Daily Comment (July 17, 2020)

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:

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.


Market and Economy news:

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