Daily Comment (December 22, 2020)

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

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with the latest coronavirus developments, where the scary news of a new strain is largely offset by the final Congressional passage of a new pandemic relief bill.  We next turn to international news, including a reminder of the particular risks when investing in Chinese stocks.  Lastly, we want to extend our heartiest holiday wishes to our loyal readers.  We wish you all a happy, healthy holiday season, and we look forward to sharing our thoughts with you again in the new year!  As a reminder, our Daily Comment will go on holiday hiatus starting tomorrow, December 23.  Our Comment will return on January 4.

COVID-19:  Official data show confirmed cases have risen to 77,517,453 worldwide, with 1,705,654 deaths.  In the United States, confirmed cases rose to 18,043,824 with 319,466 deaths.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


 Economic Impacts

  • New data from the Centers for Disease Control and Prevention suggest the coronavirus, which has now become the country’s third-leading cause of death, will reduce U.S. life expectancy by two to three years in 2020.  Birth rates and population growth are also expected to fall, which will exacerbate the secular demographic headwinds that have been weighing on economic performance for years.

 U.S. Policy Response

  • Congress last night gave bipartisan approval to the new pandemic relief spending we outlined here yesterday, which was married with a major appropriations bill to cover regular government funding over the remainder of the fiscal year.  The Senate vote was 92-6, while the House vote was 359-53.  The bill now goes to President Trump, who is expected to sign it into law.
    • Barring any unforeseen glitches, the first spending from the bill, including direct payments to individuals, could begin next week.
    • Even though the pandemic package was significantly smaller than originally demanded by the Democrats, the spending is likely to help provide a meaningful boost to the economy as it struggles with the autumn/winter resurgence of the virus.  Passage of the bill should, therefore, give a boost to risk assets in the near term.
  • Despite the positive news of the latest pandemic relief package being passed, the effort by some Congressional Republicans to stop the Federal Reserve from re-instituting debt-market support programs bears watching, as investors start to worry more about increased corporate borrowing and a rise in “zombie” companies.
  • Likewise, as the Fed and other major central banks push down interest rates and unleash massive liquidity in response to the pandemic, they continue to push yield-seeking investors into ever more risky debt, including emerging markets issuing obligations in their own currencies.

 United States-China:  As the U.S. clamps down on investment in Chinese firms based on their accounting practices and threats to national security, some observers are starting to note the risk that Chinese officials could also disrupt bilateral capital flows.  For example, to skirt Chinese restrictions on foreign investment in certain industries, and to raise capital from overseas stock markets, many Chinese companies rely on “variable interest entities,” or VIEs.  In this structure, the investor is really only buying into an offshore entity that gives him or her a contractual right to participate in the Chinese company’s profits.  It doesn’t actually convey any equity in the firm.  By one estimate, U.S.-based investors could hold as much as $700 billion worth of Chinese VIEs.  The risk comes from the fact that the Chinese government has never explicitly approved the VIE structure, suggesting it could pull the rug out from under it at any time, endangering foreigners who currently believe they have secure rights in a wide range of popular Chinese stocks.

Brexit:  Reports suggest the EU and Britain are edging closer to a deal on EU fishing rights in British waters, one of the last issues holding up a post-Brexit trade deal before the current transition arrangements end next Thursday.  In a further sign that a final deal may be close, British Prime Minister Johnson has penciled in a parliament session on December 30 to approve any agreement.

Central African Republic-Russia-Rwanda:  Central African Republic President Bozize said Russia and Rwanda have deployed hundreds of troops in his country to help him fend off a budding coup as he prepares a reelection bid, despite being disqualified by the supreme court.  However, the Russian government denied sending any new soldiers to the country beyond the military instructors who are already there.

Russia:  Opposition leader Alexei Navalny says he duped a Russian agent into revealing how the country’s Federal Security Service (FSB) poisoned him with the chemical weapon Novichok.  The agent, Konstantin Kudryavtsev, inadvertently made the admission during a recorded phone call with Navalny, who was posing as a high-ranking security official conducting a debriefing on the August attack.  During the call, which used software to make it appear it originated from an FSB phone line, Kudryavtsev admits that Russian security officials put the Novichok in Navalny’s underwear expecting it would kill the 44-year-old while on a flight to Moscow.

Global Iron Ore Market:  The price of iron ore soared 7.8% to $176.90 a metric ton yesterday, reaching its highest level since September 2011 and approaching a new all-time record.  The jump reflects a landslide at a major Brazilian mine, which has raised global supply concerns, even as Chinese demand continues to run high.

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