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

[Posted: 9:30 AM EDT]

Good morning!  After a drubbing yesterday, we are seeing a rebound in global markets this morning.  One of the factors helping sentiment is a 10% jump in crude oil prices.  The White House is continuing to talk to Russia and the KSA, and the president is meeting with energy executives.  However, Moscow has indicated it won’t change its policy anytime soon.  China announced it is buying oil for its strategic reserves.  Linked here is our updated Weekly Energy Update.  We update all the COVID-19 news, including some charts on what is happening in the economy.  Here are the details:

COVID-19:  The official number of global cases is 951,901 with 48,284 fatalities and 202,342 recoveries.  The FT did not issue an infection chart; we will try to find one for tomorrow.

The virus news:

• One of the characteristics of COVID-19 is a high number of asymptomatic cases. Sampling in Iceland suggests 50% of those who tested positive had no symptoms.  It may turn out that the disease is much more widespread than we think and we may achieve herd immunity quicker.  However, until testing becomes widespread and, perhaps even more importantly, serological testing is developed to determine who has immunity, nations are stuck with implementing difficult quarantine measures.  At the same time, those who are asymptomatic, during their infectious phase, become innocent carriers of the disease.
• Viruses mutate; China is warning that some patients seem to have a form that has very mild symptoms but shed the virus for long periods of time. If this mutation is real and spreads, the only hope is a vaccine.
• U.S. intelligence agencies are claiming that China concealed the extent of the outbreak; the fact that the U.S. has more cases with one-third of the population supports this theory.
• Latin America is becoming the next hotspot for infections. Brazil has been adamant about not implementing social distancing measures.  Although this policy runs counter to how most of the rest of the world is dealing with the crisis, poor nations with high levels of informal workers may not have much choice.  There are really two methods of dealing with a pandemic—one is to try to “flatten the curve” via social distancing measures so that the health care system can cope with the influx of infections.  This approach reduces infections but tends to extend the impact of the pandemic because herd immunity is slower to develop.  The other method is to simply accept that mortality will be really high but the impact will be short.  In developed nation democracies, the political impact of doing nothing is probably not feasible.  But, in the emerging world, allowing the disease to run its course may be a possible option.  Brazil appears to be a test case, although Mexico is operating similar policies.
• Italy is probably undercounting its death toll.
• As we learn more about the impact of the virus, it appears to have greater impact on men.
• Wimbledon has been canceled.
• Most U.S. states have now issued stay-at-home orders.
• Although China has been getting back to work, we are hearing reports of renewed quarantine efforts as new infections appear.

The policy news:

• While the White House is discussing an infrastructure package and House Democrats are preparing a fourth stimulus package, it doesn’t appear the Senate is ready to do anything further. We suspect another fiscal injection will be required.
• As we noted in the last WGR (which will be wrapped up in next week’s report), the EU is under tremendous strain. Italy desperately needs Germany to act as a benevolent regional hegemon.  Meanwhile, France is making aggressive efforts to maintain employment by giving aid to companies who are, in turn, required to keep workers on the payroll.
• The Fed continues to aggressively address liquidity issues; its last action is to ease reserve calculations by excluding Treasuries up to a year and central bank deposits when establishing leverage ratios. As we noted yesterday, the Fed is also showing itself as the world’s central bank.  This role was generally unspoken before; now it is explicit.

The economic news:

• Initial claims jumped to 6.65 million, a new record. We cover the data below.  There has been a surge in layoffs reported recently and the data confirm it.
• We are seeing a surge in worker revolt. Production workers, delivery drivers, health care workers, warehouse employees, and grocery clerks are starting to push back against what they see are unsafe working conditions.  They have high leverage at this moment.

The market news:

• China is expecting a surge of bad loans due to the COVID-19 downturn; in response, it is setting up a distressed debt market to manage this problem. The numbers are staggering, perhaps $1.5 trillion.
• Increasing oil shipments and storage is boosting tanker rates.

Foreign policy:

• Mask diplomacy is becoming a big deal. China is sending masks around the world and using this action to project soft power.  Russia is engaging in similar activities. Meanwhile, Congress is pushing to collapse medical supply chains away from China.
• The machinery of U.S. bureaucracy grinds slowly; as U.S. states and cities scramble for medical protective gear, the U.S. is sending such goods overseas. This is simply a case of the bureaucracy acting as it normally does and the executive branch not keeping up.  It does appear the White House is getting in front of these shipments and halting them.

Iran:  There are reports that Iran is planning attacks on U.S. military bases in Iraq.  The U.S. is warning Tehran against such actions.

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