Daily Comment (August 11, 2020)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
Risk assets today are being buoyed by a continued moderation in U.S. coronavirus infections and hopes that the White House and congressional Democrats will return to the bargaining table to hash out a new pandemic relief bill. President Trump has also floated the idea of a capital gains tax cut. Finally, there is news that a Russian COVID-19 vaccine has received regulatory approval in Moscow, though many worry the shot has been rushed through the review process without full consideration of its safety and effectiveness. We review all the key news below.
COVID-19: Official data show confirmed cases have risen to 20,119,511 worldwide, with 737,022 deaths and 12,366,115 recoveries. In the United States, confirmed cases rose to 5,095,163, with 163,473 deaths and 1,670,755 recoveries. Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.
- In the U.S., new confirmed infections totaled less than 50,000 for the second straight day, and the seven-day moving average of new cases dropped to its lowest level since early July. Some of the decline in new cases probably reflects a drop in testing this month, but it still appears that the latest wave of infections is passing. The seven-day moving average of deaths has pulled back to about 1,100 per day. The figures paint a moderately positive picture of the current virology in the U.S., but investors will still be looking for a continued drop in infections, progress on vaccines and treatments, and new monetary and fiscal relief measures to tide over the economy in the short term (see below).
- Overseas, large developing countries like India and Brazil continue to struggle with high numbers of new infections, while some countries in Europe are seeing localized rebounds. New Zealand has reported its first coronavirus cases outside of quarantine facilities in more than 100 days, prompting the government to order the lockdown of Auckland, the nation’s most populous city, for at least three days.
- Russia has become the first country to grant regulatory approval to a vaccine against COVID-19. The vaccine, codenamed Sputnik, will enter into mass production and be administered to key workers in the next few weeks.
- The move, the first time a COVID-19 vaccine has been approved for civilian use, comes after just two months of human trials and underscores Moscow’s desire to rush the vaccine through testing and trial procedures at breakneck speed in an attempt to beat Western pharmaceutical companies.
- Even if the vaccine begins to be administered as soon as this month, the government plans to continue trials of the shot in parallel.
- With the pandemic appearing to remain largely under control in China, the government of Macau eased quarantine requirements for visitors from the mainland. Authorities also said Macau would soon start issuing visas again. At first, visas would only be available for people from the neighboring Chinese province of Zhuhai, but the news nevertheless helped spark a global buying spree in travel and leisure stocks.
U.S. Policy Response
- The White House and congressional Democrats yesterday said they were open to restarting negotiations on a new coronavirus relief bill, but there were few concrete signs of renewed talks. The main development was that the administration clarified its memo allowing states to use federal disaster relief funds to extend supplemental unemployment benefits.
- According to administration officials, states are merely encouraged to chip in enough funds to pay a supplemental unemployment of $400 per week. States that can’t come up with their own funds can rely on the federal disaster funds to pay $300 per week.
- Either way, the supplemental benefit would be far lower than the $600 per week that was paid through the end of July. Even if the new program is put into place, the new funds would also probably not reach people for at least a couple of weeks. That alone will likely leave millions of people unable to pay their mortgage, rent, or other bills. It’s also important to remember that while the $600 per week was more than many workers’ pre-coronavirus wage, it may not have been much higher than their combined wage plus benefits. The new, reduced benefit and the multi-week delay in getting it to people could well produce a sharp contraction in demand that would hurt many businesses. Reports have already popped up regarding “eviction cairns,” or evicted tenants’ belongings piled up in the streets. Any delay in coming up with a fuller new relief package is a significant risk to the economy and is therefore potentially bearish for stocks.
- Employers are also turning increasingly against Trump’s weekend order allowing for deferred payment of payroll taxes. The president wants employers to stop collecting the 6.2% levy that represents the employee share of Social Security taxes for many workers, starting September 1 and going through the end of the year.
- The move doesn’t change how much tax employees and employers actually owe. Only Congress can do that.
- Employers’ biggest worry is that if they stop withholding taxes without any guarantee that Congress will actually forgive any deferred payments, they could find themselves on the hook. That is a particular risk in cases where employees change jobs and employers can’t withhold more taxes from later paychecks to catch up on missed payments.
- Responding to the stalled negotiations and the pushback against his executive orders, President Trump said yesterday evening that he was “very seriously” considering a cut to capital gains taxes and paring taxes for middle-income families, though it’s not clear how he would be able to implement those moves.
Foreign Policy Response
- Major bond rating firms have given the green light to the European Union’s proposed €750 billion of common, mutualized coronavirus relief bonds. According to the rating agencies, the EU’s current AAA rating wouldn’t be immediately affected by issuance of the debt.
United States: Political scientists are on the lookout for a “blue shift” in the days following the November election. Because of Democratic voters’ greater propensity to use mail-in and absentee balloting, those ballots often push Democratic candidates’ tallies higher as they are slowly counted following the close of polling places. As Democratic candidates see their tallies increase from the initial counts, some Republican candidates are likely to charge fraud.
United States-China-Hong Kong: The U.S. government has issued a rule that Hong Kong exports to the U.S. must be labelled “Made in China” starting September 25. The move, in accordance with the suspension of the Hong Kong Policy Act of 1992 and President Trump’s executive order on “Hong Kong Normalization,” will see Hong Kong companies subjected to the same trade war tariffs levied on mainland Chinese exporters, should they make products subject to these duties.
Lebanon: Amid the protests and riots sparked by last week’s devastating explosion in Beirut’s port, Prime Minister Diab and his cabinet resigned. The resignations came just ahead of reports that Lebanese security officials warned the prime minister and president in July that the 2,750 tons of ammonium nitrate stored at the port posed a security risk and could destroy the capital if it exploded. Diab’s cabinet now becomes a caretaker government with limited powers until a new government is formed. That will require a new power-sharing pact among the country’s rival religious and political factions, setting up a period of political instability, and likely foreign meddling, that could last for months. (For more on the political and economic problems that have turned the Lebanese against their government, see our WGR from December 2, 2019.)
Belarus: As protests continue against President Lukashenko’s apparently fraudulent reelection, in which he purportedly received more than 80% of the vote, popular opposition leader Svetlana Tikhanovskaya has fled the country and is now in neighboring Lithuania. Prior to leaving Belarus, Tikhanovskaya rejected the official results of the presidential election but requested her supporters to accept them in order to avoid bloodshed.