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

[Posted: 9:30 AM EDT] | PDF

It’s employment Friday!  We cover the data in detail below, but the quick view is that the data came in better than forecast.  It’s a modest risk-off morning, with weaker Chinese stocks.  Our leadoff this morning is China as tensions rise further.  Policy coverage is next as Congress looks like it won’t get a deal done.  We update the market and economic news followed by our foreign update.  The pandemic “bats ninth.”  We have a new Asset Allocation Weekly, with accompanying podcast and chart book.  Let’s get to work!

China news:

• President Trump has issued an executive order that targets Chinese social media apps. The order limits the ability of these firms to operate in the U.S. and gives Microsoft (MSFT, 216.35) 45 days to complete its purchase of the American operations of TikTok.  The order also targets Tencent Holdings (TCEHY, 72.57).
  • Microsoft is apparently considering buying all of TikToK.
• The administration is also considering measures that would force Chinese-listed firms to either comply with U.S. audit requirements or lose their listings in the U.S. It would also require any firms who want to list in the U.S. to comply before they can issue securities on U.S. markets.  The actions being considered will further weaken U.S./China relations and most likely boost Hong Kong stock markets, which would be the likely destination for Chinese firms that delist from the U.S.
• In another executive order, the U.S. is requiring the government to purchase “essential” drugs from American manufacturers.
• Interestingly enough, despite U.S. actions against Chinese companies, Beijing has mostly left American companies operating in China alone and they are benefiting from the recovery in China’s economy. Two items to consider: first, Beijing has tended to use American companies to weaken the case of the China hawks, and second, U.S. firms already face a less open environment in China.
• Google (GOOGL, 1504.95) has pulled more than 2,500 channels tied to China which were thought to be conduits of disinformation.
• Despite continued deterioration of relations, Beijing continues to try to diffuse the situation. China’s foreign minister Wang Yi indicated he is willing to restart talks.  That doesn’t apply to Canada, which continues to bear the brunt of Beijing’s anger.  A second Canadian citizen has been condemned to death for alleged drug trafficking.
• Gold is considered the safest of safe havens. However, to be safe, a holder must have it in a safe place.  Hong Kongers are increasingly moving their gold out of the former colony on confiscation fears.

Policy news: 

• It doesn’t look like a stimulus bill is going to be passed today. Both sides are at an impasse and positions have hardened.  Negotiators did meet for three hours yesterday but were unable to resolve anything.  Clearly, there are political angles being spun; we won’t go into those but there is potentially negative fallout to the economy from the lack of an agreement.  We do expect executive orders to offset some of the potential losses.

Market and Economic news:

• The U.S. has applied tariffs on Canadian aluminum. We note that the Beer Institute has criticized the decision.
• Despite Federal aid, farm bankruptcies have hit a new record. The pandemic has disrupted supply chains (processors who service restaurants saw demand plummet, while retail demand soared) and the trade conflict with China has hurt as well.
• Over the years, we have noted that coastal real estate markets have benefited from foreign capital flight. Recent data suggests this source of buying has diminished.  Not surprisingly, the largest decline in foreign buying came from China.
• That loss of foreigners isn’t hurting the housing market all that much. Lumber prices are soaring on strong building demand.
• It was expected that U.S. economic weakness would lead to a decline in foreign remittances. These are flows that foreigners working in America send home.  At least for Mexico and Central America, that has not been the case.  The most likely reason is that these workers are heavily represented in jobs considered essential and thus stayed employed during the downturn.  At the same time, outflows to Asia appear to have declined.
• As retailers enter bankruptcies, landlords are bracing for the widespread breaking of leases.
• The drop in electric vehicle sales has weakened lithium demand.

Foreign news:

• The Turkish lira has fallen to new lows. The Turkish central bank has been cutting interest rates despite elevated inflation.  Turkey’s CPI is 11.7%, while the benchmark policy rate is 8.25%, meaning the real policy rate is negative.  President Erdogan has pressed the central bank to cut rates, but it appears the financial markets are passing their judgement.
• Over the last couple of days we have discussed the tragic explosion in Lebanon. The next issue will likely be a surge in refugee flows from the country to Europe.  It should be noted that Syrians have emigrated to Lebanon to escape the Syrian civil war.  The current collapse in Lebanon will likely lead those Syrians to try to follow the Lebanese out of the country.
• A reminder—Belarus holds elections on Sunday.
• Brian Hook, the U.S. special envoy to Iran, announced his resignation. Hook has been hawkish on Iran, but his presence did offer a conduit for talks.  His exit almost guarantees that there will be no diplomatic movement on Iran before November’s election.

COVID-19:  The number of reported cases is 19,127,091 with 715,555 deaths and 11,590,138 recoveries.  In the U.S., there are 4,884,406 confirmed cases with 160,111 deaths and 1,598,624 recoveries.  For those who like to keep score at home, the FT has created a nifty 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 R_t data shows that just over 60% of the states are >1, suggesting increasing infection rates.  Midwestern states are experiencing a rising rate of positive tests.

• The pandemic has probably had the most devastating impact on South America.  GDP is expected to contract 9.4% this year.

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