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

[Posted: 9:30 AM EDT]

The relatively muted tenor in risk assets so far today comes as investors look forward to the Fed’s latest policy decision, forecast update and Chairman Powell’s news conference this afternoon.  We’ve also seen some pessimistic forecasts for the global economy from the OECD, signs the Republicans are pushing back harder against the next fiscal stimulus bill and the possibility of a future military takeover in Brazil.  We review all the key news below.

United States:  Today the Fed will wrap up its latest two day policy meeting.  As we’ve mentioned before, the policymakers have made it clear they don’t want negative interest rates, so the benchmark Fed funds rate will be held unchanged at essentially 0.0%.  The real debate will likely be over yield curve control.  Besides watching that debate closely, we’ll be parsing the policymakers’ latest forecasts for the economy and the future Fed funds rate.

COVID-19:  Official data show confirmed cases have risen to 7,264,866 worldwide, with 411,879 deaths and 3,394,970 recoveries.  In the United States, confirmed cases rose to 1,979,893, with 112,006 deaths and 524,855 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• The WHO now says it isn’t clear how often people contract and then spread Covid-19 without showing symptoms, pulling back from a top official’s earlier assertion that such invisible transmission appears rare.  The clarification highlights the continuing uncertainties about how the disease is actually transmitted.
• In Russia, authorities in Moscow eased many pandemic restrictions even as infections remain high.  Under the new guidelines, most businesses and other parts of ordinary life are expected to be fully up and running again by June 23.
• Top epidemiology official Dr. Anthony Fauci told a pharmaceutical conference that there is no way COVID-19 will simply burn itself out through current public health measures, so it will remain a problem until a vaccine is found.  On a more positive note, however, Fauci also said, “I’ll guarantee there is going to be more than one winner in the vaccine field because we’re going to need vaccines for the entire world . . . Billions and billions of doses.”
• In fact, the director of vaccine research at the National Institute of Allergy and Infectious Diseases said the federal government plans to fund and conduct final, decisive Phase III studies of three experimental coronavirus vaccines beginning this summer.  The trials are expected to involve tens of thousands of subjects at dozens of sites around the U.S.

Real Economy

• The OECD issued a set of downbeat forecasts for global economic growth after the virus crisis, warning that even though developed countries are likely to see a sharp rebound initially, the recovery will probably then stall because of the lasting impact of unemployment, corporate bankruptcies and residual social distances practices.
  • In the new OECD forecasts, the global economy will contract by 6% this year if a second wave of infections and containment measures can be avoided and 7.6% if a second wave isn’t avoided.  Such contractions would be at least twice as large as forecast by the IMF.
  • If there is no second wave of infections and lockdowns, the forecasts call for global GDP to rebound 5.2% in 2021.  With a second wave, the forecasts call for growth of just 2.8% in 2021.  The OECD’s nifty graphics showing the various global and country-by-country forecasts can be found here.
• Managers at major department stores say sales at recently reopened stores have been significantly better than expected.  The news is bullish for stocks because it boosts hope that the post-pandemic economic recovery could be more robust than previously feared.
• Global rice prices are surging in response to pandemic lockdown demand and weather issues.

U.S. Policy Response

• Labor Secretary Scalia said he opposes any extension of the supplemental federal unemployment benefit of $600 per week that workers are receiving as a result of the coronavirus pandemic.  The extra payment is scheduled to end on July 31, but Scalia argued that no extension would be necessary because job opportunities in August should be “far greater” than they are now.

United States-Germany:  Nearly two dozen Republican House members are urging the Trump administration to reconsider its decision to drastically cut the number of American troops assigned to Germany, according to a letter viewed by the Wall Street Journal.  In the letter, the Congressmen argue that, “such steps would significantly damage U.S. national security as well as strengthen the position of Russia to our detriment.”

United States-Russia-China:  Even though the U.S. and Russia have officially invited China to participate in the new arms control talks to open in Vienna later this month, Chinese officials have reportedly rejected the invitation.  Moreover, Russian Deputy Foreign Minister Ryabkov poured cold water on any hope that Russia would pressure China to participate.  The development undermines hope that a new, multilateral nuclear arms treaty can be signed to follow the U.S.-Russia New START agreement that expires next February.

EU-Russia-China:  The European Commission issued a report accusing Russia and China of conducting targeted influence operations and disinformation campaigns about COVID-19 in the EU, its neighborhood and globally.  The report accuses Moscow and Beijing of trying to “undermine democratic debate and exacerbate social polarization and improve their own image in the COVID-19 context.”

EU:  As EU members jostle to shape the bloc’s upcoming budget and coronavirus recovery fund to their liking, countries including Belgium and Ireland are arguing that more funds may be needed because of the risk of a hard Brexit at the end of the year, on top of the economic damage from the COVID-19 shutdowns.  EU and British negotiators continue to talk but are making little progress on a trade deal for the period after December 31.  Separately, Portuguese Finance Minister Centeno resigned his position, forcing him to also give up his role as head of the EU finance ministers’ group.  The proposed EU budget and recovery fund, including the idea of issuing common EU bonds, will be discussed next week by national leaders rather than finance ministers.  All the same, given Centeno’s pivotal role in pushing through the EU’s fiscal support packages to date, his departure increases the odds that the debt mutualization proposal could be rejected or substantially modified.

Brazil:  One of President Bolsonaro’s sons, who has previously praised the country’s past military dictatorship, said a similar break with democracy in Brazil is now inevitable.  The statement adds to signs that Bolsonaro is leaning toward a military takeover of the country as he deals with the coronavirus crisis, political scandals and fleeing foreign investors.  The political instability associated with any military takeover would likely be at least a near-term negative for Brazilian assets.

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

[Posted: 9:30 AM EDT]

Our newest podcast episode, “The Long-Term Effects of COVID-19,” is available.  In this episode, we discuss how the COVID-19 pandemic will likely accelerate the reversal of the equality/efficiency cycle toward equality.

Many countries continue to report falling coronavirus infection rates and economic reopening, helping to push the NASDAQ to a record close yesterday.  All the same, it appears that the official declaration of a recession in the U.S. and sobering trade data from Germany have helped spark some profit-taking in the financial markets today.  As always, we recap all the key news below.

United States:  Yesterday, the arbiter of the U.S. business cycles, the National Bureau of Economic Research, officially declared that the economic expansion that began in March 2009 came to an end in February 2020.  The surprise wasn’t that the NBER’s Business Cycle Dating Committee believes the U.S. economy has been in recession ever since then.  Just about all economists and financial market analysts around the world, ourselves included, have thought that for some time.  The surprise was that the group moved so quickly to declare the recession, rather than waiting until deep in the downturn or even later like it usually does.  The quick designation likely reflects the extreme depth of the pullback, which has made it obvious to just about everyone.  The big question is whether a recovery is at hand, and if so, how long and robust it will be.  We think things have stopped getting worse and the recovery is now starting.  The NBER therefore, could declare an end to the recession sooner than it has in the past.  Given the depth of the decline, however, we suspect the recovery back to the previous level of activity will be long and fitful.  A key risk is that officials could withdraw the supportive monetary and fiscal policies they’ve deployed to date and take the wind out of the recovery’s sails.  Indeed, yesterday Senate Majority Leader McConnell and White House advisor Hassett both suggested that improving employment numbers would mean any further fiscal packages to support the economy could be scaled back.

COVID-19:  Official data show confirmed cases have risen to 7,142,462 worldwide, with 407,067 deaths and 3,316,747 recoveries.  In the United States, confirmed cases rose to 1,961,187, with 111,007 deaths and 518,522 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Preliminary data from a study of more than 750,000 participants showed that people with Type O blood were 9% to 18% less likely to have tested positive for Covid-19.  According to the report, which has not yet been peer reviewed or published in a medical journal, Type O people who had been exposed to the virus were 13% to 26% less likely to test positive for the disease.
• While many U.S. states continue to report a falling count of new infections each day, allowing continued easing of pandemic restrictions, daily infection counts are accelerating in at least a dozen states, keeping alive the risk of a broad new outbreak in the coming months.
• India reported another record single-day rise in infections, with 9,987 new cases, bringing the total to 266,598.
• New Zealand marked its first day without coronavirus restrictions, while the country’s border remained closed with limited exceptions.
• Raising concern about a brewing coverup, the Brazilian government has stopped publishing the daily count of new infections and deaths, delayed reporting on total infections, and will now revise its death toll to date.

Real Economy

• German exports dropped by a record 24.0% in April, coming in worse than expected and leaving foreign shipments for the month down 31.0% from April 2019.  Imports also contracted sharply in April, with a drop of 23.6% from the previous month.  As shown in the tables below, this produced a sharp drop in the country’s trade balance for April.
• Although weakened demand from the crisis has driven down overall inflation so far, many food prices are rising at their fastest pace in decades.  This has the potential to further weigh on overall demand, as consumers are especially sensitive to rising costs for essentials like food.

U.S. Policy Response

• As we mentioned yesterday, today is the first day of the Fed’s latest two-day policy meeting.  Given that the policymakers have made it clear they don’t want negative interest rates, the benchmark fed funds rate will be held unchanged at essentially 0.0%.  The real debate will likely be over yield curve control.  Besides watching that debate closely, we’ll be parsing the policymakers’ latest forecasts for the economy and the future fed funds rate.
• The Fed announced another set of changes to its Main Street Lending Program for small and medium businesses. This is as it strives to make the $500 billion program more attractive to borrowers and banks, without taking undue credit risk when it ramps up in the coming weeks.  The loans still will be run through the nation’s banks, which can sell 95% of the loans to the Fed, but under the latest set of changes:
  • The minimum loan amount will be reduced to $250,000 from $500,000, which will make the program more attractive to smaller firms.
  • The maximum loan amount will be raised to $35 million for new loans, or up to $300 million to refinance an existing loan if a firm’s total debt, relative to its 2019 earnings, is below certain thresholds. Those maximum loan amounts had been set at $25 million and $200 million, respectively, in late April.
  • The maximum loan term will be extended to five years from four years previously.
  • Businesses will be allowed to defer principal payments for the first two years instead of just the first year.

Foreign Policy Response

• In France, the government announced two significant extensions of its economic support program.
  • Finance Minister Bruno Le Maire unveiled a €15-billion ($16.9 billion) aid package for the aerospace industry.  The package, which includes the €7 billion of aid previously announced for Air France-KLM (AFLYY, 6.87), consists mostly of government investments, loans and export credit guarantees.
  • Labor Minister Muriel Pénicaud announced that “temporary unemployment” wage subsidies would be extended for up to two years.

NATO-China:  NATO General Secretary Stoltenberg called for nations around the world to join with the alliance to resist China’s “bullying and coercion.”  In his speech, Stoltenberg warned that, “The rise of China is fundamentally shifting the global balance of power, heating up the race for economic and technological supremacy, multiplying the threats to open societies and individual freedoms and increasing the competition over our values and our way of life.”  While there is now broad consensus around the world regarding China’s aggressive moves to build, expand and exercise its power, Stoltenberg’s statement reflects what may be another growing consensus:  That because of China’s size and aggressiveness, resisting it will probably require the combined power of many like-minded democracies operating in alliance, i.e., not just individual countries pushing back against China, but a clash of Western Civilizations against a Chinese Civilization seeking its renaissance.

China-Hong Kong:  Hong Kong-based hedge funds are exploring ways to move their operations elsewhere as China prepares to impose sweeping national security legislation on the city.  According to one advisor who works with hedge funds in the city and elsewhere in the region, “Hong Kong as we know it is dead.  It will become just another city in China. The hedge fund community will move on to Singapore and elsewhere.”  Separately, thousands of protesters rallied Tuesday evening in downtown Hong Kong, defying a police ban on demonstrations to mark the one-year anniversary of a million-person rally that thrust the city into its biggest turmoil in decades.

North Korea-South Korea:  The North Korean state news agency KCNA said the inter-Korean communication line by which the two governments speak daily, as well as a separate hotline to the South Korean president, will be severed from midday on Tuesday.  The move is in retaliation for South Korean non-governmental groups that have been sending balloons and drones to drop anti-North Korean leaflets over the country, though it probably also reflects Kim Jong Un’s frustration at the collapse of the denuclearization talks with the U.S.

United States-Russia-China:  U.S. Special Envoy for Arms Control Billingslea said the U.S. and Russia have agreed to open a new round of arms control talks in Vienna later this month, and that China has been invited to participate as well.  The talks may include discussions to extend the New START nuclear arms treaty that is due to expire in February 2021.

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

[Posted: 9:30 AM EDT]

Our newest podcast episode, “The Long-Term Effects of COVID-19,” is available.  In this episode, we discuss how the COVID-19 pandemic will likely accelerate the reversal of the equality/efficiency cycle toward equality.

Good morning and happy Monday!  Global stocks are mixed; Europe is lower on disappointing German data, while U.S. equity futures are ticking higher.  Tropical Depression Cristobal hit Louisiana over the weekend and remnants are expected in St. Louis on Tuesday.  The Fed meets this week; we will get forecasts and maybe a dots plot.  Brexit fears are rising; we look at the looming trade deadline and other European trade issues.  We update on China and touch on its trade data.  The U.S. is pulling troops from Germany.  OPEC+ has a deal and oil prices are higher.  We update COVID-19, focusing on U.S. and global reopening from lockdown.  Additionally, we have some Monday charts!  Here is the update:

Policy news:  The Fed meets this week.  There is absolutely no mystery on the policy rate; since the FOMC has made it clear it doesn’t want negative fed funds, there really isn’t more to be done on that front.  Instead, we expect the debate to be over yield curve control.  This isn’t exactly new for the Fed; during WWII, the central bank fixed rates across the entire yield curve to control Treasury borrowing costs.  However, the impact of such control would be significant.  For example, the Treasury curve would no longer be a forecasting tool; we might be able to use the corporate curve, but even there, one would expect some relationship to the risk-free rate.  The other issue we will be watching for are forecasts for the economy and the policy rate.  The bigger issue here is that if the Fed goes this far, it has essentially ceded its independence.  It can get it back at some point, but it will be a war because no president wants to be in office when the Fed stops the stimulus.  Harry Truman would concur, we suspect.

Brexit and trade:  Although the actual exit date isn’t until year’s end, if the U.K. is going to ask the EU for an extension of Brexit negotiations, it must do so by June 30.  By all accounts, PM Johnson has made it clear that he will not ask for an extension, so the odds of a hard break are rising.  Trade officials and businesses are beginning to count the costs of a hard border with Europe.  A concern has been that British negotiators don’t seem clear on what they want from an agreement with the EU.  One of the benefits of a hard break is that the U.K. can make trade deals with other nations; Westminster is looking to make a deal with the U.S. in short order.  The U.S. has made it clear that such a deal would include U.S. agriculture, including the infamous “chlorine chickens.”  The issue of the U.S. and EU food regulation and trade is nothing new, but could become an issue when the U.S. and U.K. begin trade talks.

China:  A sharp decline in imports offset a drop in exports, expanding China’s global trade surplus.

Meanwhile, analysts are questioning China’s employment data, suggesting it is painting too rosy a picture of China’s recovery.  Recent policy statements seem to confirm this notion.  Lastly, China’s drive to semiconductor self-sufficiency has been lagging badly.

Foreign news:  The U.S. announced over the weekend that nine thousand U.S. troops will be leaving Germany.  Relations between Berlin and Washington have been strained for some time; while some commentators are suggesting this decision is supportive for Russia, that may not be the case.  Poland is hoping that the U.S. will move these forces to its soil.  The U.S. is threatening both the EU and China over lobster tariffs.  EU support has, for now, reduced financial stress in Italy.

OPEC:  As expected, OPEC and Russia have reached a deal to extend supply cuts.  Russia and Saudi Arabia were able to corral some of the smaller producers in OPEC, which have been overproducing; of course agreeing is one thing, cutting is another.

COVID-19:  The number of reported cases is 7,036,623 with 403,131 deaths and 3,153,223 recoveries.  In the U.S., there are 1,942,363 confirmed cases with 108,211 deaths and 506,367 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 news surrounding the virus, across the world, is the next phase of the crisis—the reopening.  Europe is easing restrictions; British pubs are scheduled to reopen June 22.  As we are seeing in the U.S., there are regional differences, with some European nations opening to all travelers, others creating travel bubbles, allowing free entry of some nations, restrictions from others.  Meanwhile, in the U.S., New York is starting to reopen.  In the U.S., there is evidence that as social distancing restrictions ease, infections are rising.  This should be no surprise.  The point of the lockdowns were to control the rise of infections so the health system could cope.  However, the economic costs of the lockdowns were high and, barring a mutation in the virus that turns it into something with a fatality ratio similar to smallpox, we doubt we will see broad lockdowns repeated.  Thus, the fear of the “rise in autumn” that is often discussed is probably not that great of a risk to the economy.  Instead, we expect to see targeted measures, which would protect the most vulnerable from infection while leaving the rest of the economy to normalize.  In Brazil, the government is limiting the release of virus data.

Monday charts:  Here are three charts we have been working on.  First, Friday’s employment data raised great hopes that a recovery is underway.  We tend to agree with that idea; as we stated in a recent Asset Allocation Weekly, recoveries start when conditions stop getting worse.  Given the catastrophic drop in growth, it should be no surprise that conditions are improving.  However, it is important not to confuse the trough with the path of the recovery.  The economy is in a deep hole that will take a long time to dig out of.

In this chart, we index the level of employment to the peak before the onset of recession.  Each recession is measured to see how long it takes before the previous cycle high is met.  There is nothing in the postwar experience that matches what we are seeing here.  So, if policymakers take Friday’s data as a reason to hold off on additional stimulus, it could be an epic mistake.

Meanwhile, the recovery in equities has been surprising.  This chart shows the weekly Friday closes from the onset of recession; we rebased the S&P to the market peak prior to the beginning of each recession.

Two things are notable about the current cycle. First, the decline was the fastest in the postwar experience.  The cascading decline in February and March was extremely fast.  Second, the recovery has been remarkable as well.  Only two earlier recessions, the 2001 and 1956, have the index higher than we are currently.  The 2001 recession was very mild; the 1956 recession occurred during the Asian flu pandemic, although the drop was mostly attributed to monetary policy.  The 1956 recession was very deep but short, which is similar to what we are expecting.  Here is a note of caution; the average line shows that sideways performance tends to follow once the initial bounce occurs.  We would not be surprised to see markets consolidate at some point.  On the other hand, we have never seen this degree of policy support in the postwar world.

 

Finally, this is the weekly S&P chart compared to retail MMK fund levels[1]; the orange bars show periods where MMK fell below $920 billion, which tended to coincide with market consolidations.  We have been noting rising caution among retail investors since 2018 when the trade conflict with China escalated.  Even with the strong rally in equities from Q3 2018 into Q3 2019, retail MMK continued to rise.  Cash levels have continued to rise through the recent decline and recovery in the S&P.  Note that the bull market that began in March 2009 was fueled by a decline in retail MMK; if a similar pattern develops in this cycle, we could see further gains in equities.

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

[Posted: 9:30 AM EDT]

Our newest podcast episode, “The Long-Term Effects of COVID-19,” is available.  In this episode, we discuss how the COVID-19 pandemic will likely accelerate the reversal of the equality/efficiency cycle toward equality.

Good morning and happy employment Friday!  We go into the details below, but the quick snapshot is that the numbers are much better than forecast and mostly confirm the ADP data from earlier in the week that was stronger than expected.  Global equities are mostly higher this morning as optimism over economic reopening and policy support continues.  China remains in the news.  As usual, we update what we know about COVID-19.  There was an Iranian prisoner swap.  This week’s Asset Allocation Weekly (AAW) is posted; this week’s report shows how the equity markets recover before the peak in unemployment.  Onward!

China:

• Although details are lacking, China is apparently considering a $28 billion backstop to the banking system.
• Despite the ban on demonstrations, protestors in Hong Kong defied their government and turned out in force to remember the Tiananmen Square anniversary.
• The Xi regime is apparently concluding that the costs of seeing the West isolate Hong Kong is worth bringing it under control. This decision suggests Beijing may have been worried that its major cities might push for similar democratic measures if Hong Kong retained its degree of independence.  Given how much this move will likely cost China, either the government is underestimating how much it will cost or the government was very worried about Hong Kong’s defiance.  We suspect the latter is the case.
  • According to reports, the White House isn’t considering direct sanctions on President Xi over Hong Kong.
  • China is clearly making an attempt to separate the EU from the U.S. through trade and investment. Although the U.K. has been remarkably aggressive in opposing Beijing’s policy changes in Hong Kong, the EU has been reluctant to criticize.
• Secretary of State Pompeo praised NASDAQ (NDAQ, 117.93) rules on Chinese-listed companies, calling them a “model” for the rest of the world.
• Facebook (FB, 226.29) is putting labels on state-controlled media pages, essentially putting a warning on feeds from such sources.
• Recent data from the Peterson Institute makes it abundantly clear that China is nowhere close to meeting its Phase 1 commitments. We believe that it is just a matter of time before the administration concludes that China is failing on the deal; it remains to be seen what reaction will occur.  However, as we have always said, watch USTR Lighthizer; if he leaves, it would suggest he believes the administration won’t follow through on changing the trade relationship with China.

Foreign news: 

• The U.S. and Iran engineered a prisoner swap. Iran released Michael White, a Navy veteran who had been detained while visiting Iran.  The U.S. deported Sirous Asgari, a scientist who was detained on charges of violating U.S. sanctions.  Although relations between Iran and the U.S. remain tense, the fact that this swap occurred does suggest backchannel contacts are operable.
• One of our concerns with any administration is the problem of bandwidth. A government can find itself under great strain due to multiple simultaneous problems.  That is what the Trump administration is facing currently.  The deteriorating relations with China, trade issues with the EU, civil unrest at home, the pandemic—it’s a lot happening in real time.  It is under conditions of stress that foreign nations try to take advantage of the distraction in Washington.  We note that recently Iran and Venezuela jointly violated U.S. sanctions; so far, neither has seen any retaliation.  Expect more problems to develop in the coming weeks.  We are watching North Korea and Russia to see if they try to take advantage of the situation.
• A major diesel fuel spill has occurred in Siberia.
• When political systems fracture, fringe groups emerge. The latest in Italy is dubbed the “orange jackets,” a movement with overtures to France’s “yellow jackets.”  This new movement is so extremely populist that the League party won’t affiliate with it.  Although sympathizers with such political extremes always exist, it is during periods of turmoil that they can coalesce into political movements.

COVID-19:  The number of reported cases is 6,658,334 with 391,588 deaths and 2,886,183 recoveries.  In the U.S., there are 1,872,334 confirmed cases with 108,211 deaths and 485,002 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases between countries, scaled by various variables.

Policy news:

• The expanded unemployment benefits of $600 per week expire at the end of July. There is a debate on whether they should be extended.  The Congressional Budget Office has weighed in on the debate.  Its research suggests that over 80% of recipients would get more in benefits than they would earn working and that extending the benefits would likely lead to lower growth this year.  However, not extending the benefits will lead to lower growth and employment in 2021, most likely because the growth and employment occurred in 2020.  Our read on the report likely means the expanded benefits probably won’t be extended.
• Chile is asking the Fed to extend swap lines to the country and is asking the PBOC to increase the swap line with China.

Economy news: 

• As we have been noting, the next area where we expect support to be provided is commercial real estate. Businesses are not paying their rent and some landlords are taking legal action.  The uptick in business bankruptcies suggests that property owners are likely to see continued declines in rent payments and there is a chance this could cascade into lower property values and commercial mortgage defaults.
• OPEC has agreed to meet and will likely extend production cuts at least another month. Oil prices rose on the news.

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

[Posted: 9:30 AM EDT]

Good morning.  It’s ECB day!  The ECB continues to support the EU economy.  It’s June 4, the 31^st anniversary of the Tiananmen Square Massacre; we note China is playing up the current U.S. civil unrest as a counterpoint to Beijing’s actions in Hong Kong.  Global equities are mostly lower this morning, as risk markets take a breather from recent strength; however, we have seen some recovery on the ECB news.  We cover the ECB meeting and look at the latest with China.  As usual, we update what we know about COVID-19.  We have a new Weekly Energy Update, with a special look at natural gas. Let’s get to it…

ECB:  In its prepared statement, the European Central Bank announced it will expand its emergency QE by €600 billion.  Interest rates remained unchanged.  It also said purchases will continue into June 2021.  Market reaction was swift; as the global risk-on rally has been supported by central bank action, news of the ECB’s move lifted global equities.  In something of a surprise, the EUR rallied as well.  Usually, QE is bearish for a currency.  In the press conference, ECB President Lagarde didn’t offer any major surprises

China:  Lots of China news:

• On the 31^st anniversary of Tiananmen Square, China has reacted by quashing usual memorial ceremonies in Hong Kong. Despite the crackdown in Hong Kong, protests continue and security forces have reacted with arrests.  China is deflecting the usual annual criticism by pointing to the current unrest in the U.S.
• PM Johnson has indicated he will admit 3.0 million Hong Kong residents to live in the U.K. with a potential path to citizenship if China implements its national security law. Beijing is not happy with the development.
• One of the features of Hong Kong compared to the rest of China is that the former was less affected by China’s “Great Firewall.” Tech companies put virtual private networks (VPN) in Hong Kong to prevent Beijing from interfering in internet traffic.  There are growing worries that the new national security law will put Hong Kong within the firewall and thus implement censorship.  Of course, there are also worries that the new law will stifle free speech.
• So far, China has not reacted strongly to the U.S. actions taken with regard to the national security law. It may be that Beijing wants to see what the U.S. will actually do; if the response remains mild, it may signal that China feels the actions taken by the U.S. are not significant.
• The U.S. has threatened to block Chinese airlines from coming to the U.S. as China has denied American airlines from flying to China. This morning, China relented and will allow limited flights by international carriers.
• It is evident that the Chinese economy has been hit hard by the trade war with the U.S. and the pandemic. Thus far, the policy reaction has been rather subdued.  We note that the central government announced it will send money directly to local governments, a sign Beijing is growing worried about slowing growth (and rising unemployment).
• Huawei (002502.SZ, CNY 2.900) has been having a tough run of news recently. As we reported last week, the CFO lost her bid to avoid the extradition process as a Canadian court ruled she must stand for the proceedings.  There is confirmation that the company did, in fact, evade U.S. sanctions on Iran (which is why the CFO is under house arrest).  The U.K., which was open to restricted use of the company’s products in its 5G network, is reversing course in the aftermath of Hong Kong and strong U.S. pressure.  All this is bad news for the company.
• China has cancelled some U.S. farm shipments, increasing the odds it will fail to meet its Phase One agreements.
• The U.S. is expected to designate at least four Chinese state-run media companies as foreign embassies, which will restrict reporters’ ability to operate.
• A new bill is circulating in the Senate that would restrict foreign access to U.S. research.

Civil unrest:  The widespread civil unrest is further delaying the reopening of small businesses.

Foreign news: 

• Germany has unveiled a second COVID-19 stimulus package of €130 billion, bringing Germany’s total fiscal spending to €3 trillion. Given the degree of German stimulus, we will be watching to see if Germany’s trade surplus reverses as slower-growth Eurozone nations send exports to Germany.  If this continues, it would suggest that Germany is taking on a regional hegemonic role, a reversal of previous behavior.  The EU has been aggressive in spending during this downturn.
• PM Johnson and European Commission President von der Leyen are likely to engage in direct talks to break the current deadlock on a new trade deal.

COVID-19:  The number of reported cases is 6,530,067 with 386,392 deaths and 2,820,488 recoveries.  In the U.S., there are 1,851,520 confirmed cases with 107,175 deaths and 479,258 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases and fatalities between nations, scaled by population.  Axios has updated its U.S. infection map.

• The good news:
  • When thinking about a problem, it is helpful to know more about the issue one is trying to resolve. For the most part, medical researchers have been treating COVID-19 as primarily a respiratory disease.  This led to the crash production of ventilators and the search for antiviral medicines.  However, there is growing evidence that although the virus spreads through the lungs, the biggest impact may be vascular.  The virus’s primary impact may be to infect the endothelial cells in blood vessels.  When these cells become inflamed, it could lead to microclotting and would explain the wide variety of symptoms.  Unlike seasonal flu or SARS, which tend to remain in the lungs, COVID-19 spreads throughout the body, causing damage to kidneys, conditions close to frostbite in toes, and strokes.
    • If this is how the virus works, the best protection may come from ACE inhibitors, statins and blood thinners. There are trials now underway to see if losartan, a common high blood pressure drug, may prevent the worst symptoms of the disease.  In other words, if taking cardiovascular medicine prevents fatalities and hospitalizations, we could treat COVID-19 with common drugs and extreme measures to avoid the disease may not be necessary.
  • Scientists are studying patterns to see if there is a genetic basis that might explain the wide variation seen in the reaction to infection. There is evidence to suggest that there are sizeable numbers of asymptomatic cases and, at the same time, fatalities.  If a common genetic threat could be found, it may allow for less stringent lockdowns and could help in determining who should get vaccinated before others.  A recent European study suggests that having Type A blood increases the likelihood of a more serious reaction to infection.
  • The U.S. has selected five firms as vaccine finalists. Narrowing the list will allow the government to focus its efforts on producing a vaccine once an effective candidate emerges.  In related news, Eli Lilly (LLY, 152.53) is testing a new drug that is derived from antibodies developed from patients infected with the virus.
• The bad news:
  • When I was in the Jesuits (Bill talking here), one of “ours,” a missionary in Belize, had suffered an auto accident. He recovered from his injuries with one problem: he had no sense of taste.  Although he would get hungry, he was completely indifferent to what he ate.  It led to some rather odd dinner situations.  The loss of taste and smell is noted as an effect of COVID-19 and some cases indicate the change may be long-lasting.
  • Sweden’s social distancing policy was more relaxed than what was seen elsewhere. The primary leader behind that policy has admitted the policy probably wasn’t strict enough, allowing for too many fatalities.
  • Recent studies confirm what the anecdotal evidence suggested: nursing homes have been especially hard hit by COVID-19.

Policy news:

• Europe is unveiling new digital services taxes, which the U.S. views as unfairly targeting American tech firms. So, the U.S. is considering tariff retaliation if the EU continues toward implementing such taxes.  In related news, the EU is also considering changing the rules for online content, making social media firms accept greater accountability for content.
• The Fed’s direct lending program to business has had few takers, in part on borrower concerns of the stigma of taking federal money. Overcoming this issue has been a persistent problem with direct government lending.  During the 2008 financial crisis, the Fed and Treasury forced the major banks to take funding to avoid this problem.
• Meanwhile, Illinois has decided to tap the Fed’s municipal bond program with an issue of $1.2 billion of one-year notes.
• The DOJ has indicted executives in the chicken processing industry for price fixing. Consumers have been complaining about high meat prices for some time; this move by the government may partially explain why prices have been elevated.

Finance news: 

• The Labor Department will allow private equity into 401k programs.
• Japanese regulators are warning banks about their positions in U.S. CLOs. Japanese banks, in a search for yield, own about 20% of this U.S. market.  Fears over credit quality triggered the warning.

Economy news: 

• Although businesses are starting to reopen, factories are finding their supply chains are disrupted, which is hampering their ability to ramp up output.
• As noted before, we continue to closely watch for “gaps” in the supply/payment chain that could disrupt the financial markets. One  area of concern is rent payments.  Small businesses that have been closed are unable to make their rent.  This loss of payment is a risk to landlords, who face their own creditors.  We expect that either the Fed or Congress will need to inject funding to support this part of the economy at some point; if support doesn’t occur, it may raise the risk of economic disruption.
• Another area of concern is small non-bank lenders; these firms may need to raise capital in the coming weeks or be forced to reduce their lending.
• As the rich world economies weakened, foreign remittances from workers sending money home to the emerging markets have collapsed. This drop is having a negative impact on EM economies.

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