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

[Posted: 9:30 AM EDT]

Good morning.  It’s Monday and the beginning of another month.  Global equities are mixed this morning, although we do note the Hang Seng rallied.  Over the weekend, civil disorder occurred around the U.S.  We discuss the latest with China.  The G-7 was cancelled.  As usual, we update everything we know about COVID-19.  Let’s get to it…

Civil unrest:  In the wake of the death of George Floyd, protests and violence occurred in numerous U.S. cities.  For the most part, financial markets are generally unaffected by these sorts of events, mostly because they don’t last long.  That isn’t to say they are not having an effect on the economy.  Retailers are being forced to close stores.  We also note the protests are undermining America’s credibility in reference to human rights; China is pointing this out with reference to Hong Kong.  However, overall, equity markets are not showing much effect.

China:  On Friday, as expected, President Trump unveiled U.S. policy with regard to Hong Kong.  Equities rallied, which suggests financial markets were expecting much harsher policy actions.  Still, it is unmistakable that relations are deteriorating and are expanding beyond trade.  At the same time, the EU is making it abundantly clear that it won’t take any steps to jeopardize trade relations.  For the first time in three decades, security officials in Hong Kong have banned the usual Tiananmen Square Massacre vigil, normally held on June 4.  They have cited pandemic issues, but few believe that is the primary concern.  Additionally, Beijing has told its state-run commodity firms to “pause” the purchases of U.S. agriculture products.  If this persists, it will put doubt into the Phase 1 trade deal.

Foreign news:  After German Chancellor Merkel indicated she would not travel to Camp David for the G-7 summit, President Trump decided to postpone the entire affair until autumn.  He has indicated he would like to invite Russia, South Korea and Australia to the meeting to discuss how the world should deal with China in the future.

• Kim Jong Un is issuing bonds to cover part of the budget, the first time the Hermit Kingdom has issued debt since 2003. The bond is said to be denominated in foreign currency.  It is highly unlikely foreigners will be interested in the bonds; North Korea defaulted on bank loans in the 1980s, and these loans have been consolidated into bonds which are apparently available.  The current bond issuance appears designed to absorb foreign currency holdings of the North Korea’s elite, although we would not be completely surprised if China or Russia bought nominal amounts of the new bonds.

COVID-19:  The number of reported cases is 6,193,548 with 372,479 deaths and 2,656,267 recoveries.  In the U.S., there are 1,790,191 confirmed cases with 104,383 deaths and 444,758 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases and fatalities between nations, scaled by population.

• The good news:
  • There is increasing evidence that children may not be vectors of the virus. In nations where schools have reopened, there has not been a notable increase in cases.
  • Another mystery of COVID-19 is that high altitude areas appear mostly spared from the disease.
  • The U.K. is planning to ease restrictions
• The bad news:
  • Protestors are congregating and showing few signs of social distancing. This behavior may lead to higher cases of the virus.
  • June 1 is the official start of hurricane season, although activity has already begun and usually peaks in early September. States are drawing up plans on how to address storms and evacuations under conditions of the pandemic.
  • In India, monkeys are accused of stealing blood samples from a suspected COVID-19 victim.

Policy news: The next big worry for the financial markets is state and local governments.  As revenues crater and virus-related spending soars, cities and states are facing the problem of either increasing borrowing or cutting services.  In 2010, local governments cut back spending to the point where it more than offset federal spending.  If that is repeated, it increases the threat of an economic relapse.  The alternative may be either direct fiscal support from the federal government, or expanding Fed buying of municipal debt.

• The EU’s trade commissioner, Phil Hogan, is considering applying for the WTO leader post.
• As the world deglobalizes and consolidates supply chains, companies are asking for government help to source production in the U.S.
• The Fed is very close to starting its lending program to midsized companies.

Finance news:  We are paying close attention to the dollar’s recent slide.  There are likely two factors behind the weakness.  First, as the world economy recovers, flight-to-safety demand for the greenback is likely easing.  Second, the EU’s decision to create a Eurobond for virus spending relief could bring more potent competition for the dollar’s reserve role.  We have serious doubts that the northern European nations will allow this decision to evolve into a general spending Eurobond, but the hope has lifted sentiment toward the EUR.

Economy news:  As we have noted in the WEU, gasoline consumption does appear to be recovering.  GPS requests are rising as well.  An increase in driving activity bodes well for economic recovery.

• As noted below, global PMI data is showing signs of improvement from a deep trough. However, China’s PMI data, although in expansion mode, is showing few signs of acceleration.
• It does appear that meat processing has recovered; however, in a pattern often seen, meat prices will likely remain elevated for a few weeks as grocers take advantage of improving margins.

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