Daily Comment (July 15, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Financial markets are responding to important progress in developing a coronavirus vaccine today.  You can almost hear “Happy Days Are Here Again” being played in the back of our minds, though it’s important to remember that plenty of economic and financial damage can still arise before widespread vaccinations are possible.  We review all the key news below:

COVID-19:  Official data show confirmed cases have risen to 13,349,649 worldwide, with 579,335 deaths and 7,430,243 recoveries.  In the United States, confirmed cases rose to 3,431,744, with 136,468 deaths and 1,049,098 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


  • Moderna, Inc. (MRNA, 75.04) reported that its coronavirus vaccine performed well in its Phase II trial, producing the targeted antibody response in all 45 people studied and proving to be well tolerated.  Importantly, the immune response also appeared to last at least two months.  The vaccine will now enter a Phase III trial consisting of about 30,000 people starting in late July, with final results expected around the end of the year.
    • Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, hailed the results as “really quite good news.”
    • Coupled with the other vaccines currently moving through trials, the initial success of the Moderna injection could help rekindle optimism regarding control of the disease, despite the discouraging resurgence of infections in the South and West.  As reflected in the market action so far today, the improving prospect of a vaccine should be bullish for global equities and other risk assets, but negative for bonds and precious metals.
  • Despite the improving prospects for a future vaccine, the current surge of infections continues in multiple states around the country, and in several large developing countries abroad.  Here in the U.S., the rise in infections is boosting absenteeism at large employers, leading to production shutdowns and signaling a potential new supply shock for some industries.  On the demand side of the economy, emerging data shows the U.S. recovery to date has been driven mostly by higher-income consumers with stable jobs who have been taking advantage of the rising financial markets to buy homes, cars, and other big-ticket items.  All the same, at least one low-cost item has seen a sustained surge in demand: canned tuna fish.
  • Following Britain’s decision yesterday to require face masks in retail stores, the French government said it will require mask-wearing in enclosed public spaces within the next few weeks because of a recent slight uptick in infection rates.
  • Central Asian countries that had boasted of their early success fighting the pandemic, including Kazakhstan and Uzbekistan, have reintroduced lockdowns in response to a new surge in coronavirus cases that threatens their economies.

U.S. Policy Response

Foreign Policy Response

United States:  Presumptive Democratic presidential candidate Joe Biden released his proposed plan to combat climate change.  Under the plan, the government would spend some $2 trillion over the course of a decade to eliminate carbon emissions from the power grid, put Americans into electric vehicles and zero-emissions mass transit, and rebuild roads, bridges, and other infrastructure.  The plan would devote spending to minority communities and bolster rules to support unions, which the Biden campaign frames as a way to ensure benefits go first to poor and working-class people and to communities hurt the most by pollution.

European Union-United States:  In another blow to the European Commission’s effort to exact more tax revenue from big, U.S. multinationals, an EU appeals court quashed a commission order for Apple (AAPL, 388.23) to pay back €14.3 billion in taxes to Ireland.  According to the court, the commission failed to prove that Ireland had provided Apple with an illegal discretionary tax deal that gave it a competitive advantage.  That echoed the reasoning behind a similar decision last year that spared Starbucks (SBUX, 72.73) from having to pay back taxes.  Taken together, the decisions suggest EU competition czar Margrethe Vestager may be facing a prohibitively high hurdle in her effort to crack down on low-tax regimes in the EU.

European Union:  As national leaders continue to negotiate over the European Commission’s proposed €750 billion coronavirus recovery plan, including the proposal to finance it with mutualized EU debt, the horse trading has kicked into high gear.  For example, in a meeting yesterday between Portuguese Prime Minister Costa and Hungarian Prime Minister Orbán, Costa said matters concerning “liberty and the rule of law” shouldn’t be a part of the EU’s negotiations.  In other words, to make sure Hungary doesn’t veto the program and to ensure Portugal gets its share, Costa doesn’t want to press Orbán on his controversial social and judicial policies.

Japan:  In its latest policy decision, the Bank of Japan kept its monetary policy unchanged.  The central bank held its benchmark overnight interest rate at -0.1%, kept 10-year bond yields capped at “around” 0.0%, and held its purchases of equity ETFs steady at a pace of ¥12 trillion per year.  The decision came even as the institution revised down its economic growth forecasts and warned of further downside risks.  GDP in the year to March 2021 is now expected to decline 4.7%.  Consumer prices are expected to fall 0.5%.

Saudi Arabia:  Despite the challenges caused by the coronavirus, low oil prices and the government’s effort to gradually wean the economy off oil, Riyadh has gone ahead with a tripling of its value-added tax this month.  The move hiked the VAT to 15% from 5% previously.

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