Daily Comment (July 9, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
Good morning, all! U.S. equities appear to be headed for a higher open this morning. Today’s report begins with a discussion of what happened in the financial markets yesterday. International news follows, with the EU’s decision to boost its anti-money laundering efforts and growing tensions within Mercosur. U.S. economics and policy news are up next, including an update on the Afghanistan withdrawal. China news follows, and we end with our pandemic coverage.
About yesterday: On Thursday, rising doubts about the global economy led to a rotation away from risky assets into safe haven assets. As a result, the S&P 500 closed lower and Treasury yields dropped to a three-month low. The rotation to risk-off assets may be attributed to fears of policy tightening and a reduction in stimulus. Earlier this week, the Federal Reserve minutes revealed that the central bank is considering tapering its bond purchases. Meanwhile, expectations that China will reduce its reserve requirements have led to speculation that its latest GDP numbers will miss forecasts. In short, the market pessimism can likely be attributed to investors moderating their growth forecasts for the global economy. Additionally, the rapid spread of the delta variant has likely raised concerns that the pandemic may be around longer than originally anticipated. San Francisco Fed President Mary Daly warned that she believed the biggest threat to growth is a premature declaration of victory over COVID-19. Countries have already begun reinstating restrictions following the spread of the delta variant.
We believe that forecasts of global growth were based on the best-case scenario, thus we are not surprised about yesterday’s market response. In January, investors likely assumed that by this time vaccination rates would be higher, COVID-19 cases would be lower, and the world would be closer to returning to its pre-pandemic normal. These assumptions may have led investors to hold elevated growth expectations. Halfway through the year, it seems this forecast may have been overly optimistic. Going forward, we think investors should be cautious about making drastic changes to their portfolios as there still appear to be a lot of unknowns about this recovery. Over the next few months, it will become more evident whether or not inflation is indeed transitory or permanent. Also, as demand starts to decelerate, we will see how firms and the labor market adapt. In short, we still believe it is too soon to tell when the economy will return to normal. As a result, we recommend a more cautious approach to managing portfolios in order to avoid any unwelcome surprises.
International news: European Union crackdown on money laundering, Brussels and London argue over Brexit bill, and Uruguay wants to find trading partners outside of Mercosur.
- The European Union is expected to introduce a new anti-money laundering agency. Following a series of failures that have led to consternation from U.S. officials, the new agency will look to improve efforts to crack down on dirty money entering the bloc.
- The European Central Bank announced a new policy change that will likely pave the way for monetary easing to continue for the foreseeable future. In a statement, the central bank said it will aim to keep Eurozone inflation at 2% over the medium term as opposed to the current target below 2%. The new move will likely allow the central bank to overshoot its 2% target whenever it is deemed appropriate.
- Brussels and London are currently in a dispute about the size of the Brexit bill. The EU has the figure being closer to £40.8 billion and the U.K. has the bill at £35-£39 billion. Although this situation is unlikely to lead to a major break in ties, we suspect if this issue doesn’t get resolved soon relations between the sides may deteriorate. Polls suggest that British people do not like the fact that the U.K. is paying more than £25 billion to break away from the EU.
- Uruguay has signaled that it would like to look for trade deals outside of Mercosur. The decision comes after Uruguay failed to come to an agreement with other members within the trading bloc to reduce trade barriers and allow the group to look at more trade deals with outside countries.
Economics and policy: U.S. withdrawal update, regulators to target shipping monopolies, and American frackers decide to pay down debt.
- The Biden administration announced that the interpreters that helped soldiers during the Afghanistan war will be transported out of the country. The move comes as U.S. troops begin their full withdrawal out of Afghanistan. On Thursday, President Biden announced that the U.S. military mission will conclude on August 31.
- Fears of a Taliban takeover in Afghanistan are becoming apparent. On Friday, the Taliban delegation in Moscow announced that the group now controls 85% of the country. It has offered reassurances to Russia that it will not seek to attack others and has informed China that it will not interfere with its internal affairs.
- U.S. regulators are going to reduce rising shipping costs by targeting shipping companies that are operating as monopolies. The Biden administration will be targeting foreign-owned shipping alliances in ocean shipping and rail industries. President Biden is expected to sign an executive order that will ask the Federal Maritime Commission and the Surface Transportation Board to crack down on consolidation and aggressive pricing.
- In addition to these measures on shipping companies, President Biden is expected to sign a series of executive orders designed to promote competition among big tech and agriculture firms. He will also look to curtail the use of non-compete clauses for employees.
- Seven states have now reported cases of mosquitos infected with the West Nile Virus, four of which have found cases that have been transmitted to humans.
- Shale companies have largely used profits from the rise in oil prices to repay debt as opposed to reinvesting the funds to expand drilling capacity. As a result, it is unlikely that U.S. oil production will pick up anytime soon.
- Regulators in China requested that Didi (Didi, $11.38) change its mapping function before its U.S. listing. The request was due to fears that the app could be a security risk as it may expose sensitive government locations. The request provides insight into why the Chinese government decided to come down on the tech company less than a week ago.
- The Cyberspace Administration of China is gaining more clout as it adapts to its new role of regulating U.S.-listed Chinese companies. Its growing influence has put investors on notice as it has shown that it will be undeterred by investor backlash in its regulation of companies it believes is a threat to China’s national security.
COVID-19: The number of reported cases is 185,663,348 with 4,012,659 fatalities. In the U.S., there are 33,792,445 confirmed cases with 606,482 deaths. For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics. The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors. The CDC reports that 385,495,790 doses of the vaccine have been distributed with 332,345,797 doses injected. The number receiving at least one dose is 183,237,046, while the number of second doses, which would grant the highest level of immunity, is 158,287,566. The FT has a page on global vaccine distribution.
- Spectators will be banned from watching the Olympics games at stadiums. Rising cases in Tokyo forced the government to put the city under a state of emergency.
- A White House official announced that COVID-19 cases are expected to rise in the U.S. over the next few weeks due to the spread of the delta variant. The official also warned that “virtually all COVID-19 hospitalizations and deaths” are coming from people who have not been vaccinated.
- Pfizer (PFE, $39.25) has requested emergency authorization for the third booster shot of its COVID-19 vaccine. Early data shows that the booster can increase protection against the virus.
- So far, the approval odds appear to be bleak as the FDA and CDC announced that fully vaccinated people do not need booster shots at this time.