Author: Rebekah Stovall

Daily Comment (July 10, 2020)

Posted on by Rebekah Stovall

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

[Posted: 9:30 AM EDT]

Good morning and happy Friday!  Being Friday, there is a new Asset Allocation Weekly, associated podcast and chartbook, all available for the weekend.  U.S. equity futures and global equities are taking a breather.  Conditions with China continue to deteriorate.  It looks like another round of fiscal spending is on the way.  There are growing worries about the pandemic’s resurgence weakening economic growth and it is also affecting the capital/labor tradeoff.  At the same time, it isn’t all bad news.  Gold and lumber have been doing quite well.  We update foreign news and COVID-19.  Let’s run through the tape:

China news:

  • The U.S. has formally sanctioned high-ranking Chinese officials over Xinjiang. Overall, four officials were named, including Chen Quanguo, the CPC secretary of Xinjiang.  Three of the officials will be banned from entering the U.S.; China has not responded yet, but we fully expect retaliation.
    • As an aside, we remain surprised that both sides continue to support the Phase One trade deal. We suspect the arrangement is under threat and have noted that China is well behind its targets.  However, a formal rejection of the deal would have a negative ripple effect on financial markets, leaving it abundantly clear that relations were in trouble.
  • The long arm of the dollar is showing its power with relation to Hong Kong. S. and European banks are conducting audits of their clients to see if any are controlled by Chinese or Hong Kong officials that are at risk of being sanctioned.  It is expected that relations with these clients will be severed to avoid losing access to dollar markets.
    • We are seeing a dual system developing in technology. It looks like a dual system of finance may not be far behind.  In terms of finance, China will have a hard time competing with the universality of the dollar and the deep U.S. financial system.
  • A recent roundtable discussion noted that Chinese companies listed in the U.S. continue to vary from U.S. auditing standards. It is almost impossible to avoid the risk of non-compliance in passive products, leaving U.S. investors unwittingly exposed to financial reporting issues.
  • Iran is cozying up to China; this action will almost certainly add to pressure from U.S. lawmakers to add sanctions on China.

Policy news:

  • Treasury Secretary Mnuchin is working with Congress for another stimulus bill. Most of the current measures expire at the end of July.  Expect the bill to adjust the unemployment payments.  The $600 per week flat payout won’t be extended.  We would expect the payment to be a mere replacement of lost income with some additional support for workers in industries hardest hit.  Whenever you make a blanket payout, there will be externalities introduced.  However, it should be remembered that in the initial package, due to the uncertainty, the $600 per week extra cash made sense.  It also makes sense to adjust the program to make it less attractive to stay home.  At the same time, another round of stimulus checks is highly probable.

Market and Economy news:

  • The meatpacking industry has been hit hard by COVID-19. Workers operate in close quarters, in cold conditions, that seem to allow for the spread of the virus.  In response, the industry is looking to increase automation, which would reduce the number of workers and perhaps allow them to work in less-contained environments.  The pandemic has introduced new trends in the economy, including work-from-home, cashless payments and increased use of store pickup.  What we are seeing in meatpacking is consistent with what we are seeing across the economy.
  • The IEA reported that global oil supply fell 2.4 mbpd in June to a nine-year low of 86.9 mbpd. Global consumption fell 16.4 mbpd in Q2.  The IEA is expecting both supply and demand to rise next year, but both are dependent on the path of the post-pandemic recovery.
  • In addition to strong equity markets, two commodities have been doing very well, precious metals and lumber. The former is benefiting from low to negative interest rates around the world and the expansion of central bank balance sheets.  The latter is enjoying a boost in demand; as we are stuck at home, we are apparently doing more projects that include lumber.  We are also seeing a surge in homeownership rates as the millennial generation move into their homebuying years.  That will likely lead to an increase in homebuilding that could get supported by telecommuting, which would encourage younger households living in exorbitant tax rate states to consider relocating to lower cost venues.
  • Chinese equities have been rising recently, supported by state efforts to encourage stock buying. Authorities in China are apparently worried that things are getting out of hand.  Two state-owned funds sold stocks this week to cool prices.
  • In recent years, we have seen steady stock buybacks that have led the S&P 500 divisor to fall, despite a long bull market. Essentially, despite rising equity values, companies tended to withdraw more stocks from the market than were added either by IPOs or by new issuance.  That isn’t what we are seeing now.  Companies are taking advantage of the market strength to issue new shares; the issuance will likely weigh on stocks.  If the divisor rises, it lowers the earnings per share, all else held equal.
  • California has belatedly joined an antitrust lawsuit brought by state attorney generals against Google (GOOGL, 1518.66). Since the company is headquartered in the Golden State, there has been reluctance to join the effort.  The fact that California has joined is not good news for the company.

Foreign news:

COVID-19:   The number of reported cases is 12,294,117 with 555,531 deaths and 6,760,631 recoveries.   In the U.S., there are 3,118,168 confirmed cases with 133,291 deaths and 969,111 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.

Virology:

  • The WHO has finally capitulated and confirmed that COVID-19 can spread through droplets suspended in the air. This fact makes large, crowded indoor gatherings particularly dangerous.
  • Bolivia’s president has tested positive for the virus.
  • A German biotech firm, BioNTech (BNTX, 65.61), says it will likely have a vaccine ready for regulatory approval by year’s end.
  • On the topic of vaccines, we are seeing a disturbing trend in vaccine nationalism that could end up causing problems. For example, if a country decides to only support its “national champion” to the exclusion of all others, it could lead to that nation not getting timely vaccine supplies if another nation gets there first.
  • The U.S. appears to be inadvertently engaging in the development of herd immunity. By allowing the virus to spread among younger people, more are becoming infected.  If contracting the virus leads to some level of immunity, it might make sense to do so.  However, it still isn’t clear how much immunity an infected person retains.  Another problem is that if a nation decides to go the route of establishing herd immunity, it should put policies in place to protect the most vulnerable; that really hasn’t happened on a national level.
  • Iran claims it has used drugs designed for Hepatis C as an antiviral treatment for COVID-19. The two drugs, sofosbuvir and daclatasvir, appear to have reduced symptoms of the virus in three trials with control groups.

View the complete PDF

Asset Allocation Weekly (July 10, 2020)

Posted on by Rebekah Stovall

by Asset Allocation Committee

Equity markets, to a greater or lesser degree, tend to reflect social and political trends.  After all, the mood of investors plays a role in the propensity to move money into stock markets.  Unfortunately, the impact of social or political events on equities tends to be a mixed bag.  The chart below shows over 120 incidents from 1896; some events were notable, while others had only a modest impact.

(Source: https://www.marketwatch.com/story/the-dows-tumultuous-120-year-history-in-one-chart-2017-03-23)

What is notable about this chart is that some factors can be bullish, such as the creation of the assembly line or the introduction of the internet.  Some events would seem to be negative, but the impact is fleeting, whereas other negative occurrences have a much more significant impact.

The U.S. is experiencing a wave of civil rights protests similar to what occurred in 1968 (#73 on the above chart).  On its face, civil unrest would seem to be a negative factor for investor confidence.  However, at least initially, the widespread protests may lead to a policy response that is supportive for equity prices.

One of the effects of the 1968 civil unrest was the Humphrey/Hawkins Full Employment Act.  The law required policymakers to strive for full employment.  In fact, the bill had four policy goals—full employment, a balanced fiscal budget, a balanced trade account and price stability.  As anyone with a modicum of formal economic training can note, these four goals are not necessarily consistent.  In other words, achieving full employment and price stability or a balanced budget may not be possible.  Therefore, policymakers had to decide which goal was preeminent.  The bill was passed in 1978; by the time it was enacted, concerns about full employment had been supplanted by inflation worries so the bill never really lived up to its sponsors’ goal of full employment.  However, it is this bill that requires the Fed chair to semiannually travel to Capitol Hill to talk about monetary policy and the economy.

Forty-two years after the passage of Humphrey/Hawkins, there is growing evidence that the Federal Reserve is focusing on employment, especially minority employment.  Spearheading the effort is Atlanta FRB President Bostic, who recently penned a letter on racism.  But, beyond what the Federal Reserve system can do with its own hiring and its regulatory power over lending, there is a question about what monetary policy can do about this issue.  After all, setting interest rates is a blunt policy instrument.  In his recent press conference, Chair Powell noted that minority unemployment had declined markedly before the pandemic, but has risen since the recession occurred.  In his opinion, the best way to boost minority employment is to foster a strong labor market.

This chart shows the unemployment rate for African Americans and Caucasians.  The rate for the former is persistently above the latter, but what is notable is that the longer an expansion lasts the narrower the difference between the two series becomes.  If the Fed is serious about reducing African American unemployment, one of the important policy goals would be to extend the expansion as long as possible.

To some extent, this is nothing new; monetary policy isn’t designed to end an expansion prematurely.  But, this information signals to investors that the Fed has yet another reason to preserve an expansion, which is supportive for equities—unless it becomes apparent, at some point in the future, that the FOMC would be willing to allow inflation to rise above target to preserve the expansion.  In general, for the past 33 years, major declines in equity markets have been tied to recessions.  That is true, in part, because the Federal Reserve has earned inflation-fighting credibility.  It remains to be seen whether what we are observing now represents a more notable shift away from inflation suppression.

View the PDF

Daily Comment (July 9, 2020)

Posted on by Rebekah Stovall

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

[Posted: 9:30 AM EDT]

Good morning.  Global equities are higher as Chinese markets continue on a tear.  News on China leads our commentary this morning.  Our usual update of the pandemic follows, along with foreign news, an update on policy, market action and the economy.  The updated Weekly Energy Update is available.  Off to work:

China news:

  • China’s foreign minister, Wang Yi, gave a speech this morning suggesting that current relations are at their lowest point since normalization in 1979.
  • Since taking power in 2012, Chairman Xi has aggressively consolidated control through a number of measures, including jettisoning informal term limits and purges of enemies. We noted a recent event where leaders close to Xi appeared to be instituting an aggressive crackdown on the legal system through a program of re-education (a long standing favorite tool of communists everywhere).  We are a bit surprised by the ferocity of this response; after all, there has been scant evidence of an independent judiciary for some time in China.  The fact that Xi seems to think these measures are necessary suggests a leader that is still unsure of his position, despite overwhelming evidence he has quelled opposition.  Either (a) Xi is becoming increasingly insecure, or (b) like Mao, he sees these sorts of measures as the way China is to be governed, a situation of constant “revolutionary” turmoil.
  • There are reports that the U.S. is considering steps to undermine the Hong Kong dollar’s peg to the U.S. dollar. Hong Kong uses a currency board and issues its own currency based on U.S. dollars held in reserve.  If the U.S. were to deny the Hong Kong currency board access to U.S. dollars, the board could only issue new Hong Kong dollars by allowing the currency to depreciate.  It doesn’t appear that this action is imminent, although the very fact that it is under consideration suggests a deep deterioration of relations between China and the U.S.  Interestingly enough, Hong Kong has been experiencing inflows from abroad, which has required the currency board to intervene to prevent the Hong Kong currency from appreciating.
  • The U.S. has put visa restrictions on Chinese officials involved in setting Beijing’s Tibet policy. China has retaliated.
  • China is criticizing U.S. fiscal stimulus, fearing a drop in the dollar and calling for a new reserve arrangement. We note the CNY rallied this morning and this market action might be raising concerns in Beijing. This call for another reserve currency isn’t new, but there is a lack of attractive alternatives to the dollar.  We do note, in a recent WGR, we discussed that the potential for a Eurobond might be an attractive vehicle for reserve purposes.
  • FBI Director Wray gave a speech at the Hudson Institute where he indicated the Chinese government and the CPC are a threat to U.S. economic and national security.
  • It appears that if the U.S. wants to prevent the use of Huawei (002502, CNY 2.86) equipment, it is going to require the building of alternatives. In other words, the U.S. government may need to fund the creation of 5G equipment from firms other than Huawei. Meanwhile, the company is asking the K. to slow its decision on using Huawei’s 5G equipment, fearing it will be ejected from the British market.
  • Despite the end of the “one-child policy” and steps to encourage additional births, Chinese couples apparently didn’t get the memo, as births hit a new low in 2019.
  • Over the past couple of weeks, we have been reporting on massive flooding in south-central China along the Yangtze River. The sluice gates have been opened at the Three Gorges Dam which will exacerbate flooding downstream.  The current death/missing toll is 119.
  • The Institute of International Finance (IFF) estimates that China’s total debt is 317% of GDP at the end of Q1 2020. That is up from 300% in Q4 2019 and the largest quarterly rise in history.  Consumer debt is the fastest growing segment.  Foreign investment in China’s bonds is only 2% of the total; the vast majority of China’s bonds and debt are held internally.  The rise in debt is likely tied to stimulus efforts tied to the economic recovery from the pandemic.  In related news, we note that a Chinese developer has not paid its bondholders.
  • Chancellor Merkel has come under criticism for her government’s tepid opposition to China’s actions in Hong Kong. Germany is trying to maintain economic relations with China in a period where Beijing’s actions are making it difficult to keep such ties.
  • The new national security law for Hong Kong makes it illegal for anyone to promote democratic reforms or criticize the government. This includes people living outside of China or Hong Kong.  The extensive reach of this law is remarkable; it begs for a global response.
  • There have been worries that the new security law will undermine Hong Kong’s financial firms. At the same time, Beijing needs Hong Kong’s expertise in this area and we suspect that Chairman Xi will take steps to support the financial firms in Hong Kong while he cracks down on security.  Although we are early in the process, recent listings by Chinese tech firms in Hong Kong suggest that the former colony’s financial prowess will likely be preserved, at least for now.

COVID-19:  The number of reported cases is 12,062,863 with 549,900 deaths and 6,609,462 recoveries.  In the U.S., there are 3,055,144 confirmed cases with 132,309 deaths and 953,420 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.  Axios has updated its state cases chart.

Virology:

  • In the race for a vaccine, the U.S. has committed $2.0 billion to two companies, Novavax (NVAX, 101.44) and Regeneron Pharmaceuticals (REGN, 654.42) who are working on vaccine candidates as part of Operation Warp Speed.
  • Testing is being conducted on a drug derived from the blood plasma of former COVID-19 patients. The drug may work for both treatment and as a prophylactic for the disease.
  • As testing increases, wait times for test results have increased as well. This development is a problem because a tested person doesn’t know if they should continue their normal activities, assuming a negative test result, or self-quarantine, fearing a positive one.
  • Although mask wearing remains controversial, we note a natural experiment that occurred in Germany suggests mask use does reduce the spread of infections.  In March and April, some German states required masks, others did not.  Researchers were able to measure infection differences and conclude that mask wearing reduced inflection spread by 40% compared to areas that didn’t have similar rules.
  • Another area of controversy is the debate over airborne transmission. The fact that infections appear tied to events held indoors in close quarters suggests that the virus is probably airborne and can stay in that state for long periods of time.  However, WHO continues to say that the evidence is inconclusive.   If it is established that a prime transmission factor is indoor crowded events, mitigation measures could be adopted, e.g., more outdoor events, crowd spacing, masks, improved ventilation, etc.  But as long as the messaging is inconclusive, mitigation measures will likely not be adopted.
  • As hospitalizations rise, the health care system is reporting growing shortages of personal protection equipment.

Policy news:

  • Nearly 60% of Americans have nothing saved for retirement. States are now moving to address this problem by creating programs to strongly encourage companies and individuals to start IRA contributions.
  • Recently, Washington issued rules that required foreign college students to take classes in person. This action will either mean that colleges will need to take on campus students to retain and attract foreign students, or continue online classes and lose this source of tuition revenue.  This trend comes along with an anticipated decline in Chinese students due to deteriorating relations.
  • Last September (seems so long ago, doesn’t it?) the financial markets were roiled by problems in the repo markets. Although Fed officials still seem to struggle to explain what exactly happened, the response was to flood the non-bank financial system with liquidity.  The balance sheet contraction ended and has expanded with abandon with the onset of the pandemic.  One sign of good news is that the Fed has withdrawn specific repo support due to the lack of demand.  Of course, when one sends the balance sheet to historic highs, one shouldn’t see problems in the short-term funding markets.
  • One of the areas of risk to the economy are state and local governments. Unlike the Federal government, the state and local governments don’t issue debt in a currency they control and so their spending is pro-cyclical; it rises and falls with the business cycle.  Due to the downturn in the economy, state and local government spending is showing signs of falling, and if the Federal government fails to intervene, it could undermine Federal stimulus efforts.
  • The entire housing payments chain is at risk as well. Renters and homeowners pay rent or mortgages respectively.  These payments flow to landlords or mortgage servicers and these flows eventually end up in mortgage backed securities.  There are government programs that offer protection to bondholders, but little support is available downstream.  Congress continues to discuss another stimulus package; some of the last one did support the housing payments chain.  If additional support isn’t forthcoming, the housing payments chain is at risk.  Interestingly enough, this problem is also a threat to state and local governments, because if this payment chain is broken, property tax payments will likely fall as well.

Foreign news:

Market and Economy news:

View the complete PDF

Weekly Energy Update (July 9, 2020)

Posted on by Rebekah Stovall

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

Here is an updated crude oil price chart.  The oil market has stabilized at higher levels after April’s historic collapse.

(Source: Barchart.com)

Crude oil inventories rose well above market expectations, with stockpiles rising 5.3 mb compared to forecasts of a 3.0 mb draw.  The SPR added 0.6 mb this week.

In the details, U.S. crude oil production was unchanged at 11.0 mbpd.  Exports fell 0.7 mbpd, while imports rose 1.4 mbpd.  Refining activity rose 2.0%, much higher than expected.

High negative readings for unaccounted-for crude oil continues, although it is higher than what we saw a few weeks ago.

Unaccounted-for crude oil is a balancing item in the weekly energy balance sheet.  To make the data balance, this line item is a plug figure, but that doesn’t mean it doesn’t matter.  This week’s number is -765 kbpd.  This is a large number and suggests the DOE is still struggling to figure out what accounts for the missing barrels.  We suspect much of it is caused by the DOE overestimating production.

(Sources: DOE, CIM)

The above chart shows the annual seasonal pattern for crude oil inventories.  This week’s data showed a rise in crude oil stockpiles.  We are well into the seasonal draw for crude oil.  The continued rise in inventories is bearish for prices.

Based on our oil inventory/price model, fair value is $27.81; using the euro/price model, fair value is $52.56.  The combined model, a broader analysis of the oil price, generates a fair value of $40.29.  We are starting to see a wide divergence between the EUR and oil inventory models.  The weakness we are seeing in the dollar, which we believe may have “legs,” is bullish for crude oil and may overcome the bearish oil inventory overhang.

Gasoline consumption remains below average, but the recovery is unmistakable.

As the first chart shows, oil prices have recovered rather nicely from the epic collapse in April.  However, as prices have firmed, trouble is brewing within OPEC.  Saudi Arabia is threatening another market share war if smaller OPEC producers fail to meet the production reduction pledges.  Will Riyadh follow through?  We doubt it because it would disrupt U.S./Saudi relations.  At the same time, the Saudis would probably prefer to keep prices lower for longer to crush higher-cost producers and gain market share.  They just can’t figure out how to do that and maintain good relations with Washington (as an aside: the KSA may have an incentive to renew the market share war with a Biden presidency as it is less likely the Biden administration would ride to the rescue of the U.S. oil industry).

Democrats are proposing climate change policies that would bring zero emissions by 2050 and electric-only cars by 2035.  We see little chance this actually becomes law as whoever is in the White House will be wrestling with high unemployment instead.

China has been absorbing crude oil at a fast pace, taking advantage of low prices.  However, this source of demand may be waning in light of reports that China’s oil storage is nearing capacity.  This storage issue is colliding with China’s pledges to buy U.S. energy as part of the Phase One trade deal.  It is becoming increasingly unlikely that China will meet its pledge.

Natural gas prices continue to languish despite summertime temperatures in much of the U.S.  It’s not just domestic demand that is a problem; global consumption of LNG is down as well.

View the PDF

Daily Comment (July 8, 2020)

Posted on by Rebekah Stovall

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

[Posted: 9:30 AM EDT]

Despite rising stock markets overseas, sentiment in the U.S. markets today seems finely balanced between optimism about post-virus economic reopenings and accommodative policies on the one hand and the reality of resurgent infections and renewed lockdowns in some locales on the other hand.  We review all the key news below.

COVID-19:  Official data show confirmed cases have risen to 11,856,991 worldwide, with 544,871 deaths and 6,473,170 recoveries.  In the United States, confirmed cases rose to 2,996,333, with 131,481 deaths and 936,476 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

Economic Impact

European Union:  ECB President Lagarde said her ongoing review of the central bank’s operations will examine how they can be made “greener.” This includes potentially shifting its massive asset purchases to sell off obligations issued by carbon-intensive companies and buying more obligations issued by less carbon-intensive firms.  Separately, she also tried to tamp down expectations that the EU’s proposed €750-billion coronavirus recovery, including common debt issuance, would be approved at a summit to be held on July 18.  According to Lagarde, approval of the plan will probably come closer to the end of July.

EU-Germany:  The German central bank will reportedly accept the positive findings of a finance ministry and parliamentary review of the ECB’s massive bond-buying program. This suggests the program won’t be tripped up by the German constitutional court’s ruling in May, stating that government officials must review the economic and financial costs of the bond purchases.

United States-China:  The U.S. is imposing visa restrictions on Chinese officials involved in Tibet policy.  This is the latest rise in tension with Beijing, as the Trump administration increasingly uses immigration measures as a tool to target China.

Mexico:  The Jalisco New Generation Cartel, which dominates the trade in fentanyl and methamphetamines, has become Mexico’s most powerful criminal organization, eclipsing the more famous Sinaloa Cartel. Perhaps most worrying, the Jalisco Cartel has made it a hallmark to attack Mexican security forces and public servants directly, making it the biggest danger to the country’s, at times, fragile stability and further complicating the country’s investment environment.

View the complete PDF

Daily Comment (July 7, 2020)

Posted on by Rebekah Stovall

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

[Posted: 9:30 AM EDT]

Risk assets are under pressure this morning in part because of multiple reports pointing to the reimposition of coronavirus lockdowns in some locales and the risk of halting, prolonged economic recovery.  On top of that, geopolitical tensions between the Western democracies and China and Russia remain high.  We outline all the key news below.

COVID-19:  Official data show confirmed cases have risen to 11,648,268 worldwide, with 538,828 deaths and 6,328,930 recoveries.  In the United States, confirmed cases rose to 2,938,750, with 130,310 deaths and 924,128 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

Economic Impact

Foreign Policy Response

China-India-Bhutan:  Chinese and Indian troops started to withdraw from disputed areas along the two countries’ Himalayan border, following talks between senior diplomats and military commanders to calm tensions.  The moves should help end the fistfights between the two sides, which caused at least 20 deaths among Indian troops last month.  However, Indian media reports say China has now begun designating part of the border with Bhutan as disputed.  The new pressure may be a way to keep pressure on New Delhi, which is a key Bhutanese ally.  In any case, Chinese territorial aggressiveness appears alive and well, which will keep up geopolitical tensions in the region.

China-Germany:  Chancellor Merkel is facing criticism in Germany for failing to take a tough line on China over the new national security law it has imposed on Hong Kong, with politicians from both opposition and government parties accusing her of being too soft on Beijing.

China-United States:  The U.S. Chamber of Commerce, the Business Roundtable and other business groups issued a public letter urging the U.S. and China to fully implement their January “Phase I” trade deal.  The letter reflects growing concern that Chinese purchases of U.S. goods are running far short of the pace required under the deal.  China has made decent progress with its ramp-up of U.S. agricultural goods, but that probably just reflects President Xi’s belief that President Trump would be so satisfied with increased farm exports that he would overlook China’s failure to implement other parts of the deal.  That could be a miscalculation, as China’s failure to meet its obligations could generate enough anger among U.S. conservatives that Trump would walk away from the deal.  A formal breakdown of the deal would signal even worse U.S.-China tensions and more trade conflict, which would likely be very negative for global risk assets.

United Kingdom-Russia:  Britain has imposed sanctions on more than two dozen Russian individuals in connection with the 2009 death of lawyer Sergei Magnitsky, signaling it may become more active in imposing U.S.-style economic sanctions against authoritarian regimes for their destabilizing acts.  The Kremlin said it would hit the U.K. with “reciprocal measures” in response.

Russia:  An adviser to the chief of Russia’s Roskosmos state space agency, Ivan Safronov Jr., has been detained on a charge of high treason for passing classified military information to an unspecified NATO country.

France:  As part of his cabinet reshuffle, President Macron has promoted a young lieutenant, Gérald Darmanin, to replace Interior Minister Christopher Castaner, who was criticized for his handling of the anti-government gilets jaunes protests last year.  More recently, the police also lost faith in Castaner for not doing enough to protect them from criticism by Black Lives Matters protesters.  In other aspects of the reshuffle, Finance Minister Le Maire kept his job, as did the foreign, defense and health ministers.  However, with the post-coronavirus economic recovery central to Macron’s re-election hopes, the president named new labor and environment chiefs.

View the complete PDF

Daily Comment (July 6, 2020)

Posted on by Rebekah Stovall

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

[Posted: 9:30 AM EDT]

Good morning, and happy Monday!  U.S. equity futures and global equity markets are moving higher this morning led by China after comments in the state media suggested it’s good to buy stocks.  We update the pandemic news.  China has several news items of note.  Overseas, we have a new PM in France and elections in Croatia.  Here are the details:

COVID-19: The number of reported cases is 11,470,637 with 534,784 deaths and 6,193,538 recoveries.  In the U.S., there are 2,888,729 confirmed cases with 129,947 deaths and 906,763 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 latest R0 data suggest the majority of states are seeing a rise in the pace of infections.  Additionally, this link gives a single source for the testing progress of treatments and vaccines.

Virology:

  • Temperature checks are the most common way that companies screen customers or employees. However, smell checks, where the person is asked to determine a scent may be more effective.  The most common symptom of COVID-19 is a loss of the sense of smell.
  • Although studies are in the early stages, vitamin D may prove to offer at least some protection against COVID-19.
  • Hospital systems are approaching capacity in some southern and southwestern states.
  • One of the more frustrating elements in monitoring this pandemic has been a surfeit of research papers published, many of dubious value. The media tends to report on the most sensational headlines but almost never touches on the retractions.  China has been publishing a great deal of research; a recent analysis suggests that researchers there are reusing data, which allows for the fast publication of reports that probably don’t add much to the pool of knowledge.
  • Apple and cherry farms usually hire seasonal workers to pick their crops. Reports indicate these workers have been hit by the pandemic, putting the harvest at risk.

China news:

Policy news:

  • One of the issues we are watching carefully is state and local government spending. Unlike Federal government spending, which can be countercyclical, state and local governments are pro-cyclical.  When economic activity slows, state and local governments usually see a decline in revenue with leads to falling spending.  If the Federal government or the Fed refuse to take action to counter this issue, the impact of fiscal and monetary stimulus will be blunted due to a drop in state and local government spending.
  • Sen Hawley (R-MO) proposed a bill to force the U.S. to exit the WTO. Reports indicate that parliamentary maneuvering will prevent the bill from coming to a vote before the elections, sparing incumbents a potentially problematic vote.

Foreign news:

View the complete PDF

Daily Comment (July 2, 2020)

Posted on by Rebekah Stovall

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

[Posted: 9:30 AM EDT]

Good morning, and happy Thursday!  This is the last trading day of the week before the Independence Day holiday, so there will be no Daily Comment tomorrow; enjoy the holiday!  Global equity markets are higher this morning on improving global economic data.  Due to the holiday, the BLS has put out the employment report.  We cover it in detail below but in short, it was much stronger than forecast.  We recap the Fed minutes and other policy news.  We also look at the pandemic news.  Concerning China, we take a look at the initial response to the new security law in Hong Kong.  In foreign news, Putin “won” his referendum (the outcome was as certain as the Chiefs playing the Raiders).  Here are the details:

Policy news:

  • The Fed released the minutes from the last meeting. Although there were no policy actions taken, there was interest to see what the members were thinking.  There appeared to be a great deal of discussion about forward guidance; this was evident in the dots plot, which showed there would be no change in rates for at least two years.  The members did consider yield curve control; it seems to be in the context of forward guidance, although it was also noted that if the markets were convinced that the Fed would cap rates, it may not need to actually buy a lot of bonds.  Overall, the message was accommodative policy would be in place for a long time.
    • In separate comments, Louis FRB President Bullard warned that the pandemic could still trigger financial problems and thus supported continued broad actions to prop up capital markets.
  • In a surprise move, Congress extended the Paycheck Protection Program to August 8. The program still has unused funds, but the deadline of the original bill was set to expire.  President Trump still needs to sign the extension.
  • So far, the Fed’s Main Street lending program has not attracted much borrowing. Critics suggest the terms are such that distressed borrowers can’t qualify and qualified borrowers are looking elsewhere.  However, its existence will act as a backstop if the financial markets seize up again, and we would not be surprised to see lending terms ease.

COVID-19:  The number of reported cases is 10,716,063 with 516,726 deaths and 5,499,628 recoveries.  In the U.S., there are 2,686,587 confirmed cases with 128,062 deaths and 729,994 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 Axios map has been updated; cases are rising across the country.

Virology: 

  • A recent study out of China suggests that being infected by COVID-19 does not bring long lasting immunity. Antibodies, according to the study, offer immunity for only around eight weeks.  If this study is confirmed (and we note it hasn’t been peer reviewed) it would suggest that immunity passports after contracting the disease would not be a good idea and vaccines may only offer limited immunity.  It may be that COVID-19 vaccines would need to be offered on an annual basis, like influenza.  At the same time, it suggests that a more fruitful approach may be antiviral therapies.
  • At the same time, the BBC reports that a Swedish study showed widespread evidence of T-cells associated with COVID-19. Although this evidence may indicate that a much larger number of people have been exposed to the virus, it isn’t clear if they have gained any immunity from the exposure.
  • COVID-19 may have been with us longer than we thought; some tested in New York had antibodies in February.
  • As we get to know more about the transmission of the disease, the primary vector is extended close contact with an infected person. It is less likely to get it from surfaces and incidental contact.  Large, enclosed gatherings are the primary way that people are catching the disease.
  • As we see an uptick in cases, states and cities are starting closures and restrictions on various businesses.
  • Initially, COVID-19 looked about as problematic as influenza. Although it was novel and humans had little natural immunity, it seemed possible that simply allowing the virus to infect the population and build herd immunity might be a viable plan.  To some extent, this was Sweden’s initial program.  However, as we have watched the disease progress, it appears that the infection is widespread through the body and some of the impact is lasting.  We are starting to see autopsy reports.  These take a while to process but there a now enough to where some patterns can be observed.  First, micro-clotting is being widely seen (of course, in fatalities).  Small clots are being observed in numerous organs, including the brain.  Second, although brains are not showing signs of inflammation (good news, as it suggests the blood/brain barrier is working) the virus does reduce blood oxygen and if it lasts long enough, it can irreparably damage brain cells and is leading to reports of dementia type symptoms in some patients.  This finding may mean patients may need oxygen therapy even if they remain at home.
  • Researchers are monitoring cases of the virus where the victims are facing long recoveries, with some exhibiting signs of permanent impairment. Although articles didn’t discuss this issue, the chance that an infection could lead to permanent impairment is a particular risk to athletes.  Sports teams will need to weigh the potential loss of a star to the disease, or the risk to a prospect.  It is possible that this summer’s limited MLB season could be populated with AAA players.  It will be interesting to see how college sports handles this problem; at least professional players are paid directly whereas college players who become infected could see their careers end before they get the chance to “cash in.”  As we have noted before, college athletics are heavily dependent on football; if the season is lost, it may undermine a myriad of college sports.
  • As we and others have noted, the recent wave of infections is skewing to the younger population. Although they are more likely to survive, albeit with the above section caveats, there are worries that they could become vectors for vulnerable populations.
  • An experimental vaccine that uses a novel gene-based technology has shown some initial promise.
  • After the U.S. announced it was purchasing a large amount of remdesivir, the EU is in talks to secure supplies for Europe.
  • And, finally, on fears of COVID-19, North Korea took aggressive steps to seal its borders. This action has led to a sharp decline in defections.

China news:

Economic news:

  • There is a cottage industry in economics about what the shape of the recovery will be. Our take is that the recession will end soon (it may be already) but the recovery will be slow.  One new shape that has been suggested is a square root; a sharp bounce followed by flat growth.
  • For the past few years, we have noted that the U.S. coastal real estate markets have benefited greatly from foreign buyers. We could see another wave due to the exodus from Hong Kong.  However, in recent months, it does appear that the buying from overseas is slowing.
  • One industry that has been booming on pandemic fears, and supported by recent presidential polling, is firearms.

Technology news:

Foreign news:

View the complete PDF