by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
Our Comment today opens with the latest pandemic news, including the state of play on the new pandemic relief proposal in Congress, which has been buoying equity markets. We next turn to U.S. political and policy news, including a preview of today’s Federal Reserve meeting. We end with various foreign developments; there are signs that the EU and Britain are on the verge of a post-Brexit trade deal. Note to readers—our Daily Comment will go on holiday hiatus starting December 23 and return on January 4.
COVID-19: Official data show confirmed cases have risen to 73,627,592 worldwide, with 1,638,842 deaths. In the United States, confirmed cases rose to 16,725,039 with 303,872 deaths. 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 more than 198,000 yesterday, while hospitalizations related to the virus rose to another record of 112,816. Among those hospitalized, the number in intensive care rose to yet another record of 21,897. Deaths in which COVID-19 was designated as the proximate cause came in at 2,957.
- The FDA published its analyses of the vaccine developed by Moderna (MRNA, 147.22), and characterized the substance as safe and “highly effective.” That sets the stage for an emergency authorization later this week that would add a second vaccine to the arsenal of defense against the pandemic.
- The findings published yesterday will now go before an independent advisory panel, which will vote Thursday on whether to recommend authorization.
- Barring complications, the FDA is aiming to authorize the emergency use of the Moderna vaccine on Friday.
- Meanwhile, the German firm BioNTech (BNTX, 111.20) said it will supply 100 million doses of the vaccine it developed with Pfizer (PFE, 38.71) to Chinese partner Fosun Pharma for use in mainland China next year. The deal marks the country’s first publicly announced order of a foreign coronavirus vaccine.
- Although clinical testing of the Moderna and Pfizer/BioNTech vaccines has noted that some recipients have “mild” side effects, reports indicate that those reactions can sometimes be more than just a mere nuisance.
- In a strategy that goes against the grain of most other countries’ vaccination strategies, Indonesia plans to vaccinate its young working-age population against the coronavirus before its older citizens, in an effort to quickly build “herd immunity.”
- The FDA approved the emergency use of the first over-the-counter, self-testing COVID-19 antigen kit, which can produce results within 20 minutes. The test, developed by Australia’s Ellume, consists of a nasal swab analyzer that connects to an application on a user’s smartphone, providing results without sending samples to a laboratory.
- The European Central Bank said yesterday that lenders can restart limited dividend payments next year following a nine-month ban, although it also told banks to be prudent about bonuses given the economic crisis caused by the pandemic.
U.S. Policy Response
- House Speaker Pelosi, Senate Majority Leader McConnell, Senate Minority Leader Schumer, and House Minority Leader McCarthy met several times yesterday to hammer out details of the latest pandemic relief bill, suggesting the leaders are close to a deal. Last night McConnell said, “We’re making significant progress and I’m optimistic that we’re gonna be able to complete an understanding sometime soon.” If Congress can pass a bill of about $748 billion, as now seems likely, it would help tide the economy over the current resurgence in infections until an expected rebound from vaccinations. News of the latest negotiations therefore helped give the equity markets a major boost yesterday, and it looks like the positive sentiment is continuing so far this morning.
Foreign Policy Response
- The European Union today unveiled plans to assist countries in setting up a network of national “bad banks” to soak up what could be $1.7 trillion in bad loans caused by the pandemic and allow healthier institutions to lend during the recovery. However, the effort would rely on individual governments to sponsor the bad banks, falling short of more ambitious proposals for a continent-wide bad bank.
U.S. Presidential Transition: One day after the Electoral College voted to affirm the election of Joe Biden as president, several leading Republicans finally offered him congratulations and acknowledged he would take the presidency in January.
- As we predicted in yesterday’s Comment, some Republicans said they would try to disrupt the formal count of the Electoral College votes before a joint session of Congress on January 6, but Republican leaders warned that such an effort would reflect badly on Republicans in the mid-term elections of 2022.
- Separately, reports said President-elect Biden would nominate South Bend, Indiana, Mayor Pete Buttigieg as his Secretary of Transportation and former Michigan Governor Jennifer Granholm as his Secretary of Energy.
U.S. Monetary Policy: The Federal Reserve today completes its final policy meeting of 2020. No change in the benchmark fed funds interest-rate target is anticipated, but the policymakers are widely expected to extend the timeframe for their current program of debt purchases by linking them to certain economic metrics in the recovery. Against the backdrop of rising Treasury yields and a flood of new longer-dated debt from the Treasury Department, the policymakers are also coming under increased pressure to shift the bulk of its bond-buying to longer maturities, i.e., to adopt yield curve control. However, the officials have not indicated any intention to do so at today’s meeting.
China: MSCI said it will strip its indexes of stocks in seven Chinese companies that the U.S. government says help China’s military, including the country’s largest chipmaker and a major producer of surveillance equipment. The move, which will take effect by the close of business on January 5, follows similar actions by other benchmark providers, including FTSE Russell and S&P Dow Jones Indices. The move further highlights the risk that geopolitical and economic tensions could lead to restricted capital flows between China and the Western democracies.
Australia-China: The Australian government said it is referring China to the World Trade Organization over Beijing’s imposition of punitive tariffs on Australian barley imports. In addition, Trade Minister Simon Birmingham said Canberra reserved the right to appeal several other Chinese trade sanctions levied against Australian coal, beef, timber, and lobster in recent months. The WTO filing escalates a bitter diplomatic and trade dispute between the countries, and it is likely to further exacerbate growing tensions between China and the Western democracies.
Eurozone: The IHS Markit “flash” composite purchasing managers’ index for the Eurozone rose to 49.8 in December, beating expectations and posting a healthy climb from the final figure of 45.3 in November (see data tables below). The figures suggest business activity in the Eurozone is now rebounding faster than anticipated after services companies benefited from a loosening of coronavirus restrictions in some countries, and manufacturers gained from rising exports. All the same, fresh virus restrictions imposed in some countries this week are widely expected to push the region into a double-dip recession this winter.
Brexit: As Britain and the European Union inch closer to the year-end deadline to complete a post-Brexit trade deal, signs are accumulating that an agreement is close. This morning, British lawmakers were put on standby for an extended House of Commons sitting next week, which could provide an opportunity for them to scrutinize any deal. Also, European Commission President von der Leyen today said, “there is a path to an agreement now,” even if it “may be very narrow.” In response, sterling today has jumped to its highest level since early 2018.
- One British official said talks in Brussels last weekend had been “positive” and that progress had been made on resolving the biggest outstanding issue: a new level playing field to ensure fair competition.
- Eurosceptic parliament members said they could accept what the EU calls “a rebalancing mechanism,” which would allow both sides to call foul if they felt they were being unfairly undercut on regulations.
- The mechanism would involve an arbitration panel to determine whether any harm caused by regulatory divergence was serious and to ensure any punitive sanctions were proportionate.
Turkey: Naci Agbal, the new governor of the Turkish Central Bank, said the institution will no longer sell dollars in an effort to prop up the lira, but will instead focus on rebuilding the nation’s depleted foreign exchange reserves and gradually raise interest rates if necessary to fight inflation. The statement signaled a sharp change in direction after two years of a highly contentious policy of currency intervention that has added to Turkey’s financial mess. In response to Agbal’s statement, the lira continues its recent rebound.
United States-Iran: Several firms monitoring the global oil trade say Iran has circumvented U.S. sanctions and exported more oil to China and other countries in recent months, providing a lifeline for its struggling economy and undermining the Trump administration’s so-called maximum pressure campaign against Tehran.
Mexico: President Andrés Manuel López Obrador’s ruling party pushed through a new law curbing the role of foreign law-enforcement officers in Mexico. The legislation comes after the arrest in the U.S. of Mexico’s former defense minister on drug trafficking and corruption charges, which angered many in Mexico as an insult to the country’s sovereignty.