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

[Posted: 9:30 AM EDT] | PDF

Good morning!  Equity markets are modestly higher after a choppy week.  The EU budget summit is underway.  Relations between the U.S. and China continue to deteriorate.  The new Asset Allocation Weekly is published below; the accompanying podcast and chartbook will be available on Monday.  Here are the details:

Foreign news:

• The EU budget summit is underway; here’s a way to follow along. The biggest issue at the meeting is the pandemic rescue plan that includes a mutualized Eurobond.  This meeting is historic; if the leaders agree to a mutualized debt scheme, it would make the EUR an attractive alternative reserve currency.  If the leaders fail completely, it may signal the end of the Eurozone.  We may not get a deal this weekend, but if the leaders agree to continue talks, all won’t be lost.  Given that Chancellor Merkel is endorsing the rescue plan, there is a good chance we see passage at some point.  As we discussed in a recent WGR, a mutualized bond issued by the EU would likely be bearish for the dollar.

China news:

• High ranking U.S. officials have been making speeches denouncing China. AG Barr is the most recent member to give a talk on this issue.  He accused Hollywood and Tech of collaborating with China in his remarks.  He also expressed concerns that businesses could be used by Beijing to undermine the U.S. policy crackdown.  This is a legitimate concern.  Chairman Xi will likely try to offer preferential treatment to U.S. firms in return for informal lobbying efforts to foster a more friendly policy regime.
• The U.S. is increasing pressure on China across a number of fronts. There have been notable trade actions and an increase in freedom of navigation operations in the South China Sea.  The administration is considering travel bans on CPC members.  This would be a significant action; there are over 90 MM members of the CPC.  The U.S. is considering banning TikTok (the owner, ByteDance, is not publicly traded) due to security concerns.
• Although China’s GDP showed a strong recovery, worries that the growth was driven by investment remain. Evidence that policy easing may be fostering yet another property boom could lead to a deterioration of credit quality.  China’s financial authorities have used financial repression for years, keeping deposit rates at low levels to create pools of cheap financing for investment.  Households are seeking higher returns on investment and there is an underlying belief that policymakers won’t allow residential property prices to fall (sound familiar?).  The key question that follows is “who will pay for the bailout, if it comes”?  The recent rise in foreign buying of Chinese sovereigns provides one potential clue.
• After a sharp rally, Chinese equities are taking a sudden hit.

COVID-19:   The number of reported cases is 13,830,933 with 590,608 deaths and 7,735,623 recoveries.   In the U.S., there are 3,576,430 confirmed cases with 135,205 deaths and 1,090,645 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases across nations using similar scaling metrics.  Only seven states have a reproduction ratio under one, which means that the virus is expanding at an increasing rate.  However, there was some good news in the data; Arizona, which has been hard hit recently, saw its R₀ fall under 1.

Virology: 

• The S., U.K., and Canada report that Russians are attempting to hack vaccine and anti-viral researchers in an attempt to steal their research.  As expected, the Kremlin has denied the claims.
• “…some animals are more equal than others…”; this famous quote from Animal Farm seems to describe the current testing regime.
• It is looking less likely that school districts will be able to fully open this fall. Instead, a mix of online and in school regimes is more likely.  The long-term impact on education is uncertain, but the likely outcome is a slower pace of learning.
• A bit of good news, as doctors deal with more COVID-19 patients, they are learning more about the disease and are developing treatment protocols that are improving hospitalization outcomes. These include less use of ventilators and a greater deployment of high concentration oxygen, various treatments to reduce the symptoms of the disease and simple changes, like laying patients on their stomachs.

Market and Economy news:

• The 30-year mortgage rate has dipped under 3.00%, a record low.  Housing data has been strong recently and there is evidence of a move to the suburbs.  That could put urban housing at risk.
• Food banks have seen high demand during the pandemic. Now they are dealing with logistics challenges as food supplies are increasing after facing disruptions.

View PDF