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

[Posted: 9:30 AM EST]

On this day in 1918, the first cases of Spanish influenza were reported in Ft. Riley, Kansas.  How ironic it is that we’re now dealing with another big epidemic, though there is still no indication that it will be a mass killer like the Spanish flu.  As always, below we provide an update on COVID-19, its economic impact and the evolving policy responses.  We also discuss the escalating Saudi-Russia oil price war and the results of yesterday’s primary elections.

COVID-19:  Official data show confirmed cases have risen to 121,061 worldwide, with 4,368 deaths and 66,216 recoveries.  New cases continue to slow in China, but the epidemic is accelerating elsewhere.  In the United States, confirmed cases rose to 1,039, with 29 deaths and eight recoveries.  In the hot spot around Seattle, authorities say COVID-19 has now spread to at least 11 elder care facilities; at least three have reported fatalities.  Separately, New York Gov. Andrew Cuomo called out the national guard to help set up a “containment area” in a New York City suburb that has had a rash of cases.  Residents will be free to walk around the three square mile area, but significant public gatherings will be banned for two weeks.  Illustrating one important way the epidemic could impact the political process, former Vice President Biden and Vermont Sen. Bernie Sanders canceled campaign rallies yesterday on concerns about spreading the virus.  Across the pond, even Britain’s junior Health Minister Nadine Dorries has been diagnosed with COVID-19, less than a week after she attended a reception with Prime Minister Johnson.  In South Korea, a new cluster of infections discovered at a call center led to a surge in new cases that ended a four-day string of declines.  Italy had its deadliest day of the crisis, with its death toll rising by 168 to a total of 631 dead.

• Economic Impact.  People are becoming more aware that the epidemic’s dual impact on both the supply side of the economy and the demand side will make the economic harm deeper and longer lasting than initially thought.  Some businesses are expecting the impact to last even into the third quarter.  In terms of the spreading economic impact, today Poland said it will close its schools, universities, cultural institutions and other mass events for next week.  In Japan, worries about the effects of the epidemic have made many major firms reluctant to offer base pay hikes in their annual wage talks beginning today.  Toyota (TM, 126.99) is forgoing its uniform monthly pay scale increase for the first time since 2013.  The moves could hold down Japanese incomes for some time to come.
• Fiscal Policy Response.  Precisely as we warned in our Comment yesterday, the administration’s Tuesday discussions with congressional leaders regarding an economic support package fell flat as both Republican and Democratic legislators apparently want to focus on smaller, more targeted measures instead of broad measures like a payroll tax cut.  For Democrats, that may be because of a perception that the White House is overreaching.  Reports say President Trump has privately floated ideas ranging from eliminating the payroll tax permanently to offering massive tax cuts to the oil and gas industry.  For Republicans, the resistance seems to be rooted in ideological antipathy for big government programs to support the broad working class.  In any case, we suspect the pushback against the program is a key reason for the weakness in stocks this morning.  Still, we note that Democrats in the House reportedly are preparing to propose some targeted measures as early as Wednesday in order to start the ball rolling before Congress starts a one-week break on Thursday.  In terms of administrative action, sources say the Treasury Department is also likely to extend this year’s April 15 tax filing deadline.

• • Italy ramped up the size of its emergency economic support to €25 billion from the €7.5 billion approved just last week.
  • In a video call with EU leaders, ECB Chief Christine Lagarde urged a stronger, more coordinated fiscal response across the Eurozone. A prominent group of German economists also urged Chancellor Merkel’s government to abandon its commitment to a balanced budget in order to boost the COVID-19 fight.
• Monetary Policy Response.  The Bank of England announced an emergency cut in its benchmark short-term interest rate, reducing it to just 0.25% from 0.75% previously.  The central bank also introduced a host of measures aimed at maintaining the flow of credit to British businesses.  The unexpected support for the economy has been a key factor in boosting European stocks so far this morning.

Oil market:  In a further escalation of the oil price war with Russia, the Saudi government said it would boost its crude production capacity to 13 million barrels per day from 12 million previously.  The announcement has put additional significant downward pressure on oil prices so far today.  However, as the threat of lower oil prices continues to suggest reduced U.S. shale drilling, investors are realizing that would likely also cut natural gas production (often a by-product of oil output).  Natural gas prices have therefore surged in recent days.

Russia:  President Putin said he would support a legislative proposal to lift the country’s term limits so could remain in power until at least 2036, which we discussed in yesterday’s Comment.  The Duma has already approved the change.

Super Tuesday II:  In yesterday’s Democratic primary elections, former Vice President Biden again put in a strong showing with convincing wins over Sen. Sanders in Michigan, Missouri, Mississippi and Idaho.  The race in Washington State is too close to call at the moment.  Based on current estimates of how many pledged delegates each candidate has won, we estimate Biden would only have to win 46.8% of the remaining delegates to lock up the party’s nomination on the first vote at the summer convention.  That suggests Sen. Sanders could well drop out in the coming days.  By removing the threat of Sanders-style “democratic socialism,” such a move would likely be positive for equities.  Just as important, Biden seems to be forming a broad, durable coalition consisting primarily of African Americans, white suburbanites and older voters.  That coalition would likely be potent in much of the Midwest and South.  In other words, Biden is positioning himself to be a strong rival to President Trump in the November elections.  If momentum keeps swinging toward Biden, we would look for many foreign leaders to push back stronger against Trump’s foreign and trade policies on hopes of waiting him out until January.

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

[Posted: 9:30 AM EST]

Happy Tuesday!  The markets are looking better than yesterday, largely based on signs that the White House has swung behind the idea of significant fiscal measures to offset the negative impact of the COVID-19 panic.  We update the latest news on the coronavirus and discuss prospects for the relief package.  Separately, the oil price war between Saudi Arabia and Russia is intensifying, though crude is for now being swept up in the positive sentiment about the fiscal response to the coronavirus.

COVID-19:  Official data show confirmed cases have risen to 115,855 worldwide, with 4,087 deaths and 64,046 recoveries.  In the United States, confirmed cases rose to 755, with 26 deaths and 8 recoveries.  However, the data continue to suggest the epidemic is peaking in China.  The country reported only 19 new cases today, and President Xi finally visited the epicenter of the outbreak in Wuhan and claimed “victory is near.”  That’s consistent with our view that the outbreak may follow a roughly two-to-three-month cycle when it hits a country.  With the epidemic apparently peaking in China, attention will now focus on the accelerating outbreaks in other countries.  The WHO now says the COVID-19 outbreak is “very close” to becoming a pandemic.  All the same, the two-to-three-month cycle would suggest those outbreaks could slow dramatically by late April, even if the impact on the economy and economic data extends into early summer.

• Economic Impact.  Not only did President Xi visit Wuhan, but local government officials said people in some areas would soon be allowed to travel within Hubei province.  In contrast, the Italian government extended its public health restrictions and ban on non-essential travel to the whole country.  The restrictions will be in place until April 3.
• Fiscal Policy Response.  In a statement yesterday, President Trump said administration officials will meet on Tuesday with Republican leaders in Congress to discuss coronavirus economic measures.  He said a news conference on Tuesday afternoon will include the announcement of “major” steps like a cut in payroll taxes, financial support for hourly employees who can’t work and loans for small businesses.  That news has given risk assets a strong boost so far this morning.  However, since Trump didn’t discuss broader steps and some congressional Republicans previously pushed back against early action, we think there is a risk that the total package ultimately won’t satisfy the markets.  Besides, if the Republicans can’t resist the temptation to pepper any required legislation with measures inimical to the Democratic majority in the House – such as draconian new regulations on immigration or immigrants – passage through Congress could be delayed or stopped.  Another issue to watch is any risk that President Trump himself might be exposed to the virus.  Trump was reportedly in contact with two congressmen who later went into self-quarantine because of previous contact with a coronavirus patient, and at a news conference following Trump’s statement, officials were either unwilling or unable to say whether Trump has been tested for infection.  Separately:

• • The Italian government said it would boost its fiscal measures to €10.0 billion from the original €7.5 billion, and also suspend mortgage payments. To help ease such measures, European Commission officials said they will consider loosening their rules governing state aid to businesses.
  • The Japanese government adopted a fresh emergency package valued at almost $10 billion, including no-interest loans for small and medium businesses facing lost sales.

• Stock Market Action.  Stock selling was brutal and merciless around the world yesterday, but in the key U.S. market it still wasn’t quite enough to produce a bear market in terms of the broad indices.  At market close, the S&P 500 price index was down 18.9% from its record close in mid-February.  All the same, if today’s nascent rebound doesn’t hold, the index could easily fall below the 2,708.92 level that would officially mark a bear market and put an end to the bull market that began back in early 2009.

• • One saving grace is that retail investors have been cautious ever since the late-2018 correction. Although the data are volatile, the charts below show a net inflow of funds into bond mutual funds and ETFs during 2019, along with net outflows from stock funds.  Since retail investors were already cautious going into the current downturn, the usual negative impact of a major decline in equities may not be as pronounced this time around.

• • Another saving grace is that retail money market fund assets have now risen above $1.4 trillion, as shown in the chart below. There has also been a big rise in fund assets as a share of stock market capitalization (not shown).  Either way you cut it, there seems to be sufficient fuel to support a strong recovery in equities if investors see the kind of fiscal shock and awe they’re looking for.

• Bond Market Action.  With equities looking set to enter a bear market, government bonds continue to surge.  The yield on the benchmark 10-year Treasury dropped to a record low close of 0.50%.  Market indicators continue to suggest investors are looking for the Fed to cut its benchmark fed funds rate by about 0.75% and for inflation pressures to crater for some time to come, giving a big bid to longer-term obligations.

Oil Market:  In a dramatic escalation of its price war with Russia, the Saudi government said it will boost its oil supply to 12.3 million barrels per day (bpd) by next month.  That would be 2.5 million bpd above its recent supply, and 300,000 bpd above its previously declared maximum production (suggesting the Saudis will release supply out of inventory).  Russian Energy Minister Novak responded with a threat to boost Russia’s oil supply by 500,000 bpd.  By itself, the Saudi effort to inflict maximum pain on Russia and force it to agree to production cuts would be bearish for oil prices.  However, traders today are more focused on signs of fiscal measures to tackle the COVID-19 panic; thus, prices so far this morning are rebounding.

Russia:  Legislators considering President Putin’s constitutional changes, which would let him keep exercising power even after his term expires in 2024, have proposed simply resetting the country’s term limits so he could remain president potentially until at least 2036.  The proposal comes after Putin last week said he wouldn’t take the leadership of the proposed new State Council on grounds that doing so would be “destructive” for Russia.  Importantly, the pro-Putin United Russia Party said it would support the change to term limits.

United States-Iran:  The Pentagon has begun withdrawing some of the troops it sent to the Middle East after the assassination of IRGC Commander Soleimani in January.  Officials have reportedly concluded there is now less risk of Iranian reprisal strikes.  If the assessment is correct, the improved security outlook would likely be positive for global risk assets but negative for oil.

Turkey-Syria-EU:  Turkish President Erdogan began meeting with EU officials about shoring up their 2016 migrant deal, under which Turkey harbors refugees from Syria’s civil war in return for EU financial assistance.  However, there was no sign of a breakthrough that would prompt Erdogan to reverse his move last week to allow refugees to cross from Turkey into Greece.  The threat of a new European migrant crisis remains a political risk for European assets.

United States:  In what’s being called “Super Tuesday II,” primary elections are being held in six states today.  In the key Democratic Party contests, the largest number of convention delegates at stake are in Michigan and Washington.  Also voting are Missouri, Mississippi, North Dakota and Idaho.  If former Vice President Biden polls well against Vermont Sen. Bernie Sanders and his “democratic socialist” message, the results could be reassuring and positive for stocks tomorrow.

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

[Posted: 9:30 AM EST]

Global equities suffered a deep slide overnight; equity futures fell to limit down levels, so we are not sure how far they will decline on the open.  The 30-year Treasury yield broke 1% and the 10-year T-note has fallen below 50 bps.  The JPY is appreciating.  Oil prices fell over 20% as it looks like we are in the midst of the market share war.  At the same time, there is evidence to suggest some of this event may be about a shake up in the Saudi Royal family.  We update COVID-19.  Lots to cover; let’s get at it.  Here are the details:

COVID-19:  The number of reported global infections is now 111,354, with 3,892 fatalities and 62,373 recoveries.  Although the raw data suggests some optimism—the growth rate of infections is slowing, while the recovery rate is rising—that news is being lost amid rising fear and government missteps.  Governments around the world are moving to contain and cope with the virus.

• In Europe, Italy has moved to lock down its northern provinces, while France has banned gatherings of more than 1,000 people. Germany is considering the same.  Helpfully, the French health ministry has warned that cocaine does not protect against the virus.  The quarantine in Italy affects 16 million people, which is the most economically vibrant part of the country.  We would expect ripple effects for the rest of Europe from the virus.
• In the U.S., the administration is considering further fiscal measures. As we have been noting recently, we remain surprised that the White House hasn’t moved to aggressively stimulate; the chances of inflation are nil, and this is an election year.  The desire to avoid panic is understandable, but there is little doubt that upcoming economic data is going to show weakness.  There is little point in waiting to act until after the numbers turn lower.  Our case for recovery is based on a strong fiscal response; if it fails to develop, the odds of recession are higher than we currently expect.  What would we expect to see?  Extended and increased unemployment insurance, loan subsidies for small businesses and, perhaps, a payroll tax holiday.
• Meanwhile, reports of infections in the U.S. continue to rise and spread. Seattle has been hard hit, but 35 states have now reported cases.  As we have noted, COVID-19 is especially risky for the elderly.  With Congress full of old men and women, fear is rising on Capitol Hill.  We are in the early stages of U.S. corporate reaction to the virus; look for an increasing number of workers toiling remotely in the coming weeks.
• In the rest of the world, Iran is making a hash of its response, threatening the rest of the region. We are seeing the aftereffect in China; its combined trade data for January and February reported a drop of 17% in exports as supply chains were disrupted by the widespread lockdown.  Japan’s Q4 GDP was revised lower, down 7.1% on an annualized basis.  Reports suggesting a further retreat in globalization continue as foreign investment is set to decline.  The effects on various markets continue as well; besides oil, which we cover below, we are seeing a glut of metals develop on world markets.

Ok, so where are we now?  If we think back to where all this started, in China, we started tracking the virus in the second week of January.  By late February, we were starting to see signs that the infection rate was slowing.  Currently, China is starting to show signs of recovery, although the rise is rather sluggish.  In comparison to China, the U.S. is about three weeks into this cycle.  The next three weeks will be rough; meeting cancelations will grow, travel will plummet and economic activity will slow.  But, by early to mid-April, we should start to see a slowdown in infections and some indication that the worst of this virus is behind us.  Due to reporting lags, the economic data will be lousy into June, which will still be reporting data from April and May.  Again, policymakers can help here; moving aggressively to funnel money into households remains the best way to support the economy and avoid an official recession.  If policymakers remain timid, the drop in growth will be deeper and the recovery slower.  We don’t expect a timid response, although at this point that position is more based on faith than evidence.

OPEC:  In a surprising development, the Russians refused to participate in OPEC production cuts, citing opposition to losing market share to U.S. shale producers.  Perhaps Russia expected the Saudis to maintain production cuts to prevent a sharp decline in prices.  If so, that assumption was in error.  The Saudis announced sharp price cuts and production increases.  Why is Saudi Arabia “going to the mattresses” over Russia’s action?

Most of the time, the Saudis opt for a moderate oil price policy, which is a price high enough to bring ample revenue but not so high that it destroys demand.  But, if it faces the loss of market share to a key customer, it has, in the past, flooded the market with oil to drive down the price and force its competitor in this key market to surrender.  In 1986 and 1999, the Saudis were losing market share in the U.S.  At the time, the Kingdom of Saudi Arabia (KSA) was worried that if its share fell permanently, the U.S. might not be interested in its defense.  So, in 1986 and 1999, it drove prices to around $10 per barrel until other oil producers agreed to production cutbacks.  Once peace emerged, prices recovered.

The KSA is no longer interested in defending U.S. market share.  The onset of shale oil and the clear U.S. preference to leave the Middle East means it has other areas to focus upon.  That area is China.  Last year, its oil exports to China jumped 42% which gave it back the #1 position as foreign oil suppler, with Russia as #2.  If the KSA didn’t boost production, it would cede its position to Russia, which it has decided is not in its interest.  Therefore, as we saw in the other two episodes, a sharp decline in prices is in the offing.  We have noted some analysts have been comparing this event to 2014-15, when the KSA seemed to be taking on shale producers only to retreat.  We view this as a faulty comparison.  In that event, the Saudis were not defending market share in a key market.  This event is more akin to the 1986 and 1999 events.  This is going to be a much deeper decline.  A $20 handle on oil (meaning falling below $30 per barrel, WTI) is highly likely.  One area that might benefit?  Natural gas prices may find some support as associated gas production will eventually fall.  However, patience is recommended; oil producers are hedged so it will take a few months for U.S. oil production to start falling.

We would expect Russia to take on the KSA in this fight.  Look for the RUB to fall sharply as Russia tries to reduce operating costs.  The KSA generally doesn’t use exchange rates to boost competitiveness, although it might this time.  In the U.S., the already beleaguered energy sector is facing another rout; high yield debt is at risk as well.

Another item of note:  Crown Prince Salman arrested Prince Ahmed bin Abdulaziz, the brother of King Salman, and Prince Mohammed bin Nayef, the former crown prince.  Prince Abdulaziz is the last remaining “king eligible” son of the KSA founder Ibn Saud, and Prince Nayef was initially the next in line to the throne.  Although CP Salman has been consolidating power for some time, these aggressive actions may signal that King Salman, who has been in ill health for some time, may be approaching death and CP Salman wants to eliminate any potential claimants to the throne.

Odds and ends:  Lebanon is set to default on its debt as its foreign reserves dwindle.  Turkish President Erdogan is visiting Brussels over the current refugee crisis; he wants more money from the EU.  Political turmoil is rising in Bolivia as the current government battles with supporters of the exiled former president.  In Taiwan, the KMT is dropping its Beijing supportive policy which will exacerbate tension with the PRC.

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

[Posted: 9:30 AM EST]

It’s Friday employment day, although the data is mostly irrelevant.  This report covers February, before COVID-19 hit the U.S. economy.  We detail the data below, but the quick read is that the data was very strong.  As has been our practice, we update COVID-19 news.  Risk markets are under pressure globally as the virus spreads and policymakers appear to be caught off guard.  Russia and Turkey declare a ceasefire.  Here are the details:

COVID-19:  The number of reported cases is now 100,278, breaking the 100k level for the first time; fatalities are 3,406 and recoveries are 55,694.

• We are seeing a massive risk-off trade in the financial markets. World equity markets are under pressure; U.S. equity futures, at the time of this writing, are down in the neighborhood of 3%.  Gold prices are higher and Treasury yields continue to march lower.  Mortgage yields are falling to record lows; it isn’t clear how much stimulus this development will generate.
• The news from the world outside of China remains grim. Seattle closed its schools.  In France, a deputy in the National Assembly is in intensive care, afflicted with the virus.  Islamic holy sites are being closed.  The economic costs continue to mount.  Credit spreads are starting to widen around the world as default fears rise.  Food prices are showing signs of rising again in China.  Under normal circumstances, that would be good news for U.S. agriculture.  However, global shipping has been disrupted and, at least for now, it isn’t likely that U.S. grain and meat will make its way to China.  Oil demand has been hit hard by the virus.  Maryland has declared a state of emergency; its proximity to Washington, D.C. will increase fears.  The airline industry has been hit hard; a British airline has failed.  The European Parliament has canceled over 100 events.
• There is an old saying that the first victim of war is the truth. Similar sentiments can be expressed about pandemics.  Fact checkers have been hard at work debunking reports that the U.S. created the virus (it should be noted that a similar rumor that it originated in a Chinese biological weapons factory circulated a couple of weeks ago).  Other reports offered novel ways of protecting oneself from the virus; all have been found to be false.   Reports out of China are suggesting that a second, more virulent strain of COVID-19 has emerged.  Geneticists warn against concluding that the virus is becoming more deadly.  The work of Adam Kucharski puts the disease in context.
• Another developing trend is that countries and businesses are being accused of hoarding. Italy is complaining that other EU nations won’t share medical supplies (so much for European solidarity).  Globalization has moved from a virtue to a vice.
• Our expectation of this event is that it would be significant in impact but short in duration. Part of this expectation is built on the idea that we would see aggressive fiscal and monetary policy stimulus.  So far, we have to say the results have been mixed at best.  The Fed did act aggressively, but the bond market is making it clear they didn’t move nearly enough.  The ECB hasn’t moved at all.  However, what has really surprised us is the lack of fiscal action.  This is an election year; history shows a pattern where incumbents use all sorts of tactics to boost growth to improve either re-election or the election of a new president from the incumbent party.  Rahm Emmanuel had a famous quote, made during the financial crisis, that “one should never let a crisis go to waste.”  And yet, so far, the White House has pushed back on suggestions of fiscal actions.  As the airlines have swooned, the president has indicated no aid will be forthcoming.  The attitude seems to be that COVID-19 isn’t a big deal and that nothing—no tariff rollbacks, payroll tax holidays, credit support or even cash distributions—is necessary.  We find this attitude a bit surprising; the economic data will start to deteriorate soon but, due to delays in reporting, the worst won’t be seen until April and May.  In terms of the November elections, this is the most critical time because most voters’ view of the economy is based on what was happening two quarters ago.  If the stimulus isn’t forthcoming, the rebound could be much less robust than we expected and the odds of recession are rising.

Turkey and Russia:  The two have set a ceasefire.  The refugee threat to Europe remains.  We will be watching to see if the agreement holds but clearly neither Ankara nor Moscow want a broader war.

Odds and ends:  There was an OPEC agreement but it doesn’t appear Russia will participate.  The remaining members offered to cut production by 1.0 mbpd, but without a 0.5 mbpd cut from Russia oil prices have plunged this morning.  On Thursday night, the Reserve Bank of India (RBI) seized control of its fourth largest lender, Yes Bank (YESBANK, 16.60).  The takeover was to prevent a loss in confidence of the Indian financial system due to Yes Bank’s inability to raise capital to improve its financials.  The president’s national security team has advised that he block Infineon Technologies’ (IFNNY, 20.20) proposed acquisition of the American chipmaker Cypress Semiconductor Corp. (CY, 19.18) due to its links to China.  In order to stimulate the U.K. economy, Prime Minister Boris Johnson appears to be looking into eliminating tax breaks that benefit the “staggeringly rich.”  In Tunisia, two militants on a motorbike blew themselves up outside the U.S. Embassy.

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

[Posted: 9:30 AM EST]

Happy Thursday!  After a strong equity market rally yesterday, which lifted stocks in Asia overnight, Europe turned lower and U.S. equity futures are also falling.  We update COVID-19 news.  The U.S. won a battle with China over global regulation.  Turkey and Russia meet; Europe frets over another refugee crisis.  Here are the details:

N.B.  On Thursdays, we usually update the DOE weekly energy data as part of the Daily Comment report.  We have decided to make the weekly data recap its own report, which you can access here.  Going forward, a link will be provided every week after the data is released.

COVID-19:  There are now 95,748 reported cases of COVID-19, with 3,286 fatalities and 53,423 recoveries.  Although the news flow surrounding the virus remains grim, since February 19, the number of recoveries have outpaced the number of new cases.  This is good news.

• The economic impact: The economic impact of the virus continues to ripple through the global economy. The JP Morgan world PMI report shows a sharp decline.

Anecdotal evidence of economic fallout continues to build.  The Fed’s Beige Book painted a picture of widening negative effects; in part, the report is probably one of the factors that prompted the emergency rate cut this week.  Italy has closed its schools for two weeks.  France has put price controls on hand sanitizer.  The London Book Fair has been canceled; so was the Geneva Auto Show.  European football[1] games are being played before empty stadiums.  So far, the Olympics are still a go, but there are growing concerns they might be canceled as well.  California has declared a state of emergency after the first fatality of one of its citizens was reported; the U.S. death toll has reached 11.  Companies are preparing their workers to perform their tasks remotely.  India solar groups are considering force majeure declarations due to supply problems emanating from China.  China’s auto sales fell 80%.  Japan announced that a state visit by China’s President Xi Jinping has been postponed.  Reports from the Chinese small business community remain grim.  Companies in China are being forced to offer bounties to find workers.

• Iran: The situation in Iran continues to deteriorate and may have geopolitical ramifications. At least two dozen MPs and 15 other senior members of the government have all been afflicted by the virus.  It appears the virus is spreading rapidly in Iran and overwhelming its public health capacity.
• Globalization: We continue to watch the impact of COVID-19 on globalization. In our analysis, globalization has been in retreat for some time; we would peg the U.S. withdrawal from TPP and TTIP as the events that historians will someday use to mark the end of the post-WWII globalization era.  The virus is contributing to the trend.  Reports indicate foreign firms in labor intensive industries are starting to exit.  Editorials are pointing out that the virus has exposed the risk of far-flung supply chains.  India has announced curbs on drug exports which could lead to shortages in the U.S.  China had an aggressive response to COVID-19 and was angered by other nations applying travel bans; now it must deal with Chinese nationals returning from overseas visits from areas affected by the virus.  The U.S. is not considering lifting tariffs on China due to COVID-19.
• The good news: Amid all this negative news, there were some positive items as well. Recruitment efforts have started for testing an experimental vaccine.  The House passed an $8.3 billion fiscal package to counter the impact of COVID-19.  One underlying positive factor from the Fed’s emergency rate cut is that it has given political cover for foreign policymakers to take aggressive steps of their own.  We expect the policy response to bring a strong recovery later this year.

China v. U.S. on regulation:  China has been making a concerted effort to gain more power and representation in international bodies.  Where it is being blocked, it is creating new bodies to expand its soft power.  Meanwhile, the U.S. and the rest of the West are pushing back.  The World Intellectual Property Organization’s leadership position was open and China was pushing its candidate, Wang Binying, for the role.  The U.S. fought back and won; its candidate, Daren Tang, the head of Singapore’s intellectual property office, was nominated.  On the one hand, as China’s importance in the world rises, it makes sense it would want, and may deserve, more representation.  On the other hand, if the U.S. has deemed China a strategic competitor, every office it controls becomes a threat.  These sorts of events are further evidence that the world is evolving into at least a bipolar world.

About yesterday:  The strong rally in equity markets was supported by a massive jump in health care stocks, a reflection of Super Tuesday.

Europe, Turkey and Russia:  Turkish President Erdogan and Russian President Putin are meeting to defuse an escalating conflict in Idlib.  Meanwhile, Turkey is allowing refugees to stream toward its borders with Europe, raising the potential for a political crisis during the COVID-19 outbreak.

Afghanistan:  The U.S. launched airstrikes against Taliban positions after the latter continued to attack Afghan army positions.  Although we expect the NATO troop withdrawal to continue, the lack of stability does show that Afghanistan is likely to spiral into civil conflict as we leave.

Odds and ends:  Uber (UBER, 34.53) lost a case in France; French courts ruled that its workers were employees.  If the ruling stands and becomes the new standard, the whole “gig” business model will become much less attractive.  A new study by the Economic Policy Institute confirms our suspicions about last year’s stronger wage growth for non-supervisory workers—it was all about state and local minimum wage increases, and not due to tightening labor supply.  The U.S. has finalized rules that will require the largest banks to further increase their capital buffers.

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[1] Soccer for Americans.