Daily Comment (December 10, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Good morning!  The ECB met today and decided to increase its long-term bond purchases; the market’s initial reaction is hawkish.  The EUR has rallied, and rates have lifted (albeit modestly).  U.S. equity futures are mostly sideways this morning.  There is a lot of news today.  We start with a quick look at the ECB then move to the FTC antitrust suit against Facebook (FB, USD, 277.92).  Brexit comes next as talks come down to the wire.  It looks like the EU budget has a fix, which means a Eurobond is likely.  Pandemic news follows.  We update the news from China.  Economic and policy news is next, and we close with miscellaneous foreign reports.  Being Thursday, the Weekly Energy Update is available; in the report, we link to the University of Chicago’s research showing the history of U.S. energy consumption.  Here are the details:

ECB:  Simply put, the ECB did everything that was expected in its announcement.  It is adding longer duration bonds to its purchases, boosting purchases, extending its other support programs, and continuing to press for inflation.  The market’s reaction was likely a surprise to policymakers.  Interest rates rose, and the currency appreciated.  It isn’t clear what the ECB can do if it wants a weaker currency and/or lower rates, other than a mandate to peg exchange and interest rates.  What is our take?  The currency was destined to rise because it is undervalued with only a peg policy (where the ECB would buy dollars in a consistent intervention program) to keep it suppressed.  In the press conference, there were no surprises.

Facebook:  Yesterday, the FTC and the attorneys general of 46 states joined in a lawsuit against Facebook.  The case against the company is that it bought potential competitors to prevent competition.  This case follows a similar one launched recently against Google (GOOGL, USD, 1777.86).  To some extent, the case against Facebook is based on a turn in the rules; from the mid-1980s until recently, policymakers used the Bork standard, which meant that the sole standard of harm was the impact on consumers.  As long as consumers were not clearly harmed, a company could do just about anything it wanted, and they have.  The Bork standard’s narrow interpretation of harm means that tech companies have engaged in political interference and labor suppression without fear of legal retribution, until now.  The thinking regarding antitrust has since taken a populist turn.  The FTC is seeking to unwind Facebook’s acquisitions of Instagram and WhatsApp, a move similar to the breakup of Standard Oil over a century ago.

The turn of fortune for the large-tech firms is unmistakable.  The Obama administration courted tech CEOs.  Sheryl Sandberg was thought to be slated for a cabinet job in the Clinton administration.  It still looks like both left- and right-wing establishments are uncomfortable bringing action against the tech firms (two GOP members of the FTC voted against the suit).  However, populists on both sides are supportive of further action against the companies.  We do note their end goals are not necessarily identical, but we would also note that the large tech firms are facing what may be their most potent threat—concerted antitrust action.  At the same time, antitrust action moves at legal, not market, speed, so the suits against both Google and Facebook will take a long time to work out.  Nevertheless, there does appear to be a trend in place.  What does this mean for investors?  It’s not necessarily bad.  The Standard Oil breakup created scads of smaller companies that all did quite well, probably enriching shareholders more than the single company would have.  Given the heavy weighting of the tech firms in passive indexes, there could be negative effects on overall index performance.

Brexit:  PM Johnson and EC President von der Leyen had dinner (we heard it was fish, which is symbolic) and discussions were said to be “frank,” which is usually diplomatic code for a shouting match.  The leaders agreed that Sunday will be it; if an agreement isn’t reached, we are probably on the way to a hard Brexit.  The two sides remain far apart.  The U.K. doesn’t want to live by EU rules but wants open access to trade; the EU wants to enforce automatic trade sanctions if there is a violation of EU rules, which is rejected by Westminster.  Germany, which has mostly been supportive of the U.K., is preparing for no deal.

We have seen years of EU negotiations where one can feel the breeze of deadlines passing, so even if we get to Monday without a deal, it doesn’t necessarily mean that a crisis is pending.  It is more likely that a hard Brexit will lead to real negotiations for a trade deal that both sides can live with.  In the short run, there are some important risks.  First, there will almost certainly be disruptions; shortages will likely pop up all over the U.K.  We would expect problems on the Ireland frontier.  Honda (HMC, USD, 29.97) recently was forced to close a plant due to parts shortages caused by port disruptions.  Our position has been that a hard Brexit will lead to a spike down in U.K. financial assets that will probably be a buying opportunity.  The price break will likely be painful; a GBP of $1.15/$1.20 in short order is likely.

EU:  Germany has presented a workaround to the rule of law issue that led to veto threats from Poland and Hungary.  The German plan requires a court decision before violators of the rule of law provisions could be enforced.  Reactions from Poland have been positive.  Most importantly, it gives Hungary and Poland a “win” that both political leaders needed.

COVID-19:  The number of reported cases is 69,027,093 with 1,572,162 fatalities.  In the U.S., there are 15,392,979 confirmed cases with 289,450 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 weekly Axios chart shows that infection rates are continuing to mount.


China:  Here is what we are watching in China.

Economics and Policy:  An update on stimulus.

Foreign news:  A roundup.

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