Daily Comment (December 8, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today opens with a discussion of the latest coronavirus developments.  The near-term bad news of worsening infections and continued hurdles to a new U.S. pandemic relief bill continue to present headwinds to risk markets. However, that is, at least partially, offset by news of the first public vaccinations in Britain, and there is a report suggesting the first U.S. vaccine will be approved in the coming days.  We next turn to presidential transition news and indications that Brexit negotiations remain fraught.  We conclude with miscellaneous global developments that are likely to affect the financial markets today.

COVID-19:  Official data show confirmed cases have risen to 67,740,458 worldwide, with 1,547,711 deaths.  In the United States, confirmed cases rose to 14,956,227 with 283,747 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 192,000 yesterday, with hospitalizations related to the virus topping 102,000.  Of those hospitalized because of the virus, the number in intensive care declined slightly to 20,098, but that was still enough to keep many hospitals under strain across the country.  New deaths related to the virus totaled approximately 1,400.  With the continued autumn/winter surge in infections and hospitalizations, many state and local governments are implementing additional restrictions on movement and business, including stay-at-home orders in parts of California.  We expect the potential for additional restrictions and new hurdles for a fiscal stimulus bill (see below) will remain a risk for the economy and equity markets in the short term until vaccinations can begin in mass and start protecting large segments of the population.
  • On a much more positive note, the U.K. became the first Western country to distribute a COVID-19 vaccine to its population, as it began injecting the newly approved vaccine from Prizer (PFE, 41.25) and BioNTech (BNTX, 125.70) to those over 80 years old, nursing home staff, and other high-risk healthcare workers.
  • Separately, in the U.S., the Food and Drug Administration released detailed analyses of the Pfizer/BioNTech vaccine in support of Thursday’s pivotal meeting of a panel that will advise on its possible U.S. approval for emergency use.
    • Importantly, the analyses show the vaccine met the criteria for success in that it reduced the risk of infection after the second dose was administered.
    • Among other issues, the data are also expected to show how the vaccine works with different age, ethnic, and other demographic groups. The FDA has advised vaccine companies that these subgroup analyses will help overcome any hesitancy among Americans to be vaccinated.
  • Still, as if to illustrate the challenge in manufacturing huge amounts of the new vaccines, the British government’s vaccine task force acknowledged that just four million doses of the vaccine developed by Oxford University and AstraZeneca (AZN, 54.26) would be delivered this year, imported from the Netherlands and Germany.  Previously, the task force expected production of 30 million doses in the U.K. by year-end.
  • As if to illustrate the challenges in planning and administering the new coronavirus vaccines, hospitals are struggling to decide which health-care workers should receive the small number of initially available doses.
    • December vaccine deliveries are expected to be enough for about 20 million people, according to federal officials.
    • That is slightly less than the amount needed to vaccinate all front-line medical professionals and long-term care residents—the groups that a Centers for Disease Control and Prevention advisory panel has recommended should be first in line.

 U.S. Policy Response

  • As House and Senate lawmakers haggle over the latest pandemic relief proposal, a compromise package valued at about $908 billion, it appears the main sticking points consist of:  a) the Republicans’ demand to shield businesses, nonprofits, and schools from virus-related liabilities, and b) the Democrats’ insistence on aid to state and local governments.
    • Congressional leaders still hope to attach the relief package to a full-year spending bill needed to keep the government running once its current funding expires at 12:01 a.m. Saturday.
    • However, since lawmakers are still trying to reach an agreement on the full-year spending bill and the relief package, congressional leaders said they would pass a one-week extension of the government’s current funding to buy more time for negotiations. House Majority Leader Hoyer said the House would vote Wednesday on a short-term bill to keep the government funded through December 18.

 Foreign Policy Response

  • In Japan, Prime Minister Suga launched Japan’s third fiscal stimulus of the year with a ¥30.6 trillion ($294 billion) package aimed at speeding up the nation’s recovery from COVID-19.
    • The supplementary budget, which is around 6% of GDP, follows earlier rounds of stimulus from April and May.
    • In a significant expansion of Japan’s spending, Suga’s package includes not just money to fight COVID-19, but trillions of yen aimed at investment in new digital and green technologies.
  • With many EU countries taking on enormous amounts of new debt to fund their response to the crisis, some economists and officials have resurrected the idea that the European Central Bank should help ease their debt burden by forgiving the sovereign bonds that it owns.
  • Even without that debt relief, we continue to see signs that stimulus programs around the world are helping individuals, and some businesses, improve their finances.  Even Greek banks, which are among Europe’s weakest, are getting rid of their bad loans at a healthy clip.
    • In spring, the pandemic interrupted plans among the country’s banks to shed loans still festering from the Eurozone crisis a decade ago.
    • However, stimulus from central banks and governments globally has sent fresh cash into funds that buy non-performing loans, reinvigorating their efforts.

U.S. Presidential Transition:  Against the backdrop of Georgia’s recertification of its election figures after completing its second recount, and ahead of tomorrow’s deadline for all states to complete the certification of their counts, sources said President-elect Biden will name retired Army General Lloyd Austin as his Defense Secretary.  General Austin would be the first Black to lead the Department of Defense.  He served in the military for more than four decades and ultimately commanded all U.S. forces in the Middle East during the Obama administration.

  • At least two other leading candidates for the post had more expertise in top-level Pentagon programs and strategy, but they were seen as too close to leading defense companies.
  • General Austin is perceived as cautious about U.S. troop deployments overseas, which is consistent with our view that even in a Biden administration, the United States will probably continue to pull back from its traditional role as global hegemon.
  • Separately, Biden’s national security adviser, Jake Sullivan, said the incoming administration wants to put Iran “back into the box” by rejoining the 2015 nuclear deal and forcing Tehran to comply with the terms of the original agreement.  In return, the U.S. would be prepared to honor the terms of the 2015 deal.

 United States-China:  A second federal judge has blocked the Trump administration’s attempt to ban TikTok downloads in the U.S. due to national security concerns.  The decision underscores the dwindling legal options the Trump administration has to pursue an outright ban of the popular app.  TikTok’s parent company, the Chinese firm ByteDance, remains in talks with the U.S. government to finalize a proposed deal addressing the national security concerns, but friction over the app continues to exacerbate U.S.-China relations and play into the continued political risks arising therefrom.

China Belt and Road Initiative:  Researchers at Boston University have calculated that lending by the China Development Bank and the Export-Import Bank of China collapsed from a peak of $75 billion in 2016 to just $4 billion last year.  The analysis suggests Beijing is rethinking its infamous “Belt and Road Initiative,” which aims to help developing countries build trade-related infrastructure with Chinese loans.  The program has been castigated by many foreign observers for luring poorer countries into a debt trap and operating with low transparency and governance standards.  In addition, Chinese leaders may have been husbanding their dollar assets during the intensifying U.S.-China trade war after 2016.

China’s Domestic Debt Markets:  In China’s domestic debt markets, it appears that investors are finally cooling on debt from riskier Chinese companies after a string of missed payments by state-backed firms cast doubt on the reliability of government support.  The increased wariness has helped push new borrowing costs for these businesses to their highest in nearly two years, marring what has so far been a banner year for debt issuance.

Brexit:  A call yesterday between British Prime Minister Johnson and European Commission President Ursula von der Leyen failed to resolve the remaining sticking points for a post-Brexit trade deal between the U.K. and the EU.  Coupled with other signs that there has been no progress despite the intensifying lower-level talks in recent days, the failure of the leaders’ call is renewing concerns about a hard Brexit and weighing on British equities and the pound so far today.  However, in what may be the final play of the game, Johnson said he would travel to Brussels in the coming days to meet with von der Leyen in person.

  • Johnson’s trip will most likely be on Wednesday, just ahead of a summit between the remaining EU members on Thursday.
  • The main sticking points that need to be resolved relate to subsidies and other aid to industry that can impact whether the two sides are competing on a level playing field, as well as issues related to governance of the deal and fishing rights.

 European Union:  The president of the Eurogroup of EU finance ministers, Paschal Donohoe, said that because Brexit and the coronavirus pandemic have reinforced the need to solidify the Euro’s foundations, he will intensify his work on a controversial plan to create a Eurozone-wide bank deposit insurance system.

Turkey:  Following last month’s installation of a new finance minister and central bank governor, both of whom are more orthodox than their predecessors, foreign purchases of Turkish stocks and bonds have rebounded sharply enough to start propping up the country’s foreign reserves.  The lira has also gotten a lift, though it is important to remember that the new officials have their work cut out for them to keep repairing the damage caused by the coronavirus pandemic and years of bad economic policy in the country.

Russia:  An analysis by Daniel Ahn, a former deputy chief economist at the State Department, suggests Western sanctions have had an “outsized impact” on targeted Russian companies but may have actually strengthened President Vladimir Putin’s grip on the country’s tycoons.

  • According to the analysis, Russian corporations have lost almost $100 billion since sanctions were imposed in 2014 following the annexation of Crimea.  That amount is equivalent to about 4.2% of Russia’s GDP at that time.
  • Putin’s attempts to shield some of those companies from the sanctions through tax breaks, state contracts, and other methods have increased the total impact of sanctions on the economy to 8% of GDP and strengthened Putin’s influence on the companies’ leaders.

 India:  The country has been hit by severe road and rail traffic disruptions, as farmers and opposition activists intensified their campaign against new laws intended to pave the way for the reform of agricultural markets.

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