Daily Comment (July 27, 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 multiple global and U.S. developments touching on taxes, fiscal policy, monetary policy, and labor market regulation.  Next, we discuss a variety of foreign news ranging from the sharp drop in Chinese stocks stemming from that country’s crackdown on its tech sector to cooling tensions between North Korea and South Korea.  We close with the latest developments on the coronavirus pandemic.

Global Corporate Tax Deal:  According to the Wall Street Journal, the pharmaceutical industry is already quietly mobilizing to fight the recent global deal on a minimum corporate income tax rate of 15% and other provisions to stop tax avoidance.  Lawyers and company officials estimate the tax overhaul, if adopted, could cost some of the biggest pharmaceutical companies hundreds of millions of dollars more each year.  Given the lobbying resources available to the industry and its past success in protecting its interests, the drug-industry pushback could have a meaningful impact in watering down the proposal.

U.S. Fiscal Policy:  Lawmakers negotiating over the bipartisan “hard” infrastructure bill totaling approximately $1 trillion continued to hit stumbling blocks late Monday, with the latest squabbles touching issues such as funding for water infrastructure, a requirement that federal contractors pay their employees a locally prevailing wage, and how to pay for the plan.  Meanwhile, Senate Majority Leader Schumer said lawmakers might need to work through the coming weekend to finish the deal.

U.S. Monetary Policy:  The Federal Reserve will open its latest two-day policy meeting today, with a decision and a press conference with Chair Powell on Wednesday afternoon.  We expect no change to the Fed’s benchmark fed funds interest rate or its bond-buying program.  However, with multiple renegades on the policymaking committee calling for tighter monetary policy sooner rather than later, the officials are likely to signal continued discussion about the timing of an asset-purchase taper later in the year.

U.S. Labor Market Regulation:  The Biden administration is reportedly developing a series of regulatory changes aimed at increasing workers’ pay and gaining other benefits for them.  The rule changes, most of which are still being drafted, would affect workers such as federal contractors, tipped employees, and workers who are jointly employed (such as those with jobs at franchised brands). In some cases, the changes seek to reverse Trump administration efforts. In others, the Labor Department is working to implement its own rules.

  • The new rules would be separate from other administration proposals aimed at tilting the balance of power toward workers from employers, including raising the federal minimum wage for private-sector employees, increasing wages for caregivers, and making it easier for workers to organize labor unions.  In contrast with those proposals, however, the new rules would not require Congress to pass new legislation.
  • If the rules successfully shift the balance of power in the labor market towards workers, they could raise costs for businesses beyond the amount firms can recoup by raising prices.  In other words, the proposals could work to push down margins over time, which could become a headwind for stocks.

Chinese Technology Stocks:  Chinese tech stocks plunged for a third day amid investor fears about the government’s mounting regulatory crackdown on the sector.  The government continues to signal its attempts to bring this sector under its control because of multiple concerns ranging from anti-competitive behavior, data security infractions, child pornography, and even the high cost of online tutoring.  We continue to note rising regulatory risks facing powerful technology companies worldwide, but perhaps most acutely in China.

  • Hong Kong’s Hang Seng stock benchmark closed down more than 5% today, while the Hang Seng Tech sub-index declined 8.7%.
  • The Nasdaq Golden Dragon China Index, a benchmark of Chinese tech stocks listed in New York, has dropped roughly 15% over the last two days — its worst fall since 2008.
  • Some of the most widely held Chinese tech stocks fell even more.

North Korea-South Korea:  North Korea reactivated its direct communication lines with the South Korean government, raising the prospect that the Kim Jong Un regime could be ready for engagement after a protracted period of diplomatic silence.  Pyongyang had severed all communication with the Seoul government since June 2020, after Kim Yo Jong, the dictator’s sister, condemned South Korean activists for sending antiregime leaflets over the border.  More recently, the regime has shown signs it is reeling under economic and other stresses.  Faced with the threat of instability, it will most likely seek some kind of economic assistance in return for temporary good behavior.

Turkey-Ukraine-Russia:  The Ukrainian Navy has reportedly taken delivery of the first of six Bayraktar TB2 drones it is acquiring from Turkish defense firm Baykar.  Last year, advanced Turkish drones were instrumental in giving Azerbaijan the upper hand over Armenia in their conflict over Nagorno-Karabakh.  As might be expected, the Russian Defense Ministry issued a strong warning to Turkey that it shouldn’t help build up Ukraine’s military capabilities.

Brazil:  The worst frost to strike Brazil’s coffee-growing region in over 25 years will cut a chunk out of next year’s crop, just as drought cut the 2021 crop.  As a result, coffee prices have surged to six-year highs, following a years-long stretch of depressed prices that prompted many farmers to abandon their fields.

  • New York arabica bean futures have jumped to $2.08 a pound, reaching their highest level since late 2014.
  • Coffee futures have climbed 30% so far in July, and they have almost doubled over the past year.

Tunisia:  The country plunged deeper into a political crisis yesterday as President Kais Saied tightened his grip on power, dismissing top government officials and deploying military forces around the prime minister’s office in a dramatic move that opponents called a coup attempt.  Saied has also issued a decree declaring a nighttime curfew and banning gatherings of more than three people.

COVID-19:  Official data show confirmed cases have risen to 194,885,476 worldwide, with 4,171,445 deaths.  In the United States, confirmed cases rose to 34,535,436, with 611,007 deaths.  Vaccine doses delivered in the U.S. now total 394,949,575, while the number of people who have received at least their first shot totals 188,729,282.  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, 56.8% of the U.S. population has now received at least one dose of a vaccine, and 49.1% of the population is fully vaccinated.
  • With the Delta variant driving up new U.S. infections, especially among unvaccinated people, the Department of Veterans Affairs yesterday became the first federal agency to require its workers to get vaccinated.  Department employees who work in VA healthcare facilities or provide direct care to veterans will have eight weeks to get their shots or be at risk of losing their job.
    • Meanwhile, California mandated that state employees working in healthcare facilities get their shots by August or be tested weekly for the virus.  New York City issued a similar mandate that will be effective after Labor Day for all 350,000 municipal employees.  In San Francisco, even an organization of private bar owners said patrons who want to sit inside their establishments must show proof of vaccination or a recent, negative COVID-19 test.  Vaccine or test mandates are also being imposed on people who want to enter certain facilities or venues in France, Italy, and other countries.
    • While the California and New York City mandates touched off opposition from some employees, some 60 national groups representing doctors, nurses, and other healthcare workers separately issued a call for employers to mandate vaccinations in all healthcare facilities.  The groups, including the American Nurses Association, the American Medical Association, the Infectious Diseases Society of America, and the American Academy of Pediatrics, said unvaccinated healthcare workers are putting their patients and residents of long-term-care facilities at risk for infection.
  • While good progress has been made on developing vaccines against COVID-19, much less progress has been made on treatments for those who contract the disease.  Of the ten drugs cleared or recommended for use in the U.S. to date, two later had their authorizations rescinded after they failed to work, and the government paused shipments of a third because it wasn’t effective against new variants. The best medicines for early treatment are cumbersome to administer, and drugs for those in the hospital can only do so much for patients who are already severely ill.
    • Clinical trials are currently evaluating more than 225 drug treatments, including new medicines and some already approved for other conditions, to see whether they might also be effective against COVID-19.
    • A few potential therapies in development have shown promise, including antiviral drugs from Pfizer (PFE, $41.81) and Merck (MRK, $77.24).
  • This week, the British government will consider loosening travel restrictions for travelers from the EU and the U.S., with one senior airport executive saying he’s confident that ministers would broaden quarantine exemptions “imminently.”  The move, which one government official said was “finely balanced,” would be a boost to the tourism sector and help to reopen the U.K. to mass foreign travelers.
  • In contrast, the Biden administration said it would maintain its pandemic-related travel bans for the foreseeable future on a range of countries, including the U.K., the EU, and China, due to the spread of the Delta variant.

 Economic and Financial Market Impacts

  • In South Korea, second-quarter gross domestic product (GDP) was up 5.9% from one year earlier, partly reflecting base effects from the onset of the pandemic last year but also reflecting strong exports and rebounding consumption.  The year-over-year growth in the second quarter was the strongest in a decade.  The fly in the ointment: Surging infections and low vaccination rates so far in July suggest growth could slow down dramatically in the third quarter.

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