Daily Comment (January 26, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EST] | PDF
Our Comment today opens with news from China, where new data showing a surge of foreign direct investment into the country last year is being tempered by a new move by the central bank to reduce liquidity in the financial markets. This move helps explain why Chinese equities are down today. We also examine other key news from overseas, including a potentially groundbreaking move by some German government officials to temporarily abandon a long commitment to balanced budgets. As always, we conclude with the latest coronavirus news.
China: According to new data from the United Nations Conference on Trade and Development, foreign direct investment in China rose 4.0% last year, making it the top destination for such capital flows. While the U.S. had long been the top destination, its inbound FDI plunged 49% in 2020 amid the coronavirus pandemic. Note that our current WGR series on the U.S.-China balance of power will next week examine how the two countries’ outbound FDI and other economic elements play into their global influence. The current installment of the series, published here, provides a deep dive into the U.S.-China military balance. Separately, the People’s Bank of China today withdrew 78 billion yuan ($12 billion) of net liquidity through its open market operations, boosting the overnight repo rate to more than 2.8% — its highest level since late 2019 — from 2.5% the previous day. Local media reports quote a PBOC advisor saying tighter liquidity is needed to cut the risk of asset bubbles forming. As might be expected, the moves have driven Chinese equity markets sharply lower today.
United States-China: In his address to the World Economic Forum’s online convention, Chinese President Xi issued a veiled warning to the new Biden administration not to try to rally allies against Beijing in an attempt to hem it in. According to President Xi, such efforts would only “push the world into division and even confrontation.”
United States-Iran: In preparation for a potential war with Iran sometime in the future, the U.S. military has been trying out an array of ports and air bases in Saudi Arabia’s western desert to see whether they could be used in the event of a conflict.
Germany: A dispute has broken out in Chancellor Merkel’s Christian Democratic Union party over a proposal by her chief of staff to abandon Germany’s strict curbs on budget deficits as the pandemic continues to put huge strains on the country’s finances. While Chief of Staff Braun isn’t calling for a permanent end to the constitutional “debt brake,” he argues that the constitution should be amended to allow for a multi-year series of declining budget deficits to respond to the coronavirus pandemic. Nevertheless, the proposal is a stark break from Merkel’s economic orthodoxy. If passed and extended, it would have the potential to give Germany a freer hand in economic policy and geopolitical strategy.
Italy: Prime Minister Conte is set to resign today, his office stated, amid disagreements about how Italy should use the €200 billion it will receive as part of the EU’s new pandemic relief program. Despite winning a vote of confidence in both houses of parliament last week, Conte has been weakened by the withdrawal of former Prime Minister Renzi’s party from his coalition government. Italy’s parties are now set to negotiate in search of a new governing majority, possibly under the stewardship of Mr. Conte once again but perhaps under a new premier. If no majority in Parliament can be found, Italy is likely to hold elections in coming months, which would be the first in a major West European country since the start of the pandemic.
India: In a sharp escalation of the protests against Prime Minister Modi’s agricultural reforms, thousands of farmers driving tractors have breached police barricades and invaded the center of the capital city in an effort to disrupt the annual Republic Day celebration. It remains to be seen whether the farmers, who are a huge part of the country’s electorate, will be able to make Modi back down from his proposed changes.
COVID-19: Official data show confirmed cases have risen to 99,808,397 worldwide, with 2,142,826 deaths. In the United States, confirmed cases rose to 25,298,554, with 421,239 deaths. Vaccine doses distributed in the U.S. now total 41,418,325, while the number of people who have received at least their first shot totals 19,252,275. Finally, 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 rose to approximately 147,000 yesterday. However, since that remains significantly lower than the levels seen earlier in the winter, it provides additional evidence that the recent rebound may be under some control. Importantly, hospitalizations related to the virus fell below 110,000 for the first time since the middle of December, and the number in intensive care fell to 20,875. New virus-related deaths topped 1,700.
- In California, the improvement in the number of new infections and hospitalizations prompted Governor Newsom to remove regional stay-at-home orders across the state. That means businesses ranging from hair salons to restaurants could reopen in many counties for the first time since early December. In New York, Governor Cuomo also announced an easing of some restrictions as case numbers and hospitalizations improve.
- However, conditions continue to worsen in Europe and Japan, in terms of both public health and politics. In the Netherlands, protests against a new curfew to curb the spread of the virus escalated into rioting in many cities for a third straight night last night, further complicating the pandemic management by the beleaguered government. In Japan, cases and hospitalizations remain high, and observers have been alarmed that Prime Minister Suga has gone from hoarse to losing his voice. This has raised concerns that he is either infected or is impacted by the stress of dealing with the crisis.
- Addressing reporters at the White House yesterday, President Biden said his target of giving 100 million vaccines in his first 100 days in office might rise to 150 million. Biden said he was hopeful the U.S. could soon reach an average of 1.5 million vaccines per day, as opposed to the current pace of one million a day. He said he was optimistic that by this spring, any American who wants a coronavirus vaccine should be able to get one.
- With EU officials alarmed by delays in distributing the vaccine from Oxford University and AstraZeneca (AZN, 54.01), the bloc’s health commissioner has proposed forcing companies to give advanced notice of any plans to send shipments elsewhere in the world. While not an outright ban on exports of the vaccine, the tougher approach is expected to be modeled on a temporary scheme last year that required companies to seek authorization for exporting personal protective equipment outside the EU.
- Despite optimism over vaccines, the quick and widespread vaccinations in Israel suggest that widespread injections don’t necessarily mean an immediate end to economic and social restrictions.
- In less positive news, British researchers are finding the new coronavirus mutations, like the one that emerged in the U.K., may not only be more transmissible but can also produce more serious sickness, especially among women and younger people. The rise of these mutations will probably remain a considerable risk for the equity markets until it can be shown with confidence that the vaccines are effective against them.
Economic and Political Impacts
- In an update to its global economic forecasts, the International Monetary Fund said China and the U.S. will by far be the most successful at steering their economies through the pandemic, leaving Europe and other emerging markets trailing in their wake. The fund predicts that by 2022, the recoveries in the US and China will leave their economies no more than 1.5% smaller than projected before the pandemic. Other advanced economies will still be 2.5% short of their pre-pandemic path, while emerging economies, excluding China, will in 2022 be 8.0% smaller than expected in forecasts issued exactly a year ago.
U.S. Policy Response
- An analysis by Refinitiv shows companies have raised $400 billion in global bond and stock issuance in just the first three weeks of the year as investors respond to the torrent of fiscal and monetary stimulus unleashed to fight the pandemic. The raising of funds so far this year is one of the highest for a comparable period over the last two decades, and it is more than double the average level of $170 billion for the period.
- Democrats in Congress are weighing the aggressive use of existing procedural steps to enact President Biden’s coronavirus relief plan as Republican opposition to the $1.9 trillion proposal strengthens.