Daily Comment (July 20, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
In today’s Comment, we open with new threats to regulate cryptocurrency-related assets. Coupled with the surging concerns about the new Delta mutation that pushed down prices for a variety of assets yesterday, the new regulatory threat helped push down cryptocurrency values as well. We next turn to a variety of foreign, economic, and political news. We close with the latest developments on the pandemic.
U.S. Cryptocurrency Regulation: At yesterday’s meeting of President Biden’s working group on financial markets, Treasury Secretary Yellen “underscored the need to act quickly to ensure an appropriate U.S. regulatory framework in place” over stablecoins. According to the Treasury Department, participants in the meeting discussed the rapid growth of stablecoins and their potential use as a means of payment, as well as potential risks to consumers, the financial system, and national security. The new threat of regulation put further downward pressure on cryptocurrencies yesterday, helping to drive Bitcoin below $30,000.
United States-Vietnam: In a joint statement yesterday, Treasury Secretary Yellen and Vietnam State Bank Governor Nguyen Thi Hong said Vietnam’s central bank pledged not to manipulate its exchange rate to give its exporters a competitive advantage. If the pledge is honored, it could be an important benefit since Vietnam has become a major source of U.S. imports in recent years.
- Last year, the Trump administration labeled Vietnam a currency manipulator and threatened to impose sweeping tariffs on imports from Vietnam.
- The Biden administration reversed the “manipulator” designation in April, saying it found insufficient evidence that the country was manipulating its currency but is still holding out the possibility of imposing tariffs if Vietnam doesn’t meet its pledge.
European Union: In a report on the health of the EU’s rule of law due today, the European Commission is set to highlight “serious concerns” about judicial independence in Poland and Hungary and clientelism, favoritism, and corruption in the Hungarian government. The language on Poland and Hungary is particularly sensitive, as the two countries are currently seeking approval for their plans to receive their share of the EU’s €800 billion pandemic recovery fund.
- Poland and Hungary have often been at odds with the rest of the EU over issues such as media freedom and judicial independence. Since many EU decisions require unanimity among the bloc’s members, those disputes have weakened the EU’s cohesion and hamstrung it on some issues.
- The EU’s continuing cohesion and decision-making hurdles are an ongoing challenge to the bloc’s competitiveness and economic heft.
Olympic Games: A day after Toyota Motor (TM, $176.30) said it wouldn’t show any commercials related to the Olympics in Japan during the games, other major Japanese sponsors are also announcing reduced activities related to them. Today, companies ranging from Nippon Telephone and Telegraph (NTTYY, $25.95) to Fujitsu (FJTSY, $36.36) and NEC Corporation (6701-JP, JPY, 5,550) said they would not be sending any senior officials to the opening ceremony on Friday. The news suggests that the Tokyo Summer Games will be a bust for many of those involved, including the athletes who will compete without an audience.
- On at least one level, the games will also be a bust diplomatically. South Korean Prime Minister Moon has reportedly decided not to attend the Friday opening ceremony.
- That means he won’t be meeting Japanese Prime Minister Suga, dashing hopes of a breakthrough to better relations between the two countries.
Russia-Tajikistan-Uzbekistan-Afghanistan: Russia, Tajikistan, and Uzbekistan will hold joint military maneuvers near the Tajik-Afghan border in early August amid increasing security concerns in Central Asian nations over Taliban offensives against government troops in northern Afghanistan. The drills underscore the deep concerns that the U.S. military pullout and an imminent Taliban takeover of Afghanistan could destabilize the entire region.
Ukraine: Even as Russian-backed separatists continue to hold territory and fight the government in eastern Ukraine, some economic reform efforts are proceeding in the country. The government has just proposed new laws to combat graft and promote good governance in financial institutions, which central bank governor Shevchenko said was an essential step towards the planned privatization of Ukraine’s state-owned lenders. Those lenders still make up about 55% of the country’s banking sector.
Peru: The National Electoral Jury finally gave official confirmation that leftist candidate Pedro Castillo won the June presidential election. Castillo will be sworn into office next week after one of the longest and most bitter electoral battles in the country’s history.
COVID-19: Official data show confirmed cases have risen to 191,057,501 worldwide, with 4,099,017 deaths. In the United States, confirmed cases rose to 34,133,951, with 609,268 deaths. Vaccine doses delivered in the U.S. now total 390,174,755, while the number of people who have received at least their first shot totals 186,317,651. Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.
- According to the latest CDC data, 56.1% of the U.S. population has now received at least one dose of a vaccine, and 48.6% of the population is fully vaccinated.
- Despite the progress to date on vaccinations, the seven-day average of new infections in the U.S. has risen to 32,287, more than double the level 10 days ago. The uptick in cases has touched every state and Washington, D.C., with the seven-day average of newly reported cases exceeding the 14-day average in each jurisdiction for the past four days. Hospitalizations and deaths are also beginning to rise again, driven in large part by those who have not gotten their vaccinations.
- A federal judge has ruled that Indiana University may require its students to submit proof of COVID-19 vaccination before returning to campus this fall, dealing a setback to legal efforts against vaccination requirements in higher education.
- According to the judge, the university system acted reasonably to protect public health when it required all of its students, faculty, and staff to be fully vaccinated against COVID-19 by July 1, with limited medical and religious exceptions.
- However, an attorney who represented the students who brought the suit said they would appeal the ruling.
- The Canadian government said it would allow fully vaccinated Americans to enter Canada for recreational or tourist activities beginning August 9, more than a year after authorities closed the 5,500-mile border to most travelers to limit the spread of COVID-19.
- Even though China’s strict, zero-tolerance strategy to contain the pandemic helped quickly bring it under control and has prevented any broad resurgence of the disease, analysts now note that the strategy means the country will probably not be able to open up internationally until the end of the year.
Economic and Financial Market Impacts
- The National Bureau of Economic Research, the official arbiter of U.S. economic cycles, declared that the pandemic-induced recession lasted only during March and April 2020, after which the economy began to recover. That means that the recession was the shortest on record, owing in large part to the rapid governmental response in terms of loosening monetary and fiscal policy.
- Rebounding demand and a shortage of workers continue to give workers the leverage to demand higher pay. Information technology tools such as online courses and social media may be helping to give workers more leverage over employers, just as unions did in the past.
- With the dollar surging again in response to concerns over the Delta mutations and the prospect of higher interest rates, emerging market investors are bracing for increased volatility. Further appreciation of the greenback would be a negative for emerging-market stocks going forward.
U.S. Policy Response
At the White House yesterday, President Biden touted the burst of job creation and economic growth during his first six months in office as pandemic restrictions were lifted and households benefited from large doses of fiscal stimulus. However, he also took pains to say that the administration would remain vigilant about rising prices, and he expects the Fed to take action if needed.