrians to try to follow the Lebanese out of the country.
• A reminder—Belarus holds elections on Sunday.
• Brian Hook, the U.S. special envoy to Iran, announced his resignation. Hook has been hawkish on Iran, but his presence did offer a conduit for talks.  His exit almost guarantees that there will be no diplomatic movement on Iran before November’s election.

COVID-19:  The number of reported cases is 19,127,091 with 715,555 deaths and 11,590,138 recoveries.  In the U.S., there are 4,884,406 confirmed cases with 160,111 deaths and 1,598,624 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.  The FT has also issued an economic tracker that looks across countries with high frequency data on various factors.  The R_t data shows that just over 60% of the states are >1, suggesting increasing infection rates.  Midwestern states are experiencing a rising rate of positive tests.

• The pandemic has probably had the most devastating impact on South America.  GDP is expected to contract 9.4% this year.

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

[Posted: 9:30 AM EDT] | PDF

It’s the 75^th anniversary of the bombing of Hiroshima.  U.S. equity markets are a bit weaker after a strong showing yesterday.  We lead off with an update on policy progress (or lack thereof), followed by foreign news, with an update on Lebanon.  We also check in on the pandemic, followed by China.  Being Thursday, the Weekly Energy Update is available.  Here are the details:

Policy news: 

• Congressional leaders remain far apart on the next round of stimulus/support. The White House is threatening to take executive actions in lieu of legislation, although there will be limits to how much this can accomplish.  Although the process looks unsettling, this messiness is very common in democracies.  As Otto von Bismarck is attributed to have said, “There are two things no one should ever watch, the making of sausage and laws.”
  • The lack of agreement has probably already affected the economy. Even if the funds are returned, households will note the fragility of the moment and likely save additional amounts of any new stimulus.
  • Here’s a twist—dead people may get a stimulus check after all.
• As Congress continues to work on a support package, worries about a rise in evictions are starting to develop. The previous support package had put a moratorium in place, but that measure has expired.  At present, the decision to evict is a local issue, unless another moratorium is established.
• The National Guard has provided support for COVID-19 testing and other measures. The funding for these soldiers to participate in this mission will expire on August 21 without new authorization from the White House.  However, the demobilization is set to start tomorrow to allow the soldiers to quarantine for 14 days.  Some states have vowed to pay for the National Guard personnel to remain, but others lack the available funding.
• The WSJ has a detailed report on the Fed’s foreign swap lines. The decision by the FOMC to expand these lines was critical in maintaining global financial stability.
• In a recent AAW, we discussed monetary policy and social goals, specifically, what the Fed could do to improve the lot of disadvantaged groups. For African Americans, the evidence suggests the best way to narrow the unemployment gap (the gap between racial groups) is by extending the business cycle.  Congressional Democrats have introduced new legislation that would give the Fed a mandate to reduce racial inequality.  Here are a couple of thoughts:
  • The original Humphrey/Hawkins bill was designed to give the Fed the mandate to bring about full employment. Much of this thrust came from the civil rights movement, as leaders of that movement noted that having rights mattered little if one didn’t have work.  So, this legislation isn’t anything new; in fact, it is already part of the Fed’s mandate.
  • What is being lost here is that the inherent tradeoff is efficiency versus equality. When a society favors efficiency, it gets low inflation at the cost of higher inequality.  When it favors equality, it pays for that goal with higher inflation.  As we have been saying for nearly a decade, the U.S. is embarking on a cycle shift toward equality and away from efficiency.  That will eventually lead to higher inflation, but, given the level of slack in the economy, it will take a long time before that inflation becomes an issue.  Part of the reason the Humphrey/Hawkins bill never really did much is that it passed in 1978 when inflation was becoming a crisis.  The focus on inflation meant that most of the Humphrey/Hawkins law was ignored.  In fact, the most visible vestige of that bill is the fact that the Fed chair has to go to Congress biannually to testify about monetary policy.  This used to be known as the “Humphrey/Hawkins testimony.”
• One of the consequences of the TikTok issue is that it is further evidence that the World Wide Web is rapidly going regional, or becoming a “splinter-net.” Europe, China, Russia, and the U.S. are all taking measures designed to limit the global scope of internet traffic.  The potential impact on globalization is significant; if data can’t be moved easily anymore, The Great Convergence discussed by Richard Baldwin will reverse itself.

COVID-19:  The number of reported cases is 18,835,986 with 708,278 deaths and 11,381,042 recoveries.  In the U.S., there are 4,824,175 confirmed cases with 158,268 deaths and 1,577,851 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.  The FT has also issued an economic tracker that looks across countries with high frequency data on various factors.  Axios has updated its state map; there is clear evidence of improvement.

• There is growing consensus that once a vaccine is developed, supplies will be limited. This means some form of triage will be necessary and the protocol for who gets vaccinated and who must wait will be controversial.  Meanwhile, vaccine developers are starting to float pricing schemes.
• One of the common themes we continue to monitor is that societies are struggling with the balance between reopening and virus control. What we are seeing globally is that lockdown rules are eased.  In response, people congregate, relieved from the pressures of following guidelines.  Shortly thereafter, cases rise, and governments attempt to implement restrictions again.  We haven’t yet mastered the balance between the level of interaction and disease proliferation.

Foreign news:

• Here is what we are watching on Lebanon:
  • Although the initial reports from Lebanon were so horrific that it seemed logical that it must have been a bombing, the general consensus is that the cause was catastrophic negligence.
  • After such events, there is a drive to blame someone. Currently, port officials are under house arrest.
  • The Lebanese public is rightfully furious. For this dangerous material to be stored, essentially unsecured, for several years is unfathomable.
  • Ultimately, this is a problem of governance. Lebanon has the characteristics of a Middle East post-colonial state.  The colonial powers tended to create “states” that were not naturally composed.  Instead, they were borders that ignored conditions on the ground.  Peoples, religions, and ethnic groups that would not have naturally congregated were put together.  When the Europeans left, these essentially ungovernable entities remained.  Iraq, Syria, and Lebanon are all classic examples of this phenomenon.  The current government structure, which emerged from the 1990 agreement that ended a 15-year civil war, is no longer functioning.
  • Even before this catastrophe, Lebanon was in deep trouble. It was in the midst of a currency and debt crisis with no clear path to resolution.  The state is trying to avoid direct involvement in the Syrian debacle and has persistent tensions on its southern border with Israel.  What this blast lays bare is that the government probably can’t cope with all the pressures it faces.
  • We would not be surprised to see fighting break out between rival groups and another refugee crisis emerge.
• Azerbaijan and Armenia have been at loggerheads since the breakup of the Soviet Union.  Outside powers, including Iran, Russia, and Turkey, have routinely intervened to support one side or the other.  Recently, Turkey has been sending signals that it is willing to support Azerbaijan as tensions rise.
• Liam Fox, the former U.K. trade secretary, admitted that classified documents related to U.K./U.S. trade talks had been leaked after Russian hackers broke into his account. The episode highlights the risk of Russian technology infiltration.
• It is likely that Belarus is Russia’s closest ally. President Lukashenko is an autocrat much like President Putin.  In addition, Belarus’s close proximity to Russia means that the former needs to get along with the latter, although Lukashenko has tended to follow the small nation handbook of playing Russia against the West for aid. Recently, relations have been strained as Lukashenko faces a real election threat and he has accused Russia of interfering in the election.  The latest is that Belarus claims Russian agents have penetrated the country; it is not clear what the goal was, although intimidation is likely.  The Russians have been detained, which won’t sit well with President Putin.

Markets and Economic news:

• Gold prices have broken above the $2,000 per ounce line with little resistance. Negative real interest rates, currency debasement fears, and societal stability fears are all combining to lift the yellow metal.
• Housing has always been a difficult asset to value. Total return is calculated by the price change of the asset plus any benefits derived from ownership.  Calculating total return from a financial asset is usually straightforward.  How much did the price change over the period of ownership and was other income, interest or dividends, captured?  Housing is different because the benefits can be difficult to calculate.  It is possible to estimate the price gains of a property, although given the characteristics of the market (homes are not universal in quality and thus prices are best estimates), one doesn’t know for sure until the house is sold.  At the same time, there are benefits of living in a home.  And, if we are stuck at home, getting more benefit from the house becomes important.  We are seeing ample anecdotal evidence that homeowners are undertaking remodeling projects.  In the hard data, if we look at retail sales of building supplies and restaurants, it is evident that we are seeing a massive divergence.  The WSJ has a nice reflection piece on the benefits of homeownership; although they can be difficult to value, they are nonetheless real and enhanced under current conditions.

Although inflation has generally been modest, one area that has seen rapidly rising prices is food.  Such divergences are not unprecedented, but rising food prices do have distributional effects, harming lower income households.  Historically, rising food price inflation is not generally persistent and we would expect this episode to end fairly soon.  However, it highlights that any disruption in income support could have an increasingly adverse effect on lower income households.

• Commercial banks are notoriously procyclical. They tend to be too easy during expansions and too tight during recessions.  The most recent Senior Loan Officer Survey suggests a dramatic tightening of lending standards, which will tend to hamper the recovery.

China news:

• SoS Pompeo indicated the U.S. is prepared to expand its crackdown on Chinese tech firms by expanding into cloud-computing companies.
• Globalization and the drive for efficiency rested on an assumption of geopolitical stability.  Specifically, it needed the U.S. to act as global hegemon, reliably providing security and a reserve currency and the rest of the world accepting that condition.  As China has threatened this assumption, it is starting to expose previously unforeseen risks.  Simply put, under conditions of efficiency, there is little worry about where one produces a good.  The only thing that matters is whether production is cost-effective.  However, as the assumptions that underpinned globalization come under question, the U.S. finds itself in a position where it has supply chain risks it hadn’t acknowledged before.  The pandemic has revealed that the U.S. is dangerously exposed to China when it comes to pharmaceuticals.  That vulnerability isn’t a problem when the U.S. is the hegemon and China agrees, but it’s a big problem when the U.S. doesn’t know whether it wants to be the hegemon and China would like to remove our influence from that part of the world.

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

[Posted: 9:30 AM EDT] | PDF

Moderating coronavirus infections in the U.S. and continued progress in vaccine and treatment studies are helping buoy risk assets so far today, despite a major explosion in Beirut that initially raised fears of terrorism.  Another important positive today is that White House and congressional negotiators say they’re hoping to reach a deal on the next coronavirus relief bill by the end of the week.  We review all the key news below.

COVID-19:  Official data show confirmed cases have risen to 18,570,858 worldwide, with 701,316 deaths and 11,163,388 recoveries.  In the United States, confirmed cases rose to 4,771,846, with 156,839 deaths and 1,528,979 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• New coronavirus cases in the U.S. climbed above 50,000 for the first time in three days, but the tally remained lower than during recent peaks.  In addition, there are now only 18 states where the seven-day average of new confirmed cases is above the 14-day average, compared with 48 states a month earlier.  The data appear to confirm a continued moderation in new U.S. infections, even if some states and some foreign countries continue to face accelerating cases.  The figures should therefore be supportive for risk assets today.
• In contrast with the good news in the U.S. and many other major developed countries, the pandemic is still buffeting many large developing countries.  The Bolivian government has canceled its entire school year, worrying there isn’t enough internet reach across the country to make virtual classrooms feasible.  Longer term, there is also increasing concern that the pandemic will make it even harder for less developed countries to reach advanced country status.
• Novavax, Inc. (NVAX, 157.17) said its experimental coronavirus vaccine induced promising levels of both neutralizing antibodies and T-cells in an early-stage human trial of the shot.  The company also said the vaccine was generally well-tolerated.  That means the Novavax vaccine is in the current horserace of almost half a dozen vaccine candidates that have either moved into a final Phase III trial or are preparing to do so.  The news should help keep alive the current market optimism that a shot can be approved around the end of the year.  There would still be many challenges to be met before the global population can be broadly immunized, but the vaccine progress to date is encouraging, which should be positive for risk assets.
• In the search for treatments, researchers running a large national study found that hospitalized COVID-19 patients who received transfusions of blood plasma rich with antibodies from recovered patients reduced their mortality rate by about 50%.

Economic Impact

• June retail sales in the Eurozone rose by a seasonally adjusted 5.7%, following a revised 20.3% gain in May.  That left sales slightly higher than in February, before the pandemic took hold in Europe, and it left sales 1.3% higher than in June 2019 (see tables below).
  • Clothing and footwear sales rose especially strongly in June, while fuel sales also continued to rise.
  • However, in a sign of what may happen in other advanced economies as they recover from the pandemic, online purchases and mail orders dipped after four months of growth, suggesting consumers were beginning to return to stores rather than relying on home deliveries.
• In an interview with the Financial Times, Tokyo Olympic Games Chief Toshiro Muto insisted Japan will hold the event next summer as currently planned, even if the coronavirus isn’t yet under control.

U.S. Policy Response

• Treasury Secretary Mnuchin said the White House and congressional Democrats are aiming for a deal on the next coronavirus relief bill by the end of this week.  However, he also warned that the two sides are not yet “at the point of being close to a deal.”  Given the way massive monetary and fiscal stimulus have been so instrumental in buoying the U.S. economy and financial markets through the crisis to date, continued negotiations and optimistic statements like Mnuchin’s are a positive for risk assets.  All the same, if brinksmanship rears its ugly head again or the resulting package is deemed disappointing, the markets could become volatile late in the week.

Lebanon:  After a massive explosion at a warehouse in central Beirut killed dozens of people yesterday, Lebanese officials offered assurances that the blast occurred because of a fire and was not on purpose.  Press reports say the explosive was 2,700 tons of ammonium nitrate seized from a Russian ship in 2014 and stored in a waterfront warehouse pending legal proceedings.  However, President Trump called the explosion a “terrible attack” and said U.S. military leaders believe the tragedy was caused by “a bomb of some kind.”  Even though Israel exchanged fire with Hezbollah militants on its border with Lebanon last week, an Israeli government official said Israel had no involvement in the explosion.

United States-China:  U.S. and Chinese officials have agreed to meet via videoconference on August 15 to assess Beijing’s compliance with the Phase I trade deal signed in January.  The meeting will reportedly include both U.S. Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He, President Xi Jinping’s point man on economic policies.

United States-China:  In a move China will likely see as provocative ahead of the trade deal meeting, U.S. Health and Human Services Secretary Azar will lead a delegation to Taiwan to discuss the coronavirus pandemic.  Azar’s trip would be the first visit by a U.S. cabinet official to Taiwan in six years.  In a statement, Mr. Azar said his trip is intended to show President Trump’s support for Taiwan, its democratic government and the leadership it displayed in handling the coronavirus outbreak.

Saudi Arabia-China:  Based on information from Western officials, the Wall Street Journal yesterday said Saudi Arabia has secretly built a facility to extract yellowcake from uranium ore, advancing its drive to master nuclear technology and keeping open an option to develop nuclear weapons.  The Saudi government categorically denied the report, but the news is still bound to generate concern in the U.S. Congress, where a bipartisan group of lawmakers has expressed worries about Crown Prince Mohammed bin Salman’s vow to develop a nuclear bomb if Iran does so.  Given Saudi-Iranian enmity, possession of nuclear capability by both sides would seriously increase potential devastation in the event of war.  Besides that, the report said the facility was built with Chinese help, which will raise concerns that China might try to woo U.S. allies into its orbit with promises of nuclear technology.  Finally, the news will likely be concerning to Israel due to its past military confrontations with Saudi Arabia.

India:  Prime Minister Modi has presided over a ceremony to kickstart the construction of a Hindu temple on the site of a 16^th century mosque, whose destruction in 1992 sparked deadly riots across India.  The ceremony underlines Modi’s commitment to Hindu nationalism one year after he revoked the semiautonomous status of India’s only Muslim-dominated region, Jammu and Kashmir (see our WGR from September 9, 2019).

North Korea:  After a period of relatively good behavior, satellite imagery shows North Korea has ramped up its sanctions-busting coal exports again.  The new activity is being taken mostly as a sign of increased economic pressure on North Korea.

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