Daily Comment (February 10, 2021)

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

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with several items reflecting rising geopolitical risks, mostly related to China and Russia.  There is further evidence of increased regulatory and political risk for the major U.S. technology firms, which could present them with increasing headwinds going forward.  As always, we wrap up with the latest pandemic news.  That news still points toward falling infections in the U.S. and should be positive for the markets today.

United States-China:  The commander of the U.S.S. Nimitz, Rear Admiral James Kirk, said Chinese military activity in the South China Sea was expanding steadily during the aircraft carrier’s recent ten-month deployment in the area, which had included a rare two-carrier exercise with the U.S.S. Theodore Roosevelt.  Kirk specifically cited a larger number of Chinese aircraft and navy ships utilized on a daily basis.  Although the statement doesn’t necessarily point to imminent Chinese military action, it does dovetail with our recent WGR highlighting the increasing strength of the Chinese military and its growing confidence in taking on the U.S. in the waters near Taiwan and off the coast of mainland China.

  • Separately, the Trump administration’s plan to force the sale of Chinese social media firm TikTok’s U.S. operations to a group including Oracle Corp. (ORCL, 63.67) and Walmart (WMT, 145.83) has been shelved indefinitely.  President Biden will undertake a broad review of his predecessor’s efforts to address potential security risks from Chinese tech companies.
  • Regarding China’s domestic financial markets, note that today was the last day of trading before the week-long Lunar New Year holiday.  After ringing in the Year of the Ox (hopefully, the Year of the Bull Market?), trading in China will resume next Thursday, February 18.

Australia-China:  Reports indicate that Chinese efforts to punish Australia for its call to investigate China’s role in starting the coronavirus pandemic could be backfiring.  One big problem is that China’s punitive embargo on importing Australian coal has left its own users scrambling for supplies and forced them to pay exorbitant prices.  If Chinese officials were to start fearing this kind of blowback, they could become more reluctant to throw China’s economic weight around, which could help ease tensions and ultimately be positive for Chinese assets.  However, it’s not yet clear that such blowback is sufficiently painful to prompt a change in China’s behavior.

United States-Russia:  Norwegian intelligence officials have warned that Russia is developing a range of exotic new nuclear weapons that wouldn’t be covered by existing U.S.-Russian arms control agreements, including a nuclear-powered, nuclear-tipped, underwater “mega-drone.”  Despite Russia’s demographic decline and worsening economic challenges, the news shows that the Kremlin is still intent on boosting its military might to preserve its leadership power and maintain Russian influence in geopolitics.

Russia:  The wife of opposition activist Alexei Navalny has reportedly left Russia for Germany.  It is not yet clear whether she escaped freely amid the Kremlin’s political crackdown on protests over Navalny’s imprisonment, or whether she was forced out of the country.  Meanwhile, close Navalny associate Leonid Volkov has been put on the country’s wanted list.  The moves illustrate the intensity with which the Kremlin is focusing on Navalny and his supporters, which will likely further strain relations between Russia and the major democracies and pose new challenges for Russian assets.

India:  In another sign of the rising regulatory and political risks for major technology companies, Twitter (TWTR, 59.87) has buckled to government pressure and started blocking more than 500 accounts related to growing protests against Prime Minister Modi’s agriculture reforms.  The company was criticized last after temporarily blocking several high-profile accounts amid a government clampdown on tweets about the demonstrations.  However, the company’s decision to reopen the accounts within hours put it on a collision course with the government, which threatened Twitter with fines or even the imprisonment of executives.

COVID-19:  Official data show confirmed cases have risen to 107,002,486 worldwide, with 2,343,477 deaths.  In the United States, confirmed cases rose to 27,193,849, with 468,217 deaths.  Vaccine doses delivered in the U.S. now total 62,898,775, while the number of people who have received at least their first shot totals 32,867,213.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


 U.S. Policy Response

  • In order to build support for his $1.9 trillion pandemic relief plan, President Biden yesterday met in the Oval Office with the chief executives of several major U.S. companies, including Jamie Dimon of JP Morgan (JPM, 139.58) and Doug McMillon of Walmart (WMT, 145.83).  Officials who attended said the discussion of Biden’s proposal was wide-ranging, serious, and detailed, but the corporate leaders didn’t offer any public endorsement of the plan.
  • The Biden proposal would reportedly include major enhancements of the Affordable Care Act in order to help people who have lost their employer-provided health insurance due to the pandemic.  Under the proposal:
    • People making up to 150% of federal poverty would be eligible for fully subsidized plans.
    • No one — regardless of income — would pay more than 8.5% of their income for health insurance.
    • People receiving unemployment would get full subsidies for a year.

Economic and Market Impacts

  • New analysis shows large U.S. banks saw their loan books shrink in 2020, the first time in more than a decade.  In fact, the 0.5% drop was just the second decline in 28 years.  The drop in lending came even as companies rushed to borrow against credit lines early in the pandemic.  Once the situation calmed down and bond yields fell, those firms rushed to issue their own debt and pay off their credit lines.  Meanwhile, smaller businesses borrowing under government support programs have seen more of those loans forgiven by the government.  And finally, many individuals receiving rich government support payments have used them to pay down debt.
  • Propane prices have climbed more than 70% since late November, thanks to an explosion in patio heating amid pandemic-related restrictions on indoor restaurant dining, as well as an uptick in exports to Asia.  On top of that, an arctic gust expected to deliver some of the coldest temperatures in decades to the Great Plains and upper Midwest this coming week could push prices for the rural heating fuel even higher.

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