Daily Comment (June 8, 2021)

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

[Posted: 9:30 AM EDT] | PDF

We open today’s Comment with a range of reports that ultimately touch on technology, Taiwan, and China.  We also explore important trade news out of Europe and new developments in the Peruvian presidential election, where it now looks like a Marxist firebrand will take power.  We conclude with the latest news on the coronavirus pandemic, including the news of a major U.S. intelligence report that last year lent credence to the hypothesis that the virus could have escaped from a Chinese laboratory.

United States-Global Cybersecurity:  On a day filled with reports that key commercial and government websites are down across the globe, sparking fears of a coordinated hacker attack, there is also an important report that underlines our belief that the U.S. probably has greater offensive capabilities in cyberspace than many people realize.  According to the report, the FBI was able to use “Trojan horse” technology to gain access to a criminal internet network and, in conjunction with allied police forces in other countries, has monitored millions of encrypted criminal messages over the last three years.  In Australia alone, the program has allowed police to disrupt 21 murder plots and seize 3.7 tons of illegal drugs.

United States-Taiwan:  Secretary of State Blinken revealed the Biden administration is launching talks with the Taiwanese government on a “framework agreement” relating to trade and investment.  Although Blinken declined to elaborate and referred any questions to U.S. Trade Representative Tai, it appears the effort would revive lower-level talks that the two governments have pursued off-and-on for years.  Coupled with the revelation of a U.S. intelligence report that lends credence to the hypothesis that the coronavirus pandemic could have resulted from a Chinese laboratory accident (see below), the announcement of closer economic ties with Taipei will certainly exacerbate U.S.-China tensions and keep risks elevated for investors.

United States-China:  As a result of President Biden’s call in February for a review of supply chain security for key products, the Commerce Department will investigate whether imported rare earth magnets made largely in China pose a national security threat that could warrant the imposition of tariffs.  The magnets, made from the rare-earth element neodymium, are used to manufacture everything from smartphones to electric vehicle motors.  Tariffs on the magnets could be imposed under Section 232 of a 1962 trade law, which was rarely used until former President Trump employed it to justify tariffs on steel and aluminum imports from U.S. allies.

  • The investigation and potential imposition of tariffs is another example of how President Biden is not only continuing many of the Trump administration’s trade policies but has also sharpened their focus on China.
  • According to press reports, Biden will release further results of the supply chain probe later today.

European Union-United Kingdom:  EU Brexit Commissioner Maros Sefcovic warned that Brussels would intensify its retaliation if the U.K. continues to delay implementing the post-Brexit trade treaty’s provisions on Northern Ireland.  The EU has complained that Britain is failing to implement basic parts of the new arrangements, such as building and properly staffing border control posts for goods and sharing data with Brussels.

Germany-Ukraine:  In testimony before Congress yesterday, Secretary of State Blinken said Germany is discussing ways to compensate Ukraine for the financial loss it will suffer from the completion of Nord Stream 2, the controversial pipeline that will carry Russian natural gas under the Baltic Sea to Germany.  By providing an alternate route for gas that had previously flowed through Ukraine, the pipeline is expected to deprive Kyiv of billions of dollars in annual transit fees if completed.

Peru:  With 96% of the vote in Sunday’s presidential election now counted, Marxist politician Pedro Castillo has extended his lead over conservative Keiko Fujimori and appears to be poised for victory.  Many of the remaining tallies should come from rural areas, where Castillo is strongest.  Although ballots from Peruvians living abroad are likely to favor Fujimori, it appears there will not be enough to tip the balance back in her direction.

  • In an effort to reassure markets, the Castillo team published a statement outlining an economic plan that is considerably more moderate than the platform approved by Castillo’s “Peru Libre” party.  While it reiterated Castillo’s plan to raise taxes on natural resources companies to pay for increased health and education spending, the plan also asserted, “We have not considered nationalization, expropriation, confiscation of savings, exchange controls, price controls or import prohibitions . . . [We would] respect the autonomy of the central bank, which has done a good job [of] keeping inflation low for more than two decades.”
  • However, despite those reassurances, Peruvian stocks and bonds have been dropping dramatically, and the country’s currency, which has depreciated sharply in recent weeks in anticipation of a possible Castillo victory, has lost over 2% against the dollar to trade at an all-time low of 3.93.

COVID-19:  Official data show confirmed cases have risen to 173,694,649 worldwide, with 3,739,238 deaths.  In the United States, confirmed cases rose to 33,378,767 with 597,983 deaths.  Vaccine doses delivered in the U.S. now total 371,520,735, while the number of people who have received at least their first shot totals 171,310,738.  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, 51.6% of U.S. residents have now received at least one dose of a vaccine, and 42.1% are fully vaccinated.
  • As U.S. infections and deaths continue to fall and more people get vaccinated, both Carnival Cruise (CUK, $26.50) and Norwegian Cruise Line (NCLH, $33.11) said they will finally resume sailing from U.S. ports this summer.  Given that infections on cruise ships were some of the most notorious incidents early in the pandemic, the announcement marks an important milestone in the post-pandemic economic reopening.
    • The announcement from the companies comes after protracted negotiations with the CDC over the safety measures that will be required.
    • Passengers must have a final dose of a coronavirus vaccine approved by U.S. authorities.
  • New reporting shows the Lawrence Livermore National Laboratory issued a classified report in May 2020 that concluded, based on a genomic analysis of the SARS-CoV-2 virus (which causes COVID-19), the virus might have leaked from a Chinese lab in Wuhan.  The report, vetted with other U.S. intelligence agencies, called for further investigation into the hypothesis.  It was referenced by the State Department when it conducted an inquiry into the pandemic’s origins during the final months of the Trump administration.  It also appears to be one reason President Biden last week directed the U.S. intelligence community to send him a report on how the virus emerged.
    • The study is important because it came from a respected national laboratory and differed from the dominant view in spring 2020 that the virus almost certainly was first transmitted to humans via an infected animal.
      • Specifically, the report came from the laboratory’s intelligence division, which has deep expertise in biological warfare issues.
      • Notably, when President Biden announced his request for a study of the pandemic’s origins, he said the federal government’s national laboratories would contribute to the effort.
    • Because of Lawrence Livermore’s strong reputation in biological warfare issues, its view that the pandemic could plausibly be traced to a Wuhan lab leak will likely keep that hypothesis alive in the near term.  Not only will that help keep tensions high between the U.S. and China, but it might even lead to the Biden administration explicitly blaming China for the pandemic at some point.  After all, the administration has already shown it is willing to be tougher on China than Trump was.  For example, it has highlighted Chinese human rights abuses and has worked hard to corral U.S. allies into a coalition that will stand up to China’s destabilizing geopolitical, military, and economic behavior.  Explicitly blaming China for the pandemic in a multilateral way would further sour relations between the liberal democracies and China, with unpredictable consequences for investors.

 Economic and Financial Market Impacts

  • As Taiwan suffers its first large COVID-19 outbreak, the spread of infections in the island’s globally important semiconductor industry is raising the prospect of reduced production and a worsening in the global computer chip shortage.
    • For example, chip testing and packaging company King Yuan Electronics said an outbreak among its workers could reduce its June output and revenue by up to 35%. Of KYEC’s 7,300 staff, 238 are confirmed to have been infected.  Multiple firms are testing their entire workforces or have closed entire factories for days at a time in order to conduct disinfecting.
    • As we have often noted, Taiwan occupies a critical place in the global semiconductor industry.  For more details, see Part I and Part II of our recent WGR on the Taiwanese chip industry and how it fits into the U.S.-China geopolitical rivalry.
  • Reflecting on the new strategies companies are adopting to deal with the tight labor market, Southwest Airlines (LUV, $58.28) is leaning more on digital job placement tools, including chatbots, to speed up the hiring process.
  • All the same, high-frequency data suggests that while job openings are still climbing, they’re beginning to moderate.  The data suggests labor demand is already leveling off in some sectors, such as manufacturing and retail trade, and it may even be falling a bit in construction.

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