Daily Comment (July 22, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Global financial markets are facing some headwinds today from new U.S.-China tensions and signs that the negotiations over the next U.S. coronavirus relief bill may be tougher than previously expected.  We review all the key news below.

United States-China:  Following the Justice Department’s indictment yesterday of two Chinese hackers for attempting to steal sensitive information from U.S. firms (see below), the State Department said it has ordered the Chinese government to close its consulate in Houston within 72 hours “to protect American intellectual property and Americans’ private information.”  The Chinese government said it would retaliate if the move isn’t reversed.  It also complained that the U.S. has been opening its confidential diplomatic pouches in recent months, and in a sign that it fears more intrusive moves by the U.S., media reports from Houston this morning said firefighters were called to the consulate after neighbors noticed people burning paper in trashcans within the consulate courtyard—evidence of emergency document destruction to protect secret information.  The U.S. order to close the consulate represents a further escalation of tensions on top of the two countries’ trade war, disagreements over technology, and concerns about China’s aggressive geopolitical maneuvering.  As Western countries wake up to the challenge of a rising China, they are adopting more and more measures to counter and contain it.  Moves like the closure of the Chinese consulate in Houston provide evidence that those measures continue to be taken, and even more are likely in the pipeline as President Trump seeks to bolster his anti-China credentials for the November election and many foreign governments show signs of coalescing into a coordinated, allied approach to China.  Further efforts to isolate China could be disruptive economically and geopolitically, so the U.S. move today has taken wind out of risk markets and pushed down the renminbi.

Chinese hackers:  As mentioned above, the Department of Justice yesterday unsealed indictments against two Chinese hackers for trying to steal sensitive information worth hundreds of millions of dollars from U.S. defense contractors, research institutions, and healthcare companies, including at least two working on coronavirus vaccines and testing.  The hackers, who sometimes worked privately but at other times worked under the direction of the Chinese Ministry of State Security, are evidently still in China and therefore out of the reach of U.S. law enforcement.  Nevertheless, the indictment is likely a way to put pressure on China for its cyber warfare against the U.S. and to encourage U.S. firms to boost their cyber defenses.

COVID-19:  Official data show confirmed cases have risen to 14,976,453 worldwide, with 617,297 deaths and 8,499,299 recoveries.  In the United States, confirmed cases rose to 3,902,377, with 142,080 deaths and 1,182,018 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


Foreign Policy Response

  • New details on the €750 billion coronavirus relief program agreed upon by the EU yesterday provide some indication of how the funds will be allocated among the member countries.  Since the funds will be disbursed to countries based on the damage they’ve suffered from the crisis, the allotted amounts will be a more significant share of GDP for the relatively smaller, harder-hit southern countries like Spain and Italy.  Preliminary figures suggest those two countries would each receive almost 20% of the funds, while France would receive around 10% and Poland would receive about 8%.
    • If the final allotment is anything close to the preliminary figures, the funding for Spain and Italy would equal around 10% of their GDP in 2019.  That could be a significant boost to those economies, although it’s important to remember that the funding would be spread over three years.
    • For most of the other EU countries, the allotments would amount to a much less significant share of economic activity.
  • As we’ve mentioned before, a key innovation in the new EU coronavirus relief program is the issuance of common EU bonds to finance it.  Those bonds will be backed by the full faith and credit of the EU, rather than just individual countries.  For a useful primer on these upcoming bonds, click here.
  • Despite the EU leaders’ approval of the coronavirus program, it’s becoming clear that at least one major political fault line remains.  Some officials, led by European Commission President Ursula von der Leyen, insist that EU budget funding for countries will depend on their adherence to the EU’s rule-of-law standards, which would punish countries like Poland and Hungary.  Other officials insist Brussels has backed down from those demands.

U.S. Policy Response

United States:  The Senate Banking Committee yesterday approved President Trump’s latest nominees to the Federal Reserve’s Board of Governors and sent their nominations to the full Senate for a final confirmation vote.  The vote was 18-7 for Christopher Waller, a mainstream economist and current director of research at the St. Louis Fed.  It was a much closer 13-12 vote for Judy Shelton, an unorthodox gold bug with a reputation for more politicized policy positions.  Shelton’s nomination has generated pushback from multiple observers, but it is important to remember that as only one of seven Fed governors, her influence on Fed policy would be limited.  For example, emergency lending programs of the sort implemented during the coronavirus pandemic require the votes of at least five Fed governors, so Shelton alone couldn’t sway Fed policy into new directions unless two current governors depart.

United States-United Kingdom:  Senior British officials have reportedly given up on their goal of reaching a comprehensive post-Brexit trade deal with the U.S. this summer.  On top of the delays arising from the coronavirus crisis, the two sides are still struggling to deal with contentious issues such as the amount of U.S. agricultural products to be allowed into Britain.  Perhaps more importantly, British officials see little hope of significant compromise on those issues ahead of the U.S. presidential election in November.

Russia:  President Putin’s bid to snuff out protests in the far eastern region of Khabarovsk by naming an opposition politician as governor appears to be falling short.  Hundreds of protestors continue to demonstrate today, marking the 11th straight day of unrest.

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