Daily Comment (July 21, 2020)

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

[Posted: 9:30 AM EDT] | PDF

A new Confluence of Ideas podcast episode is available, titled “The 2020 Election: Part 3.”  This is the final episode looking at the 2020 election.  In this episode, we handicap the election based on the tools of prediction, polling and decision markets.  We examine the geopolitics of the election, focusing on what countries are likely to intervene in our election, their capabilities and their goals.  We also touch on what we expect to see in terms of policy if we get a new president or if the incumbent wins, and likely market reaction in either scenario.

Today’s upswing in risk assets comes in large part from yesterday’s good news regarding potential coronavirus vaccines and a massive new virus recovery program in Europe.  We discuss each of those developments in detail below, in addition to discussing today’s other major news developments.

COVID-19:  Official data show confirmed cases have risen to 14,729,037 worldwide, with 610,587 deaths and 8,323,901 recoveries.  In the United States, confirmed cases rose to 3,831,430, with 140,909 deaths and 1,160,087 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


  • Echoing the good Phase II trial results announced for the Moderna (MRNA, 82.68) coronavirus vaccine last week, three other leading competitors yesterday posted trial results showing their vaccines successfully produced an immune response with little or no serious side effects.
    • Besides the four leading prospects, more than a dozen other vaccine candidates have entered human testing.  In total, about 160 potential vaccines are now in development.
    • With the rapid success of multiple vaccine candidates so far, and with the numerous alternatives in development in case the top four candidates falter, investors will now have greater confidence that a protective shot could be ready later this year.  Of course, unforeseen scientific issues with the vaccines could still arise.  In addition, there could be challenges in ramping up production, distributing the vaccine worldwide, and making sure enough people get it.  All the same, the news suggests humanity could well get control over the coronavirus in fairly short order and start to rebuild the global economy.  The news is therefore bullish for stocks, as shown by the positive reaction in the markets yesterday and today.
  • Despite the good news on a potential vaccine, current infections and deaths continue to rise across the globe, with an especially heavy impact on Latin America.  The economic strains there are raising concerns about a potential new Latin American debt crisis.
  • In the U.S., new infections rose by approximately 61,800 yesterday, although that was the lowest figure in a week.  The mayor of Chicago announced tighter restrictions on restaurants, bars, and gyms, but the mayor of New York said his city would generally proceed to its Phase Four of reopening.
  • With the success that most major European nations have had in bringing the pandemic under control, some European sports organizations are opening for business again, in contrast to the continued shutdowns in the U.S.
  • Now that researchers have had more than six months to study the coronavirus, they’re finally getting a hand on just how deadly it is.  Researchers now believe the disease kills from 0.3% to 1.5% of people infected, with most studies putting the death rate between 0.5% and 1.0%.  That means that for every 1,000 people who get infected, five to 10 would die on average.
    • The estimates suggest the new coronavirus is deadlier than the seasonal flu, though not as lethal as Ebola and other infectious diseases that have emerged in recent years.
    • The coronavirus is killing more people than the deadlier diseases, in part because it is more infectious.

Foreign Policy Response:

  • On the policy front, the EU’s member states finally reached agreement this morning on a massive €750 billion coronavirus relief program that will not only channel funds to hard-hit countries like Spain and Italy to help them recover from the crisis, but will also involve the first large-scale issuance of common, mutualized EU debt.  Key points of the “Next Generation EU” deal are as follows:
  • The approved financial assistance will include €390 billion in grants to hard-hit countries, supplemented by €360 billion in loans.  That spending would be partially paid for by spending cuts in the EU’s budget of €1.074 trillion for the next seven years, which the leaders also approved.
    • The grants will consist mostly of a “Recovery and Resilience Facility” totaling €312.5 billion.  To access these funds, member states will need to prepare national recovery plans pledging to reform their economies.  The funds will be distributed from 2021 to 2023.
    • The remaining €77.5 billion of grants will be used to top up normal EU budgetary programs.
  • To fund the €750 billion coronavirus program, the European Commission will be granted new powers to borrow on capital markets.
    • While most of the borrowed money will go to the new recovery fund, the remainder will be channeled through the EU’s normal budgetary programs in areas such as scientific research, rural development, and environmental protection.
    • The funds available for debt service were left vague, but EU leaders have suggested new sources of funds for the EU bonds might include taxes on digital services or carbon emissions.
  • To overcome resistance from the Netherlands, Denmark, Sweden, and Austria, the leaders agreed that the “Frugal Four” nations will get more of their annual contributions to the EU budget rebated back to them.
  • As we’ve been arguing, the provision of assistance to the EU’s poorest countries should help buttress the European economy, while the issuance of hundreds of billions of euros of common EU debt should help make the euro a much more viable reserve currency to compete with the dollar.  As reflected in today’s market action so far, the deal is therefore bullish for European equities, lower-rated European sovereign debt, and the euro.

U.S. Policy Response:

Financial Market Response:

  • Despite the good news on a potential vaccine and a slowing in U.S. infections, which might be assumed to take the wind out of safe-haven precious metals, gold and silver prices continue to trend upward, with silver hitting a multi-year high yesterday.  Our research shows precious metals tend to move along with the gross size of the federal budget deficit, so today’s loose monetary and fiscal policy are likely to keep pushing gold and silver higher for the foreseeable future.

United Kingdom-Russia:  A long-awaited parliamentary report into Russian interference in British politics has concluded that Moscow’s influence is “the new normal,” with senior figures linked to the Kremlin enjoying access to top business and political leaders.

Russia:  To diffuse the massive anti-government protests that have broken out in Russia’s far eastern region of Khabarovsk after the arrest of its popular governor, President Putin has chosen a politician from Russia’s tightly controlled “systemic opposition” to take over the position.  The new governor will be Mikhail Degtyarev, a 39-year-old lawmaker from the nationalist Liberal Democratic Party.

Egypt-Turkey:  The Egyptian parliament has approved deploying troops to Libya in order to prevent the UN-recognized Government of National Accord from advancing eastward and capturing the strategic port of Sirte, a gateway to Libya’s oil installations.  Such a deployment would raise the stakes in Libya’s proxy civil war by increasing the potential for direct clashes between Egypt and Turkey.

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