Daily Comment (June 24, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
Good morning! Risk assets are trending higher this morning. Although the Fed scare remains in the background, as the markets become accustomed to the change in tone, we are seeing a resumption in earlier trends. China news leads our coverage today, as Apple Daily ceases operation. Market and economics coverage are next. The international roundup follows, and we close with the pandemic update.
China: Apple Daily closes, and the U.S. blocks China’s purchase of a South Korean chipmaker.
- Apple Daily, the democracy supporting tabloid in Hong Kong, officially shut down today. Hong Kong citizens are racing to buy the last issue. Beijing already arrested the paper’s founder and owner, Jimmy Lai. Pressure from the government apparently made it impossible to continue operations, despite the fact that the paper had 600,000 paying subscribers and enough assets to continue printing for 18 months. The government has been raiding the offices of the paper, arresting managers, editors, and increasingly, journalists. We expect lots of comments from the West, but Beijing has made it abundantly clear that it has taken total control of Hong Kong. It won’t allow dissent, and it really doesn’t care what that West thinks.
- The U.S. conducted a freedom of navigation exercise by sending the USS Curtis Wilber through the Taiwan Strait.
- Magnachip (MX, USD, 24.02) is a South Korean company that makes semiconductor chips for display drivers. It’s a small company that doesn’t sell to the U.S.; all its operations, employees, and sales appear to occur within South Korea. The product it sells isn’t cutting edge by any means. A Chinese private equity firm wants to buy the company. The U.S., under the CIFUS law, has intervened to block the sale on the idea that the company is listed on the NYSE, thus giving the U.S. standing on this issue. This action, which has been adopted by South Korean regulators, shows that the U.S. is willing to go to extensive lengths to prevent China from acquiring any semiconductor chip technology, even that of a small and rather inconsequential company.
- LinkedIn, part of Microsoft (MSFT, USD, 265.00), is reportedly blocking some account access in China without explaining why the individuals are being blocked.
- China has been releasing metals from government reserves to cool price increases. The latest sale was apparently less than expected and supported a price recovery.
Economics and policy: The debt ceiling looms, infrastructure makes progress, and the Supreme Court decides the fate of the government mortgage guarantors.
- The debt limit is creeping closer. By August, Treasury says it may not be able to meet all of its obligations. In 2019, Congress suspended the borrowing limit until July 31, 2021. Obviously, that deadline is approaching, although Treasury can deflect some payments to continue to operate beyond the deadline. Treasury Secretary Yellen has warned that financial markets could be adversely affected if the limit isn’t raised. So far, the Congressional leadership doesn’t seem to have a plan. The normal order would be to convince 10 GOP senators to agree to either a rise or suspension of the ceiling. Or, the measure could be placed in a budget bill that only requires a majority. Either way, some senators will need to be swayed, either to accept a measure that they may not agree with or a method of passage they oppose. This situation bears watching as the end of July approaches.
- It looks like a bipartisan $1.0 trillion infrastructure bill framework is in place. This development increases the odds of passage. Whether another bill passes in reconciliation remains to be seen.
- The Supreme Court ruled yesterday that the Federal Housing Finance Agency was unconstitutionally structured in that it didn’t give the executive branch control of the agency’s leader. After the decision, the Biden administration signaled the removal of Mark Calabria, the current head of the agency. It will soon appoint a replacement. The administration has also signaled that it is in no hurry to return the mortgage guarantors, Fannie Mae (FNMA, USD, 1.52) and Freddie Mac (FMCC, USD, 1.41), to the private sector. In a related decision, the court rejected claims from investors who wanted to end the practice of the firms turning profits over to the Treasury, something that was established after the housing crisis when the two firms failed. The stocks plunged on the news.
- Bank stress test results should start arriving soon. The banks that pass are expected to boost dividends and buybacks.
- Thirty-nine million households will begin receiving childcare credit checks soon. The new program gives funds monthly instead of at tax time.
- One surprising development in the aftermath of the pandemic is that new business formation has been soaring. An NBER study suggests that some of the growth reflects post-pandemic restructuring; there has been a surge in non-store retailing, for example. Logistic snags have led to a jump in truck firms, often small owner-operators. A rise in professional and personal services may reflect how workers in other areas used the disruption caused by the pandemic to start different careers. The lift in entrepreneurial activity is a good sign for the economy, one that might be difficult to capture in the economic data.
- In another surprising development, Congress is taking a second look at the successor of the Trans-Pacific Partnership. Although we doubt the U.S. would be interested in the original treaty, a narrow trade arrangement might find some interest in Congress.
- The rent moratorium is scheduled to end on June 30. We expect the administration to extend it by at least a month, but eventually, it will need to end. Although various programs designed to support renters and landlords have been put in place, the government is struggling to distribute the funds. The administration would like to avoid mass evictions, but that might be difficult without better fund distribution.
- The shipping industry continues to be plagued by bottlenecks. Nearly all elements of transport—trucks, ships, and airplanes—have faced some degree of disruption. The last three business cycles have seen sluggish recoveries, and thus, firms in the industry have been reluctant to build capacity. Complicating the issue has been the slowing of globalization that emerged after the Great Financial Crisis. Malinvestment played a role as well. Shippers chartered container vessels that became so large that ports struggled to handle them. In addition, the large ships travel slower than the smaller ones, and in a world that is behind in shipments, slower isn’t better. Although the situation will improve over time, it may still take years before conditions normalize.
- Easy credit conditions have kept firms afloat during the pandemic. We are now starting to see “going concern” notices from auditors.
- Meatpacking has become increasingly concentrated and vertically integrated over the past three decades. This development has given the firms market power over ranchers and farmers. Regulators and Congress are beginning to look at measures to weaken the power of these firms.
- Tech firms, facing increasing scrutiny, are boosting their lobbying efforts. Their efforts, thus far, have failed to prevent new regulations and Congressional oversight.
- Russia is curtailing natural gas supplies to Europe, lifting prices there.
- Home builders are apparently worsening the housing shortage by slowing production due to the uncertainty surrounding building supplies and costs.
- Human resource job openings are rising rapidly as firms navigate the transition to hybrid workforces and excessive churn in the labor markets.
International roundup: Germany and France go it alone with Russia, and conditions deteriorate in Myanmar.
- Germany and France scuttled EU policy towards Russia by offering to (a) add new unilateral sanctions on Russia and (b) offering Putin a summit. Their actions show that, despite all the talk of EU solidarity, Germany and France still tend to call the shots in Europe.
- Germany says it will need to borrow an additional €100 billion this year due to pandemic costs.
- The assessment from U.S. intelligence agencies is that the current Afghan government probably falls to the Taliban within six months after the exit of U.S. troops.
- We haven’t commented on the situation in Myanmar recently, but tensions between the government and protestors remain elevated. The unrest appears to be worsening. The military and armed civilians recently clashed in Mandalay; it is the first time there has been an armed incident in a major city.
- India and the EU are improving relations as China becomes increasingly belligerent.
- Yesterday, we noted Russia fired a warning shot at a British warship. Nine Russians and one Lithuanian have been arrested in Chad on suspicions of spying. The 10 are thought to be employed by the Wagner Group, a Russian semi-private intelligence operation. Chad is concerned that the group may support rebel organizations in Chad. France has a special interest in the country because of its colonial ties.
- Nicaragua is holding presidential elections in November, and in front of the vote, President Daniel Ortega is arresting opponents. Fifty-nine governments are pressing him to reverse the practice.
COVID-19: The number of reported cases is 179,657,832 with 3,893,114 fatalities. In the U.S., there are 33,578,819 confirmed cases with 602,838 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 378,882,200 doses of the vaccine have been distributed, with 319,872,053 doses injected. The number receiving at least one dose is 177,948,892, while the number of second doses, which would grant the highest level of immunity, is 150,787,303. The FT has a page on global vaccine distribution.
- Jesse Bloom, a virologist at the Fred Hutchinson Cancer Research Center, has uncovered the fact that gene sequences that were posted from China in the Cloud have apparently been removed. Bloom suggests the removal appears to obscure their existence and could make it more difficult to establish the origin of the virus.
- Congress is pressing for an investigation of the 2019 Military World Games held in Wuhan. There were reports of participants getting sick during and after the games with symptoms that align with COVID-19. It appears these complaints were not taken seriously, but they may show that the coronavirus was circulating in China as early as October 2019.
- The CDC says that there is a “likely association” between the mRNA vaccines and heart inflammation. The cases appear to be rare and mostly occur in adolescents. Reports indicate that 80% of those affected have already recovered. Men appear to be more susceptible. With any drug or vaccine, side effects occur, and we don’t expect a recommendation from the CDC to stop vaccinating the young. However, the reports could increase vaccine hesitancy.
- The Delta variant is spreading across the U.S. and is expected to represent 50% of new cases by the end of next month. Cases are rising in some states while remaining low in others.
- China intends to keep border restrictions in place for another year.
We have seen governments use all sorts of incentives to encourage vaccination, including lotteries, beer, etc. Philippines President Duterte is threatening to jail citizens who refused to be vaccinated.