Daily Comment (April 21, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
Today’s Comment opens with a few key U.S. developments that are likely to affect financial markets today. President Biden will reportedly call for an aggressive 50% cut in U.S. greenhouse gas emissions, which will likely raise concerns about new regulations and reduced corporate profitability going forward. There are new signs of increasing U.S.-Russia tensions, especially with today’s mass protests in Russia supporting jailed opposition activist Alexei Navalny. Finally, we review the latest news on the coronavirus pandemic. Germany’s top court has removed an obstacle to the EU’s big pandemic spending package and the launch of mutualized EU debt, which will likely make the Euro a more viable reserve currency over time.
U.S. Climate Policy: At his climate summit on Thursday and Friday, President Biden will reportedly set a goal of cutting U.S. greenhouse-gas emissions by approximately 50% by 2030 from their 2005 levels. At least some scientists see such a goal as achievable but ambitious. More important for the financial markets, such an ambitious goal raises concerns about the kinds of regulatory or fiscal policies that might be put into place to achieve it. Over time, efforts to achieve the goal could have disparate impacts on different sectors of the market.
United States-China: Sources at the White House say President Biden will name veteran diplomat R. Nicholas Burns as U.S. ambassador to China. Early in his career, Burns served as State Department spokesman and ambassador to Greece in the Clinton administration. In the George W. Bush administration, he was ambassador to the North Atlantic Treaty Organization and helped organize NATO’s response to the Sept. 11, 2001, terrorist attacks. He then became undersecretary for political affairs, a senior State Department post, during the Bush years until he retired from the foreign service. By naming such an experienced and skillful diplomat to the post, Biden will signal that he intends to take a serious and careful approach to the U.S. relationship with China.
United States-Russia: The Russian space agency announced that it will withdraw from the International Space Station program in 2025 and leave the facility to the U.S. Instead, Russia plans to launch its own space station by 2030. The move will also give Russia a freer hand to increase its space cooperation with China, as it faces increasing political pushback from the U.S. and Europe.
Russia-Islamic State: The Russian military said it launched airstrikes in central Syria against Islamic State insurgents who were threatening government-held oil facilities, killing some 200 militants.
Russia: Supporters of jailed opposition activist Alexei Navalny have launched mass protests calling for his release. However, police are aggressively rounding up and arresting major figures in the movement, and it is not yet clear how large the demonstrations will actually get. The Navalny issue does put pressure on President Putin, but not yet enough to threaten him politically.
COVID-19: Official data show confirmed cases have risen to 143,076,046 worldwide, with 3,047,222 deaths. In the United States, confirmed cases rose to 31,793,715, with 568,475 deaths. Vaccine doses delivered in the U.S. now total 272,030,795, while the number of people who have received at least their first shot totals 133,266,995. Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.
- Newly confirmed U.S infections totaled approximately 54,000 yesterday, well below both the seven-day average of 67,122 and the 14-day moving average of 67,940. New deaths related to the virus totaled a relatively modest 767.
- Because of rebounding infections in Japan, the government is preparing to reintroduce a state of emergency in Tokyo and Osaka with just three months to go before the Summer Olympics are set to kick off in Tokyo. However, Osaka’s governor is facing severe backlash for requesting such a tight lockdown.
- Infections in India have now skyrocketed to the point where the pandemic is worse than at any other time. The surge in infections is due to multiple factors, including new, more transmissible mutations, a lagging vaccination campaign, and political and religious superspreader events.
- Despite rebounding infections in countries such as Japan and India, a new analysis by the Financial Times shows that mass vaccination programs appear to have a positive impact no matter what the overall trend in infections looks like. Countries with extensive vaccination programs giving first priority to older, more vulnerable age groups show significantly lower rates of infection, hospitalization, and death than their less vaccinated cohorts. The data should be comforting to investors concerned about rebounding infections and new virus mutations. If borne out by further analyses, the study suggests that economic reopening could generally continue regardless of the fits and starts in some countries. If so, the news should be supportive of risk assets going forward.
- In a vote of confidence for the vaccine from Johnson & Johnson (JNJ, $166.48), the European Medicines Agency said the best way to handle the shot’s possible connection to blood clots was to make it carry a warning that clots could be a very rare side effect, but the benefits of the vaccine still outweigh the risks.
- The finding by the European agency leaves it up to EU governments whether to use the vaccine and whether to impose any restrictions. J&J said after the EMA announcement that it would resume European deliveries.
- The injection remains under a pause in the U.S., at least until Friday, when an advisory committee is scheduled to recommend a way forward to the CDC.
- Meanwhile, Pfizer (PFE, $39.03) said it found the first confirmed instances of counterfeit versions of its vaccine in Mexico and Poland.
Economic and Financial Market Impacts
- According to a report from the testing company Renaissance Learning, elementary students continue to test below their pre-pandemic expectations, but the gap is shrinking as schools open up and return to in-person learning.
- A survey by business advisory firm Vistage Worldwide shows 44% of small businesses reported temporary shortages or other supply chain problems as the economy began to reopen from the pandemic in March. Supply disruptions and shortages are likely to feed into increased inflation pressure in the coming months, although that pressure will likely decline eventually as those shortages get resolved.
U.S. Policy Response
- President Biden told a meeting of lawmakers yesterday that he would back a multi-year extension of the enhanced child tax credit included in the $1.9 trillion pandemic relief bill passed earlier this year.
- The enhancement raised the tax credit to $3,000 from $2,000, setting it at $3,600 for parents of children under age six and making parents of 17-year-olds eligible.
- The credit, which scales down above certain income thresholds, is fully refundable and was designed to be paid in intervals rather than in one lump sum.
Foreign Policy Response
- Ahead of tomorrow’s ECB policy meeting, hawkish monetary officials like German central bank chief Weidmann and Dutch central bank chief Knot are urging a quick end to the ECB’s massive bond-buying program.
- At the ECB’s last monetary policy meeting, council members all agreed to conduct the purchases at a “significantly higher pace” in the second quarter to avoid a sell-off in bond markets, pushing up borrowing costs before a recovery had taken hold. Since then, however, the ECB’s weekly net purchases have increased only marginally, leaving analysts scratching their heads and wondering if the recent rebound in sovereign bond markets led officials to have second thoughts.
- Despite the pushback from Europe’s inflation hawks, the ECB is more likely than not to continue its loose policies, especially given the resurgence of infections and the relatively lagging rollout of vaccinations in Europe. All the same, if the pushback from the hawks gets worse, it could lead to bouts of volatility in European financial markets.
- More important for the long-term future of Europe, Germany’s constitutional court rejected an emergency motion to stop the country from ratifying the bloc’s €750 billion pandemic relief fund and its provision allowing mutualized EU debt backed by the full faith and credit of all EU member countries.
- The court said it would consider a lawsuit challenging the fund but would not put ratification on hold while its decision on the main case was pending. According to the judges, their initial review indicated that it was unlikely they would find the recovery fund violated the German constitution.
- The judges also ruled that giving the European Commission powers to raise it up to €750 billion on capital markets to finance the recovery fund “does not create direct liabilities for Germany or its federal budget.”
- The decision removes a key threat to Europe’s pandemic relief program, but more importantly, it also removes a threat to the mutualized debt program, which could help make the Euro a more viable reserve currency over time. That probable development is one key reason why we think the dollar is likely to lose value versus the common currency over time.