Daily Comment (April 19, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Good morning, and happy Monday!  Global equity markets are mixed this morning, with U.S. equity futures taking a breather.  Our coverage this morning starts with bitcoin, which had a rather wild weekend.  Russia news follows and includes several items.  China news is next, followed by an update on German politics.  There is an economic roundup, and we close with the pandemic update.

Bitcoin:  Prices fell hard over the weekend.

(Source:  Coindesk)

Although the plunge over the weekend isn’t all that unusual, the reasons behind the pullback are unclear.  There are reports that the Treasury is contemplating a crackdown on digital assets, which are often used for money laundering.  We note that Turkey’s central bank has banned cryptocurrency payments as well; one of the greatest dangers to cryptocurrencies could come from government regulation.  This decline could also be part of the post-market Coinbase (COIN, USD, 342.00) IPO.  As the chart above shows, prices had rallied into the IPO, and thus some of this decline could be profit taking.  Although China has made it more difficult to mine bitcoin because of the drain on electricity, the PBOC has taken a rather sanguine position on cryptocurrencies.  We doubt this will last; General Secretary Xi tends to take a dim view on things he can’t control.

We comment on market action this morning in part because bitcoin and other cryptocurrencies have siphoned off liquidity from the financial markets.  If prices reverse, that liquidity could look for a new home.

Russia:  Navalny’s health, Czech Republic expels Russian diplomats, and the Ukraine’s military buildup are raising concerns.

 China:  U.S. and China agree to cooperate on climate issues, and Japan and the U.S. agree to counter Chinese coercion.

  • Relations between the U.S. and China are at a low ebb. The Trump administration ended the policy of accommodation, applying sanctions, and the Biden administration has not only maintained the trade tariffs but is working to build a coalition to isolate China.  Despite these difficulties, the two countries have vowed to work together on climate issues.  Although such agreements are welcome, we doubt China will actually do much on this issue without a broader group of nations involved and higher levels of coercion.
  • Japan and China have close economic ties; these relations have tended to keep Tokyo from making aggressive statements toward Beijing. But, we note that, after the Biden/Suga meetings, the Japanese PM clearly stated the U.S. and Japan would oppose China’s aggression in the region.
  • Chinese authorities appear to have extracted their penalty for Jack Ma’s position on financial regulation of Ant Financial. It appears he is being forced out of his controlling stake in the company.
  • We have viewed China’s belt and road project as a thinly veiled return to 18th century imperialism. Like the European powers of that era, China has excess capacity and needs a captive economy to absorb its production.  The latest nation to find itself facing excessive debt to China is Montenegro.  The country accepted Chinese financing for a massive road project that the EU was critical of when it was announced.  In a twist, the EU and NATO member is asking for help from the EU to service the debt; Brussels is not inclined to do so.  After all, if small European countries can accept lending from Beijing and then rely on the EU for bailouts, the moral hazard problem will simply worsen.
  • The Biden administration is targeting rare earths for industrial policy in a bid to loosen China’s hold on that market.
  • The Treasury is warning Taiwan that it is manipulating its currency. Given the geopolitical importance of Taiwan, we would not expect the U.S. to move aggressively to resolve the manipulation.
  • The CPC is pushing a traditional “family values” role for Chinese women. This is being done to address a serious demographic problem.  We doubt Chinese women will be swayed by party messages.

Germany:  Germany will hold national elections in the fall, and the CDU/CSU is struggling to agree on a leader in the midst of a slump in the polls.  Meanwhile, the Greens, who are seeing their poll numbers rise, have selected Annalena Baerbock as party chair.  If the party wins in the upcoming elections, she would become Chancellor.  The Greens are an environmental party, but over the years have become increasingly centrist.  Perhaps more important for the U.S., the Greens are much more strongly opposed to Russia and China compared to the CDU/CSU, who loath to harm business relations.  The conservatives are more closely aligned with the “metal banging” part of the economy.  The Greens are closer to the technology and services sectors.  It is notable that the Greens oppose the Nord Stream 2 project.

 Economics and policy:  Tax negotiations continue, and the economy starts to emerge from the pandemic.

COVID-19:  The number of reported cases is 141,499,661 with 3,021,912 fatalities.  In the U.S., there are 31,670,706 confirmed cases with 567,217 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors.  The CDC reports that 264,505,725 doses of the vaccine have been distributed with 209,406,814 doses injected.  The number receiving at least one dose is 131,247,546, while the number of second doses, which would grant the highest level of immunity, is 84,263,408.  Half of U.S. adults have received at last one dose of a COVID-19 shot, and 25% are fully vaccinated.  All adults are now eligible for a vaccination.  The FT has a page on global vaccine distribution.


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