Daily Comment (July 14, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Our latest Confluence of Ideas podcast episode is now available, titled “The 2020 Election: Part 2.”  In our “2020 Geopolitical Outlook,” we named the 2020 U.S. election as a key event.  Our recent five-part Weekly Geopolitical Report series examined this issue in more detail.  This is the second of three podcast episodes that will look at the 2020 election.  In this episode, we discuss the issue of inequality and the rise of populism, the impact of social media, and the current problems of extreme partisanship and political legitimacy.

As usual in recent weeks, the financial markets today reflect a tug-of-war between coronavirus optimism, and renewed outbreaks and lockdowns in a growing list of countries, states and localities.  As described below, the renewed outbreaks and lockdowns seem to be winning of late, helping reverse an initial uptrend in the stock market yesterday.  Just as important, we also review several indications that relations are continuing to worsen between China and the Western democracies, which is a further threat to global risk assets.

COVID-19:  Official data show confirmed cases have risen to 13,127,030 worldwide, with 573,664 deaths and 7,280,515 recoveries.  In the United States, confirmed cases rose to 3,364,704, with 135,615 deaths and 1,031,939 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


  • Responding to the recent surge of infections in California, state officials ordered an immediate lockdown on indoor activities at restaurants, bars, museums, zoos and movie theaters.  In addition, the main school districts in Los Angeles and San Diego said they would start the school year solely online.  Separately, Oregon Governor Kate Brown ordered a ban on most indoor social gatherings of more than 10 people, and said the state would require people to wear masks outside when they can’t properly social distance.
    • Coupled with renewed lockdowns in other areas, these measures underscore the risk of renewed economic damage from the resurgence in infections in the South and West.  Even though this round of infections has mostly affected the younger, healthier victims that typically handle the disease better, intensive-care capacity is already being stretched to the limit in some areas and the first hints of a resurgence in deaths is already visible.
    • If those trends continue, more state and local governments are likely to reimpose their lockdowns to protect the most vulnerable – a move that would probably lead to another retreat in equity prices.
  • Compounding the negative news from the U.S., the Walt Disney Company (DIS, 116.22) said it is reclosing its Hong Kong Disneyland theme park, just a month after it reopened, because of a resurgence of infections in the city.  The closure comes as Hong Kong officials said all activities such as large social gatherings, dining in at restaurants and going to the gym would be temporarily suspended.
  • The British government said face masks will be required for anyone entering retail stores in England beginning on July 24, on top of the existing requirement to wear a mask on public transport.  Cabinet Office Minister Michael Gove had said on Sunday that masks should not be made mandatory, but the government overruled him on grounds that “there is growing evidence that wearing a face covering in an enclosed space helps protect individuals and those around them from coronavirus.”  The decision brings England in line with Scotland, Germany, Italy and several other European countries and locales.
  • In South Africa, a sharp resurgence of coronavirus cases has forced the government to reimpose its lockdowns, including a ban on alcohol sales and a curfew.
  • Economic reports from Europe and Asia today show continued deep economic scarring from the virus lockdowns (see data below), including an annualized drop of 41.2% in Singapore’s second quarter GDP.
  • If you’re looking for more evidence that some things will never be the same after the virus crisis, recent polling shows that a large percentage of Japanese commuters don’t want to go back to the office and submit themselves again to the nightmare known as Japanese public transport.  The reporting highlights the risk that many office complexes around the world could end up being less utilized and less valuable going forward.

Foreign Policy Response

United States-China:  In a major shift away from the previous U.S. policy of not taking sides in territorial disputes where it is not involved, Secretary of State Pompeo said the United States has formally rejected a range of Chinese territorial claims against its neighbors in the South China Sea.  In his statement, Pompeo characterized the decision as an effort to uphold international law against what he called a “might makes right” campaign by China to coerce and intimidate its Southeast Asian neighbors into ceding their interests.  Although it wasn’t immediately clear what the practical implications of the policy shift will be, there is a high risk that the move will exacerbate U.S.-China tensions in trade, technology, human rights and other areas.  At the extreme, the move could also raise the risk of military confrontation with China at some point down the road, so it is a decided negative for equities and bears close watching.

China-United Kingdom:  Buckling to U.S. pressure, the U.K. did an about-face and banned Chinese telecom giant Huawei (002502.SZ, 3.07) from the country’s 5G communications network.  The company will be banned from supplying new equipment to Britain’s 5G networks from December 31, while existing Huawei equipment must be stripped from 5G networks by 2027.  The move, which aims to prevent Huawei’s equipment from being used for Chinese spying or influence operations, illustrates the growing global pushback against China’s political, economic and technological rise.  Not only does that pushback portend a potential conflict with China at some point in the future, but it also has the potential to crimp Chinese economic growth and the success of its firms as they attempt to expand overseas.  As noted above, the pushback is therefore a growing risk for global risk assets.

China-Hong Kong-United Kingdom:  The British government estimated about 200,000 residents of Hong Kong could apply for special “British National Overseas” passports and emigrate to the U.K. under Foreign Secretary Raab’s offer last month.  That’s far below the 3,000,000 or so who are eligible for the passports, but even that level of emigration would likely anger Beijing and further strain relations between China and the West.

United States:  A fire in port has caused major damage to the USS Bonhomme Richard, one of the Navy‘s few amphibious assault ships capable of conducting offensive operations like an aircraft carrier.  According to officials, the damage is so severe that it may be impractical to repair.  If the ship is lost, it would significantly reduce U.S. ability to project power around the world for an extended period.

European Union:  The European Commission is reportedly planning to clamp down on the sweetheart tax deals that some smaller countries have offered to multinational firms.  Crucially, unlike ordinary tax legislation in the EU, the initiative would only require the backing of a qualified majority of the EU’s 27 member states rather than unanimous support of all countries.  That would limit any government’s ability to wield a veto, although the measure would also need approval from the European parliament.

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