Daily Comment (July 1, 2020)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT]
A slew of purchasing managers’ indexes from around the world today show manufacturing activity is either growing again, or declining at a much milder pace than at the initial peak of the coronavirus crisis (see tables below). However, renewed infection outbreaks and lockdowns are taking the wind out of investors’ sails, as are renewed tensions with China after its imposition of a new national security law on Hong Kong. We present all the key news below.
COVID-19: Official data show confirmed cases have risen to 10,501,482 worldwide, with 511,909 deaths and 5,378,800 recoveries. In the United States, confirmed cases rose to 2,636,538, with 127,425 deaths and 720,631 recoveries. Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.
- In his testimony before a Senate committee, top infectious disease official Dr. Anthony Fauci warned yesterday that new U.S. infections could surge from their current rate of about 40,000 per day to more than 100,000 per day if people continue to ignore advice on social distancing and using face masks.
- Highlighting the disparate response of some state governments as they face rebounding infections, Florida Gov. Ron DeSantis said his state was “not going back” after reopening because its increase in cases was caused by young people out socializing rather than people visiting businesses. Massachusetts Gov. Charlie Baker relaxed his state’s 14-day self-quarantine mandate for visitors by exempting those from seven nearby states, including New York and New Jersey, but New York Gov. Andrew Cuomo extended quarantine requirements enacted last week to include people coming from California, Georgia, Iowa, Idaho, Louisiana, Mississippi, Nevada and Tennessee.
- Even after months of experience with the virus, emergency room physicians also disagree on the best way to treat victims and are taking a wide variety of approaches. The disparity in approaches even extends to the proper settings to use on ventilators.
- Even though a lot of global economic data points to an economic recovery as lockdowns ease, some figures suggest the recovery could already be hitting a plateau. For example, data from the digital timecard firm Homebase show the number of small-business employees working in late June was lower than earlier in the month.
- European airliner giant Airbus (EADSY, 17.85) said it would cut 15,000 jobs across its commercial aircraft division, citing what it expects to be a years-long impact on the aviation sector from the pandemic. The cuts will amount to about 11% of the company’s total workforce.
- German auto giant Volkswagen (VWAGY, 16.17) said it would cancel plans to build a new factory in Turkey because of the severe decline in auto demand caused by the virus crisis. The plant was slated to start producing 300,000 cars per year in 2022.
U.S. Policy Response
- In their testimony before the House Financial Services Committee yesterday, Federal Reserve Chair Powell and Treasury Secretary Mnuchin said they would consider additional relief measures to prevent lasting damage to labor markets and businesses, as more states struggle to suppress a rebound in the coronavirus pandemic. Despite the concerns generated by renewed outbreaks and lockdowns, the policymakers’ willingness to keep adding monetary and fiscal support should offer significant support for risk assets.
China-Hong Kong: The Hong Kong municipal government officially published the text of the new national security law imposed on it by Beijing yesterday, putting the legislation into effect just one hour before today’s 23rd anniversary of Britain’s handover of Hong Kong to China. The full text of the law, which can be found here, is largely consistent with the hints and summaries provided by Chinese officials over the last few weeks. In other words, the legislation seems as bad as feared, which will further tamp down anti-China political opposition in Hong Kong and exacerbate tensions with the U.S. and other Western democracies. Police in Hong Kong today made their first arrests under the law when a group of protestors tried to hold a demonstration marking the 1997 handover of Hong Kong to China. Under the law,
- Secessionist, subversive, and terrorist activities against China, or Hong Kong are criminalized beginning today, as are acts of collusion with foreign forces that endanger national security. The collusion offenses include espionage and efforts to impose sanctions against China, or Hong Kong, as well as inciting hatred against the central or local government. Punishments include jail terms up to life in prison.
- Any person who commits offenses defined by the legislation are subject to the law’s provisions, even if they are outside Hong Kong and aren’t permanent residents of the territory. It wasn’t clear how this provision would be implemented.
- China’s central government is empowered to supervise the policing of subversive activities in Hong Kong and, in some cases, intervene directly. Its provisions would supersede Hong Kong legislation should there be inconsistencies between them.
- A special council formed by Hong Kong officials and led by the city’s chief executive has responsibility for enforcing the law. Their work will be confidential, with decisions not subject to judicial reviews.
- Within the municipal police force, a special unit will be set up to handle national security cases. Beyond the police’s usual powers in criminal investigations, the law allows the special police unit to put suspects under secret surveillance with authorization from the city’s chief executive.
- Hong Kong’s government is also required to strengthen its scrutiny and management of schools, civic organizations, media and the Internet, and use these platforms to educate local residents on matters related to national security.
- A dedicated central-government office in Hong Kong will oversee national-security affairs, and its personnel are empowered to gather and analyze intelligence, as well as advise and supervise local authorities on security matters. Its personnel won’t be subjected to Hong Kong law when they are carrying out their duties.
China-Hong Kong-United States: Just after the publication of the new Hong Kong security law, a bipartisan group of U.S. senators and representatives introduced legislation that would offer refugee status to Hong Kong residents at risk of persecution under it. The legislation would require the State Department to give special status to Hong Kong residents and certain family members who suffered persecution, or have a well-founded fear of it, due to their expression of political opinions, or peaceful participation in political activities. The paperwork could be completed in Hong Kong or in a third country, and refugees would then be able to apply for permanent residency and citizenship. The opportunity, which wouldn’t be restricted by the current U.S. cap on refugees, would be valid for five years from the date of the bill’s passage.
Russia: The country will finish voting today on a series of constitutional changes that would allow President Putin to run for two more terms in office and stay in power until 2036. To sweeten the pot, the amendments also include a range of social and nationalist goodies such as guaranteeing social benefits and a ban on “belittling the significance” of Russia’s victory over Nazi Germany in World War II (though voters can only vote for or against the entire package). And in case that’s not enough to drive participation, posters and mass text messages are promising Muscovites “a million prizes” through raffles in exchange for voting, officials are pressuring public employees to vote and large state companies are offering their own prizes for doing so via QR codes that could be used to track people at polling stations. A positive outcome for Putin seems little in doubt.
Germany: Defense Minister Annegret Kramp-Karrenbauer is dissolving a unit of the country’s special forces, known as the Kommando Spezialkräfte (KSK) after some of its members were found to have radical rightwing sympathies. The KSK will also be restructured and stripped of control over its training.
United States-Mexico-Canada: The new U.S.-Mexico-Canada (USMCA) trade agreement, which updated the previous NAFTA deal, officially went into effect today.