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

[Posted: 9:30 AM EDT]

A slew of purchasing managers’ indexes from around the world today show manufacturing activity is either growing again, or declining at a much milder pace than at the initial peak of the coronavirus crisis (see tables below).  However, renewed infection outbreaks and lockdowns are taking the wind out of investors’ sails, as are renewed tensions with China after its imposition of a new national security law on Hong Kong.  We present all the key news below.

COVID-19:  Official data show confirmed cases have risen to 10,501,482 worldwide, with 511,909 deaths and 5,378,800 recoveries.  In the United States, confirmed cases rose to 2,636,538, with 127,425 deaths and 720,631 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• In his testimony before a Senate committee, top infectious disease official Dr. Anthony Fauci warned yesterday that new U.S. infections could surge from their current rate of about 40,000 per day to more than 100,000 per day if people continue to ignore advice on social distancing and using face masks.
• Highlighting the disparate response of some state governments as they face rebounding infections, Florida Gov. Ron DeSantis said his state was “not going back” after reopening because its increase in cases was caused by young people out socializing rather than people visiting businesses.  Massachusetts Gov. Charlie Baker relaxed his state’s 14-day self-quarantine mandate for visitors by exempting those from seven nearby states, including New York and New Jersey, but New York Gov. Andrew Cuomo extended quarantine requirements enacted last week to include people coming from California, Georgia, Iowa, Idaho, Louisiana, Mississippi, Nevada and Tennessee.
• Even after months of experience with the virus, emergency room physicians also disagree on the best way to treat victims and are taking a wide variety of approaches.  The disparity in approaches even extends to the proper settings to use on ventilators.

Economic Impact

• Even though a lot of global economic data points to an economic recovery as lockdowns ease, some figures suggest the recovery could already be hitting a plateau.  For example, data from the digital timecard firm Homebase show the number of small-business employees working in late June was lower than earlier in the month.
• European airliner giant Airbus (EADSY, 17.85) said it would cut 15,000 jobs across its commercial aircraft division, citing what it expects to be a years-long impact on the aviation sector from the pandemic.  The cuts will amount to about 11% of the company’s total workforce.
• German auto giant Volkswagen (VWAGY, 16.17) said it would cancel plans to build a new factory in Turkey because of the severe decline in auto demand caused by the virus crisis.  The plant was slated to start producing 300,000 cars per year in 2022.

 

U.S. Policy Response

• In their testimony before the House Financial Services Committee yesterday, Federal Reserve Chair Powell and Treasury Secretary Mnuchin said they would consider additional relief measures to prevent lasting damage to labor markets and businesses, as more states struggle to suppress a rebound in the coronavirus pandemic.  Despite the concerns generated by renewed outbreaks and lockdowns, the policymakers’ willingness to keep adding monetary and fiscal support should offer significant support for risk assets.

China-Hong Kong:  The Hong Kong municipal government officially published the text of the new national security law imposed on it by Beijing yesterday, putting the legislation into effect just one hour before today’s 23^rd anniversary of Britain’s handover of Hong Kong to China.  The full text of the law, which can be found here, is largely consistent with the hints and summaries provided by Chinese officials over the last few weeks.  In other words, the legislation seems as bad as feared, which will further tamp down anti-China political opposition in Hong Kong and exacerbate tensions with the U.S. and other Western democracies.  Police in Hong Kong today made their first arrests under the law when a group of protestors tried to hold a demonstration marking the 1997 handover of Hong Kong to China.  Under the law,

• Secessionist, subversive, and terrorist activities against China, or Hong Kong are criminalized beginning today, as are acts of collusion with foreign forces that endanger national security. The collusion offenses include espionage and efforts to impose sanctions against China, or Hong Kong, as well as inciting hatred against the central or local government.  Punishments include jail terms up to life in prison.
• Any person who commits offenses defined by the legislation are subject to the law’s provisions, even if they are outside Hong Kong and aren’t permanent residents of the territory. It wasn’t clear how this provision would be implemented.
• China’s central government is empowered to supervise the policing of subversive activities in Hong Kong and, in some cases, intervene directly. Its provisions would supersede Hong Kong legislation should there be inconsistencies between them.
• A special council formed by Hong Kong officials and led by the city’s chief executive has responsibility for enforcing the law. Their work will be confidential, with decisions not subject to judicial reviews.
• Within the municipal police force, a special unit will be set up to handle national security cases.  Beyond the police’s usual powers in criminal investigations, the law allows the special police unit to put suspects under secret surveillance with authorization from the city’s chief executive.
• Hong Kong’s government is also required to strengthen its scrutiny and management of schools, civic organizations, media and the Internet, and use these platforms to educate local residents on matters related to national security.
• A dedicated central-government office in Hong Kong will oversee national-security affairs, and its personnel are empowered to gather and analyze intelligence, as well as advise and supervise local authorities on security matters. Its personnel won’t be subjected to Hong Kong law when they are carrying out their duties.

China-Hong Kong-United States:  Just after the publication of the new Hong Kong security law, a bipartisan group of U.S. senators and representatives introduced legislation that would offer refugee status to Hong Kong residents at risk of persecution under it.  The legislation would require the State Department to give special status to Hong Kong residents and certain family members who suffered persecution, or have a well-founded fear of it, due to their expression of political opinions, or peaceful participation in political activities. The paperwork could be completed in Hong Kong or in a third country, and refugees would then be able to apply for permanent residency and citizenship. The opportunity, which wouldn’t be restricted by the current U.S. cap on refugees, would be valid for five years from the date of the bill’s passage.

Russia:  The country will finish voting today on a series of constitutional changes that would allow President Putin to run for two more terms in office and stay in power until 2036.  To sweeten the pot, the amendments also include a range of social and nationalist goodies such as guaranteeing social benefits and a ban on “belittling the significance” of Russia’s victory over Nazi Germany in World War II (though voters can only vote for or against the entire package).  And in case that’s not enough to drive participation, posters and mass text messages are promising Muscovites “a million prizes” through raffles in exchange for voting, officials are pressuring public employees to vote and large state companies are offering their own prizes for doing so via QR codes that could be used to track people at polling stations.  A positive outcome for Putin seems little in doubt.

Germany:  Defense Minister Annegret Kramp-Karrenbauer is dissolving a unit of the country’s special forces, known as the Kommando Spezialkräfte (KSK) after some of its members were found to have radical rightwing sympathies.  The KSK will also be restructured and stripped of control over its training.

United States-Mexico-Canada:  The new U.S.-Mexico-Canada (USMCA) trade agreement, which updated the previous NAFTA deal, officially went into effect today.

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

[Posted: 9:30 AM EDT]

U.S. risk assets are little changed today as encouraging economic data out of China is being largely offset by reports of renewed coronavirus outbreaks and lockdowns in many key U.S. states and some foreign localities.  At the same time, geopolitics are rising to the forefront again, with China passing its new national security law for Hong Kong and Australia boosting its cyber-defenses against Chinese aggression.  We present all the key news below.

COVID-19:  Official data show confirmed cases have risen to 10,417,063 worldwide, with 509,474 deaths and 5,255,829 recoveries.  In the United States, confirmed cases rose to 2,682,897, with 129,544 deaths and 705,203 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Surging coronavirus cases in California, Arizona, Texas and Florida are reportedly straining hospital systems and maxing out the capacity of their intensive care units.  In Phoenix, where ICU units at several hospitals are already full, some are reportedly refusing to admit patients arriving by ambulance to the emergency room.  When a community’s health system is overwhelmed, it tends to prompt government officials to take action they otherwise wouldn’t take, and it can have a significant negative impact on people’s confidence.  The development could prompt renewed economic restrictions and undermine political support for current incumbents in key localities, so it’s an important risk for the equity markets.
• Just as Florida and Texas did last week, Arizona has responded to the surge in caseloads and stress on the hospital system by putting its economic reopening into reverse.  Governor Ducey said yesterday that the state would immediately close all bars, gyms and cinemas for at least one month.  Separately, New Jersey halted plans to allow indoor restaurant operations and New York’s governor said he is considering a similar move, while Tennessee’s government said its state of emergency would be extended.  Curiously, even as states continue to stretch their traditional health and welfare responsibilities into stringent economic lockdowns, few of the new announcements touched on the imperfect but much simpler and less costly measure of requiring people to wear facemasks in public.
• Meanwhile, in Britain, the city of Leicester and surrounding areas have been placed under renewed lockdown in response to a resurgence in COVID-19 cases.  Health Secretary Matt Hancock said non-essential shops had been told to close on Tuesday and schools asked to shut their doors to the majority of their pupils from Thursday.  Classes will remain open for vulnerable children and children of critical workers.
• In India, the government said schools would stay shut for another month and restrictions would be extended until the end of July on nonessential services and movement of persons in containment zones—coronavirus hot spots where lockdowns are still in effect. A nighttime curfew will also be kept in place across the country.
• The FDA today will outline its conditions for approving a COVID-19 vaccine, including a requirement that any vaccine be at least 50% more effective than a placebo in preventing the disease.  According to the Wall Street Journal, the agency will also say that a vaccine won’t be approved simply if it leads to antibodies in the bloodstream of patients, on grounds that it is not known what level of antibodies will confer protection.  The guidance will also reportedly say that no vaccine would be approved unless a vaccine company had “clearly demonstrated” proof of a vaccine’s safety and effectiveness through a clinical study.
• WHO Director General Ghebreyesus warned that the virus pandemic is far from over and the worst could yet come.  He also said the WHO would send a second team to China to investigate the source of the pathogen.

U.S. Policy Response

• Federal Reserve Chair Powell and Treasury Secretary Mnuchin will testify before the House Financial Services Committee today on the coronavirus crisis and the policies implemented to fight it, as required by economic support legislation passed in March.  According to his prepared remarks, Powell will say that even though the economy appears to have bounced back faster than previously expected, there is still significant uncertainty as to whether the virus will be kept in check and how the economy will grow from here.  If Powell sticks to that theme, it will probably be interpreted as confirmation that monetary policy will remain extraordinarily accommodative, which would be supportive of the markets.

Foreign Policy Response

• In an effort to build momentum for the European Commission’s proposed €750 billion post-coronavirus recovery fund, which would be financed with common EU debt, German Chancellor Merkel assured the “frugal four” nations opposed to the idea that all EU countries must also be willing to reform their economies and make them more “future-proof.”  Merkel expressed confidence that EU leaders would reach agreement on the fund and on the bloc’s new budget at a summit due to be held in July, although she admitted there is still a “long way to go.”  If Merkel’s gambit helps push the recovery fund forward, it will likely be positive for European assets and negative for the dollar, at least in part because the common EU debt would help create conditions for the euro to eventually become a true reserve currency to rival the greenback.

China-Hong Kong:  In an extraordinary meeting, China’s rubber-stamp legislature gave final approval to a new national security law for Hong Kong and President Xi immediately signed it, though full details are still to be released.  Demonstrating how swiftly the new law is affecting Hong Kong politics, anti-China activist Joshua Wong disbanded his Demosisto opposition party and urged pro-democracy leaders to use “more flexible” methods to resist Chinese influence on Hong Kong.

China-India:  New Delhi announced it would ban dozens of Chinese mobile apps from being downloaded or used in India, citing this month’s China-India border clashes in the Himalayas and the possibility that the apps could be used to monitor and profile Indian citizens.  According to a senior Indian official, “This is India’s first salvo to China after the border clashes, showing that India has a diverse range of retaliatory options.”  The move deprives some of China’s biggest and most important technology firms from accessing India’s large, fast-growing market.  It may therefore encourage similar moves by the U.S. or other countries that are concerned about China’s growing assertiveness.

China-Australia:  The Australian government is recruiting 500 additional cyber spies and making its largest-ever investment in digital security after a breakdown in diplomatic relations with China and mutual allegations of espionage activity.  The investment of almost $1 billion over a decade follows a warning from Prime Minister Morrison that the nation’s government, companies and educational institutions have been under sustained attack from a “sophisticated state actor.”

Russia-Libya:  The Russian government is sending additional fighters, weapons and cash to Libyan opposition leader Khalifa Haftar, who is on the defensive after a failed effort to topple the country’s UN-backed government.  In an effort to maintain influence in the country in case Haftar loses further support, the Russians are reportedly also building relationships with alternative opposition leaders, including Aguila Saleh.

United States:  A nonprofit higher education research organization said overall enrollment at U.S. colleges and universities this spring was down 1.7% from a year earlier, marking the seventh straight year of annual declines.  The drop was most severe for four-year, for-profit institutions and smaller, nonprofit schools.  Many large public and private nonprofit schools saw increased enrollment.

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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 are currently pointing to a modest rise in a holiday-shortened week.  We update the COVID-19 news.  In foreign news, we cover the Poland elections and a new government in Ireland.  The end of stimulus measures is looming in the U.S.  We update weather news.  Here are the details:

COVID-19:   The number of reported cases is 10,154,984 with 502,048 deaths and 5,147,436 recoveries.  In the U.S., there are 2,549,069 confirmed cases with 125,803 deaths and 685,164 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.  State infection rates are showing a definite rise.

Virology: 

• We have been monitoring reports that the virus may be mutating. A paper out of China suggests that COVID-19 has indeed mutated from its form in China to a more virulent form in Europe.  A mutation, named D614G, increases the number of spikes on the virus, enhancing its ability to infect.  The mutation has made the virus more contagious by increasing its shedding.   This development may explain why the virus initially seemed to be about as problematic as influenza and has become something worse.  There are also reports that the virus has developed in such a way that it sends out “fingers” that increase the pace of infection.
• Last week, in the face of rising infections, Texas and Florida took the aggressive actions to close bars, ban the sale of alcohol consumption and limit restaurant seating.   The population infected in the South does appear different than what we saw in the Northeast.  The current infections are hitting younger Americans and thus we are seeing fewer fatalities per infection.
• Doctors are finding that even asymptomatic patients with COVID-19 are showing signs of lung damage. How serious the damage is remains uncertain.
• Health officials are considering a new testing strategy, pool testing. In a pool test, a single test is administered to a group of people.  If all test negative, it is assumed the entire pool is infection free.   This method allows for a much larger testing base with the same level of resources, and, with careful sorting, can even increase the power of the testing.  It has two downsides.  First, a false negative means a much larger problem because it means the entire pool is considered safe, but it may not be.  Second, the process of pooling itself can dilute the sample, increasing the odds of a false negative.
• There is evidence that COVID-19 is causing psychiatric and neurological problems in patients. The symptoms include strokes, encephalitis, and encephalopathy.  Some patients exhibited evidence of dementia and psychosis.
• There remains hope that a vaccine will be developed by late 2020. We remain skeptical that it will occur in this short time frame.  However, a vaccine isn’t the only path to reducing the risk of the virus.  Antiviral treatments could also reduce the virulence of the disease; AIDS has been controlled by this path.  Three[1] new anti-viral drugs are being tested; all three are currently used in treating cancer, so if they work on COVID-19, they could be deployed rapidly.

Policy news:

• State and local governments who have seen their expenditures rise and revenue decline are searching for new sources of funds to make up for budget shortfalls. We consider this sector to be a risk factor for the economy.  Without aid from the Federal government, state and local governments will have no choice but to cut services and raise taxes which will act as a drag on growth.
• As households deferred loan payments, credit rating agencies have not been reporting their payment gaps as delinquent. Banks, worried that they can’t tell if a borrower is merely postponing payments or not intending to pay, have been tightening lending standards.   If this continues, it will tend to exacerbate the downturn.
• One of the worries that will likely begin to affect investor sentiment is if income support ends next month. The boost to unemployment insurance and the $1200 income checks are scheduled to end at the end of July.  If they are not extended, or at least adjusted, we could see a drop in economic activity.
• The Federal Reserve has listed the corporate bonds it purchased recently. It appears that automakers and tech firms made up the bulk of the buying.
• The Fed continues to be actively looking at yield curve control and is examining Australia’s experience.

China news:

• China has been aggressively building out its 5G network. Although the U.S. has been working to reduce Chinese tech firms’ ability to sell 5G products abroad, China also needs to import products for its domestic build out.  Apparently, Japanese firms have been aiding this effort.  We will be watching to see if Washington takes steps to end this practice.
• The PBOC is promising to take stronger measures to support the Chinese economy.

Technology news:

• Although we haven’t seen much of an impact yet, the EU’s increasing aggressive actions in regulating technology bears watching.  First, their actions may affect how these firms operate.  Second, they may become a model for U.S. regulators.

Foreign news:

• Andrzej Duda won a plurality in this weekend’s election in Poland but not a majority. A second round of elections will be held on July 12^th, where he will face Warsaw Mayor Rafał Trzaskowski, who won second place.
• Ireland has a new PM, Macheal Martin; he will govern a three-party coalition of Fianna Fail, Leo Varadkar’s Fine Gael and the Green Party. Sinn Fein, the political arm of the IRA, will be the official opposition.  The current PM, Varadkar, will be deputy PM and will take over the PM jog in 30 months.   This is a “grand coalition” of sorts; for the first time since the founding of the modern Irish republic, Fianna Fail and Fane Gael will form a coalition.  This is mostly because neither could agree to form a government with Sinn Fein.
• Russia is increasing its arms sales to Turkey and India. The former is a member of NATO and a long-time U.S. ally; the arms relationship with Russia has been an unwelcome development.  India, on the other hand, is a long-term client of Russia’s arms industry but is being courted by the U.S. in a bid to contain China.  The arms sales will likely not cause problems for New Delhi, but we would expect U.S. arms makers to try and encourage India to begin using U.S. platforms.  This will be especially the case if relations become closer.
• Despite U.S. opposition, it appears the EU will be moving ahead to implement digital taxes. The U.S. opposes this move because it is seen as a threat to the American tech firms.
• The EU has also slapped tariffs on an Egyptian fiberglass firm that was built in conjunction with the Chinese “one belt, one road” project.  This action will be seen as a snub to Beijing.
• Lebanon is in the midst of a debt and currency crisis. The currency has lost 75% of its value in the unofficial market and its external debt is over 186% of GDP and the country is in default.  Demonstrations took place late last week to protest declining living conditions.  Although the level of anger is palpable, it is not clear at all how the situation will be resolved.
• The State Department says Iran has become a haven for al Qaeda. Although we doubt much will come from this news, it could be used as a pretext for retaliation, either kinetic or financial, by the U.S.
• Late last year, Congress passed the Caesar Act, makes sanctions mandatory for anyone who facilitates the Assad regime’s acquisition of goods and services among other actions that support the current regime in Syria.  The U.S. has begun implementing that act, putting additional sanctions on Syria and could add more to Iran as well.  Lebanon will also face a sanction threat from the law. The other important characteristic of the Caesar Act is that it applies sanction pressure directly on Syrian Alawites, the base of Assad’s support.
• We are monitoring reports of elevated levels of radioactive particles in Northern Europe.  The current levels are not a health risk but the inability to pinpoint the source is a worry.  There are concerns that the elevated levels may signal a problem due to a Russian nuclear power facility, Russia claims that no problems exist.

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[1] https://xospata.com/, https://ascopubs.org/doi/abs/10.1200/JCO.2019.37.15_suppl.5537, https://www.prnewswire.com/news-releases/senhwa-biosciences-silmitasertib-named-as-potential-covid-19-therapy-301032362.html

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

[Posted: 9:30 AM EDT]

The 13^th episode of the Confluence of Ideas podcast is available; it is our first in a series of episodes on the November elections.  Additionally, there is something new!  As usual, we have a new Asset Allocation Weekly in today’s report (which we also post as standalone report), but we are adding two new features to this report: an associated podcast and an automated chartbook!  Check them out!

Good morning and happy Friday!  Equity futures are mostly marking time this morning.  Personal income and spending are out today; we detail the numbers below.  In the economics section, we look at the drop in global trade and the problem of college sports.  There was news on banking policy; we go over the details below, but, in short, “the Fed giveth and the Fed taketh away.”  China had something akin to a bank run.  We update the pandemic, including the “Duff’s map.”  We also take a look at tech.  Here are the details:

Economic news:

• The Netherlands Bureau for Economic Policy Analysis has developed a global trade monitor. In April, it fell an “unprecedented” 12.1% on a sequential basis.  It was down 16.2% from the prior year.  It is not surprising that trade fell in April; this was the month where nearly all the developed world was in lockdown.  What we will be watching is the speed of recovery.
• We are starting to see more commentary shifting from the recession to the recovery. We discussed this issue about a month ago in the May 29 edition of the AAW.  As we noted in that report, we expected this recession to be deep but short, with an elongated recovery.  That doesn’t necessarily bode ill for equities, as a slow recovery will tend to support continued policy stimulus.
• College sports has seen a wave of program cancellations. It’s no secret that football funds the rest of the athletic program at major universities.  Most colleges are assuming (hoping?) for a normal season with packed stadiums this fall.  If that isn’t possible, we could see a near collapse of college athletics, which would have significant effects on numerous sports.
• One of the factors that is slowing the return to work is the lack of childcare. Providers have been slow to reopen, or are doing so with less capacity; the informal system, which often includes grandma and grandpa may not be available either due to the vulnerability of the elderly.  If this issue isn’t resolved, it will further weaken the recovery.
• The pandemic has apparently prevented us from taking our coins to the bank for counting. As a result, the Fed is reporting a growing shortage of coins in the economy.
• Smaller banks have been supporting the commercial real estate industry, granting forbearance as rent payments are delayed. If this continues, the Fed may need to offer additional support to these institutions.

Policy news:

• As noted, the Fed reported on its banking stress tests yesterday. The test has variations for the recovery— “U,” “V” and “W”—and as one would expect, it did best with a “V.”  The worst case showed about $700 billon of loan losses and a decline in capital ratios of 12%.  Generally speaking, the results suggest the system would likely hold up, but to shore up capital, the Fed did announce it was restricting buybacks and dividend growth.
• On the “giveth” side, regulators have relaxed elements of the “Volcker Rule” that restricted bank’s ability to use insured deposits to buy and hold financial assets. The goal of the rule was to ensure that banks didn’t take excessive risks with government insured money; in practice, it has reduced their market making capacity and reduced market liquidity.
• Regulators have eased rules on drilling leases on Federal land. Under normal circumstances, oil companies have a time constraint on a lease.  If they don’t drill before the deadline, they lose the lease.  The Bureau of Land Management has been liberally granting drilling suspensions to avoid forcing these firms to drill on the land to avoid losing their claims.

China news:

• Chinese households, like their counterparts in Japan, Europe and the U.S., have been in search of yield for their savings. In China, trust companies have emerged to satisfy this demand.  The industry holds CNY 21.0 trillion ($3 trillion); it is estimated that around CNY 625 billion of these assets are distressed.  However, financial institutions that are sound can face liquidity problems if depositors demand liquidity simultaneously.  Small scale protests have broken out in Chengdu, Sichuan, after Sichuan Trust told investors that it would “struggle to make principal and interest payments” on about CNY 13 billion of assets.  China’s debt growth has been of concern for some time.  It has been noted that Chinese policy support from the pandemic has been modest compared to what we saw after the Financial Crisis, leading to concerns about China’s debt capacity.  This situation bears watching; if Chinese investors begin to fear the stability of the financial system, we could see purchases of bitcoin, gold and capital flight.

COVID-19:  The number of reported cases is 9,632,969 with 489,854 deaths and 4,859,744 recoveries.  In the U.S., there are 2,422,312 confirmed cases with 124,415 deaths and 663,562 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.  Additionally, one way of monitoring reopening is by the number of beer taps operated relative to capacity, or as we like to call it, the “Duff’s map.”

Virology:

• Texas is suffering through a rise in COVID-19 cases, leading the governor to scale back his state’s reopening. Elective surgeries have been suspended to open up hospital capacity for COVID-19 cases in some counties.
• South America has seen a tripling of cases over the past month.
• Germany, who had seen cases fall, is now seeing a rise, as lockdown restrictions ease.
• Antibody tests are used to see if a person has been infected. If the test signals positive, it would suggest that person has some degree of immunity, and thus could return to circulation.  However, there are two problems that have emerged.  First, the tests, so far, are so inaccurate that they can’t be relied upon to determine if a person has been infected.  Second, it isn’t clear how long immunity lasts.
• The CDC indicated that the number of cases in the U.S. may be 10x higher than reported. It isn’t obvious where that figure was derived, but we suspect the government is assuming a 0.5% fatality rate, with 124,415 deaths attributed to COVID-19, a 24 MM infection rate would be consistent with that number.

Technology news:

• The DOJ is continuing to move forward on antitrust investigations. The department also opposed a tech firm cable link between Hong Kong and mainland China.  At the same time, the White House is considering Federal support to ensure American development of 5G.
• Google (GOOG, 1441.33) has agreed to pay for news content with several news providers, a significant development for content providers.
• As the U.S. restricts work visas, Canada is opening its doors to these foreign workers.

Foreign news:

• Iran is developing a capacity to make aluminum powder, a key ingredient for solid rocket fuel.
• Polish voters go to the polls on Saturday.

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

[Posted: 9:30 AM EDT]

The 13^th episode of the Confluence of Ideas podcast is available; it is our first in a series of reports on the November elections.

Good morning, all.  Lots going on today.  For the second consecutive day, we are starting with weaker equity markets.  In fact, almost everything is red this morning except Treasuries.  In equities, there are worries that institutional managers may try to capture Q2’s surge in equities with an aggressive rebalance and that would be bearish for stocks in the very short run.  We update the pandemic news; it appears another surge in cases is upon us, although we are noting some differences compared to the initial rise.  We update China news this morning, noting a real cold war is emerging on the India/China frontier and there is some divergence in policy direction between the White House and Congress.  The economic news includes the IMF’s downgrade of global GDP.  Poland is open to U.S. troops.  We are noting some flooding issues and there was an earthquake yesterday in Mexico; we also follow up on the arctic heatwave.  The Weekly Energy Update is available.  Here are the details:

COVID-19: The number of reported cases is 9,440,535 with 483,207 deaths and 4,754,755 recoveries.  In the U.S., there are 2,381,369 confirmed cases with 121,979 deaths and 656,161 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 U.S. state map has been updated.

Virology:

• The WSJ details the rise in new cases; although increased testing is a factor, it does look like we are seeing increased spreading.
• One factor we are seeing is fewer deaths per the number of cases.

This chart looks at the rolling seven-day change in new cases and fatalities.  We are seeing a clear upswing in cases, but fatalities are continuing to decline.  It is possible that there is a lag between cases and fatalities.  In fact, the above chart suggests there is about a 10-day lag, so some increase in fatalities wouldn’t be a surprise.  But, at the same time, we are well into that 10-day window and, so far, fatalities haven’t jumped yet.  We suspect two changes have occurred that may slow the rate of deaths; first, the medical system has probably gotten better at treatment.  We know ventilator use has slowed as less invasive techniques have proven to be more effective.  Second, it is probably the case that vulnerable populations (the elderly, chronic conditions, etc.) are being more careful in public and those contracting the disease are younger and healthier.  That doesn’t mean this group can’t die from the disease, but the chances are lower.

• Therefore, we may be seeing a slow transition from avoiding the disease at all costs to learning to live with it. It is apparent that lockdowns do work in slowing the rate of infections, but the economic cost is horrific.  Being more selective in who stays home, taking other measures (distancing in social situations, mask wearing) and working on mitigation therapies are all probably in our future until widespread vaccination develops.
• Disney (DIS, 112.07) may be forced to delay reopening its theme parks as workers push back against the company’s plans. Other companies and industries are facing similar concerns.  Several states are reconsidering their plans to reopen as well.
• India is facing a massive problem in its medical system due to the pandemic.
• Genetic researchers in the U.K. have identified 68 genes associated with the risks surrounding COVID-19. One of the mysteries of the virus is the wide variation in symptoms.  Some people who are infected exhibit no symptoms, while others are seriously affected.  Their research suggests that COVID-19 is not just a respiratory illness but a cardiovascular one as well.  It has also been found that Type A blood groups are at higher risk of serious complications, while Type O groups are not.  If specific markers can be determined, genetic testing could indicate who is vulnerable and who is not and thus allow low-risk groups to reengage in social and economic activities (which could have much less attractive aspects as well).

China news: 

• As the powers between Congress and the executive branch have evolved over time, the president generally has a greater say in foreign policy. That doesn’t mean Congress has no impact, but, in the day-to-day operation of foreign policy, the White House is in charge.  Still, for better or worse, Congress reflects the broader populous and thus has exhibited swings in sentiment over various policy issues.  Accordingly, in terms of foreign policy, Congress can push for sanctions and other policy measures that the president may be reluctant to implement as they might undermine other policy goals.  This is a situation that has been part of American political history since Washington (our first president had to fend off congressional desires to join France against England in French Revolutionary Wars).
  • Currently, Congress is pushing for numerous measures to punish China over various issues. Regarding Hong Kong, the White House is trying to prevent Congress from passing mandatory sanctions.
  • Congress is pressing to ease restrictions that would allow Americans to sue China over pandemic costs.
  • There are divisions within the executive branch as well. The Pentagon has published a list of 20 Chinese companies with ties to the Chinese military; it is presumed this list was created to reduce these companies’ ability to tap U.S. financial markets and perhaps sanction trade.  The Senate is pushing for greater transparency for foreign firms listing on U.S. exchanges.  It appears the goal of the bill is to force Chinese firms to give up their ties to the security state for access to U.S. financial markets.  National Security Advisor O’Brien recently gave a speech that was sharply critical of the CPC.
  • It is often the case that a president doesn’t necessarily oppose measures brought by Congress or other members of the executive branch; what presidents oppose are measures that restrict their ability to enjoy policy flexibility.
• Although direct hostilities appear to have eased in the India/China frontier, it does appear both sides are digging in for potential future conflicts. India has blocked the importation of various Chinese goods in retaliation for the recent attacks.
• There are increasing worries about military conflicts between China and the U.S.

Trade policy news:

• If you are a fan of European wines, get busy; there is a possible jump in tariffs on EU wine coming due to the ongoing dispute over EU aircraft subsidies. Other European “goodies” might be targeted as well.
• It looks like the structure of a grand bargain over Brexit is in the works. The U.K. would be allowed to make changes to its policy that may lead to an “uneven” playing field with the EU.  In other words, if the U.K. relaxes its environmental laws, the EU could be at a disadvantage in trade.  The EU will be given the right to selectively apply tariffs on U.K. goods to offset Britain’s advantage.  The strategic ambiguity of this proposal is rather impressive; both sides can claim they got what they wanted, and a hard Brexit can be avoided.  How it would actually work in practice is another matter, but this looks like a rather elegant solution.
• The U.K. is beginning to realize that a trade deal with the U.S. may require it to simply adopt U.S. regulatory policy.

Foreign news:

• Poland could receive American soldiers who are likely to be removed from Germany, assuming Poland is willing to pay for billeting U.S. troops. Poland does want the U.S. presence to remain in Europe; given Poland’s history, this is a very reasonable request.
• Russia held its May parade yesterday; the country goes to the polls today on a referendum to extend Putin’s rule.
• Mexico suffered a massive earthquake yesterday but, so far, fatalities have been remarkably light. Mexico’s unions oppose the decision by the government to nationalize lithium mines.

Economic news:

• The IMF downgraded its economic outlook, indicating the world economy will shrink 4.9% this year compared to its earlier estimate of -3.0%. The pandemic was blamed.
• One of our concerns about the economy is that state and local governments, facing falling tax revenues and pandemic costs, will be forced to curtail services and lay off workers. There are reports that New York is facing this problem.
• The Fed is conducting bank stress tests. Governor Quarles is suggesting banks test for a second downturn in the economy.
• Yelp reports that 140K businesses remain closed due to the pandemic; around 40% of those firms may not reopen.
• Congressional leaders are criticizing the Fed for relying on the three major rating agencies in their purchases of corporate debt. If the Fed widens its buying beyond this group, the central bank may be accepting more credit risk.
• We have been monitoring the financial markets for evidence of election worries. One of the issues that is evolving is that the widespread use of absentee ballots, due to COVID-19, will delay reporting results and thus it is very possible that we may not know for certain who won on the day after the election.  That will include congressional races as well.  We are seeing a rise in JPY call option purchases for November as traders speculate that the yen would rally if uncertainty over the election were to develop.
• On a lighter note, MLB will allow mascots to return when the baseball season resumes. Fredbird has avoided a layoff.

Weather news:

• Massive, widespread flooding is being reported in China. Although this is a period of seasonal rain, this year, rain has been much greater than normal.  The Chinese party organ, the Global Times, reports that the Three Gorges Dam is ok…which, of course, begs the question: why did the CPC need to tell us that?  We are also seeing flooding in Ukraine.
• Yesterday, we reported on the arctic heat wave; it appears that the higher than normal temperatures could trigger widespread fires.

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