Daily Comment (July 20, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Monday!  Equity markets are mixed; the U.S. is modestly lower, while Chinese markets jumped on reports that insurance companies will be able to hold more stocks.  Foreign news leads today’s report as the EU was unable to make an agreement this weekend, but marathon talks continue; the EUR is modestly higher.  Congress is back and negotiations on a fourth stimulus bill are front and center.  We update the pandemic news and close with the economy and markets.  And, as promised, the Asset Allocation Weekly podcast and chart book are updated.  Here are the details:

Foreign news:

  • EU leaders continue to talk. France and Germany are pressing for the package, with the Netherlands and Austria acting as spoilers.  This budget summit is critical.  In a situation where the U.S. is no longer guaranteeing the security of Europe, if the EU fails it is hard to see how Europe will be able to have much of a global impact.  A couple of reflections on the EU and Britain: if the U.K. were still in the EU, the idea of a Eurobond would have been a non-starter. And, if the EU can’t act in unity over the pandemic, the U.K. will look prescient, being the first in line to leave a failing project.  If the EU fails, it is hard to see why Italy would remain in the Eurozone.  You can follow the latest on talks here.  The fact that the EUR has held up and Italian borrowing costs have declined despite no deal over the weekend suggests financial markets do expect an agreement.
  • Although the EU recently lost its tax disagreement with Ireland, the push to regulate global tech remains in place. A budding trade war over digital taxes is looking increasingly likely.
  • Saudi King Salman has been admitted to the hospital in Riyadh over gallbladder inflammation. If he were in serious trouble, we would expect him to be moved to a European or U.S. hospital, although the pandemic may have affected where his treatment would be conducted.  Although his son, CP Salman, appears to have solidified his rule, we would not be shocked to see a power struggle once King Salman dies.  The crown prince would be the first king of his generation, the grandchildren of Ibn Saud.  Given the large number of claimants to the throne and the heavy-handed way King Salman promoted his son, a challenge is possible.
  • Bulgaria is facing widespread unrest as protests rise against the center-right government over accusations of corruption.
  • Russia is seeing continued protests in the Russian Far East due to Putin’s decision to remove a controversial governor.
  • Lebanon, facing a serious debt crisis, is nearing economic collapse. Electricity has become so sporadic that nighttime aircraft landings have become challenging.  International aid is available but only if the country accepts austerity.  Given the political divisions in Lebanon, austerity is problematic because every group wants to shift the burden of adjustment to the other.
  • Argentina is negotiating with its creditors but is essentially saying that it can offer no further concessions. It is difficult to have much sympathy for the creditors.  Argentina is a serial defaulter and anyone lending money to it should have expected a fairly high chance of default.

Policy news: 

  • Congress is back in session and the leadership is scrambling to negotiate a fourth pandemic stimulus package. There are two areas we are closely watching.  The first is unemployment insurance.  The $600 per week additional support is, in many cases, more than many workers made on their job, giving them a disincentive to return to work.  At the same time, many of these workers have no job to return to.  If you just end the program, the risk is that those without job prospects will dramatically curtail their spending, weakening an already weak economy.  We would expect (hope?) for a bit of creativity from lawmakers, perhaps a bounty for returning to work along with a reduction in the support package.  A second and perhaps even more intractable problem is daycare.  Getting people back to work if their kids can’t go to school or daycare will be a challenge.  But, as anyone who had kids in daycare knows, they are places where infections spread easily.  If the bill doesn’t address funding for PPE in schools, there is a risk that the rebound in employment could be at risk.
  • The Senate banking committee is expected to approve Judy Shelton to an open Fed governor position. Shelton may be the most politically oriented governor appointed in my lifetime; we would expect her to support easy policy under a GOP White House but be hawkish if a Democrat is in the Oval Office.  If she does get approved by the banking committee, we do expect her to be approved by the broader Senate.  (An aside…it will be fun to see her interactions with the rest of the FOMC when the full transcripts of the FOMC meetings are released in 2025.)

China news:

COVID-19:  The number of reported cases is 14,508,892 with 606,206 deaths and 8,134,747 recoveries.   In the U.S., there are 3,773,260 confirmed cases with 135,205 deaths and 1,131,121 recoveries.  For those who like to keep score at home, the FT has a nifty interactive chart that allows one to compare cases across nations using similar scaling metrics.


  • The first clinical trial results from the Oxford vaccine will be released later today. This is a Phase One trial.  The NY Times ran a feature article in the Sunday edition raising concerns that acceptance of a vaccine could be slow.  There is an established anti-vaccine movement in the U.S., but beyond this group there are concerns that the rush to deliver a vaccine may increase the odds of unexpected side effects.  It is quite possible that many Americans may take a “wait and see” approach to the vaccine before taking the shots.  If so, even the production of a vaccine may not lead to economic recovery.
  • Epidemiologists are noticing that rapid increases in COVID-19 infections appear to be tied to “super-spreader” events, where a few asymptomatic carriers can trigger an exponential increase in cases. This information suggests that (a) widespread regular testing might catch these carriers, and (b) mass gatherings should be greeted with great caution.
  • Venezuela is facing a rapid rise in new cases. President Maduro is blaming returning refugees. The collapse of the Venezuelan economy led to a mass migration out of Venezuela in recent years.  However, as surrounding countries shut down due to the pandemic, these refugees are returning to Venezuela.  Although the government is attempting to secure the border, reports of harsh treatment of returnees has led many to illegally return.  If these returnees are infected, they could be boosting infections.
  • Hong Kong is seeing a rise in new cases.
  • Mask wearing remains controversial. It was controversial in the Spanish Influenza pandemic too.

Market and economy news:

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