Daily Comment (June 16, 2020)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT]
Risk assets are on a tear so far today in response to a blockbuster report on U.S. retail sales suggesting that the economy may be rebounding from the coronavirus crisis more rapidly than expected. At the same time, officials across the globe continue to signal more monetary and fiscal stimulus, though geopolitical risks are also rising on the China-India border. As always, we review all the key news below.
United States: Federal Reserve Chairman Powell will testify before Congress this morning. While the Fed’s recent forecasts calling for a long post-coronavirus recovery have buttressed expectations that monetary policy will remain extremely accommodative, we’ll be watching closely for any sign that today’s better-than-expected retail sales data may have shifted his views or policy preferences.
COVID-19: Official data show confirmed cases have risen to 8,058,427 worldwide, with 437,473 deaths and 3,893,780 recoveries. In the United States, confirmed cases rose to 2,114,026, with 116,127 deaths and 576,334 recoveries. Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.
- An analysis by the Wall Street Journal found that COVID-19 infections are now accelerating again in more than a dozen states. Some of the increase reflects broader testing. However, some of it also appears to reflect increased infection rates, since the share of tests rendering a positive result is increasing in many localities.
- In spite of the rebound in infections, some localities are no longer aggressively enforcing their social distancing policies.
- In New York, Governor Cuomo threatened to reverse reopenings in parts of his state that aren’t following or enforcing safety rules. According to Cuomo, the state had received 25,000 reports of reopening violations, predominantly in Manhattan and the Hamptons on Long Island.
- The Department of Transportation said it would allow Chinese airlines to make a total of four round-trip flights per week, doubling the level it had set earlier this month after China backed off its plan to limit U.S. carriers to just two weekly flights each. The news is positive for the financial markets because it suggests the two countries may be trying to cool tensions.
- The FDA said it has revoked its emergency-use authorization for the anti-malaria drugs chloroquine and hydroxychloroquine for the treatment of COVID-19.
- The decision was apparently based on recent clinical studies that have failed to show the drugs are effective in treating or preventing the disease.
- Those studies are separate from another recent report showing both a lack of effectiveness and a risk of heart problems and death, which was subsequently retracted because of inconsistencies in the data.
- In its monthly oil-market report, the International Energy Agency said that while the world’s demand for crude oil will drop by 8.1 million barrels a day this year (slightly less than forecast in last month’s report), demand in 2021 will rebound by a record 5.7 million barrels a day. Coupled with the current massive production cuts by major producing countries, the IEA said the rebound in demand could help rebalance the global oil market by late next year.
U.S. Policy Response
- The Fed announced moves to significantly broaden its Secondary Market Corporate Credit Facility beyond its current focus on corporate bond ETFs. Starting Tuesday, the Fed will also buy individual corporate bonds based on a broad, diversified index of U.S. corporate obligations. The target index would consist of substantially all corporate bonds in the secondary market that: a) were issued by U.S. firms rated as investment-grade in late March, and b) have a maturity of five years or less.
- The Fed said it would recalculate its “broad market index” every four or five weeks to add bonds that newly meet the eligibility requirements and to remove those that no longer meet them. Going forward, purchases of ETF shares would be limited to 20% of any given fund.
- The moves would give the Fed greater flexibility to ramp up purchases if the markets seize up again. The announcement underlines the Fed’s commitment to aggressively support the economy amidst the virus crisis, which we think is a significant positive for equities.
- The Fed also outlined a proposal to include nonprofit organizations in its previously introduced Main Street Lending Program for small and midsize businesses disrupted by the pandemic. The central bank indicated it wants the nonprofit loan terms to be broadly similar to the MSLP’s five-year maturities at a rate of 3% above short-term rates.
- Finally, in the realm of fiscal policy, the Trump administration is reportedly considering a one trillion dollar infrastructure program to help jumpstart the economic recovery.
Foreign Policy Response
- In a move that would align the ECB’s monetary policies more closely with the Fed’s policies, ECB Executive Director Fabio Panetta offered assurances that his central bank would consider buying “fallen angel” bonds that have recently lost their investment grade rating if necessary to combat the financial fallout from the coronavirus crisis. Even though the ECB increased the size of its bond-buying program to €1.35 trillion earlier this month, Panetta said it still hasn’t unleashed the “full monty” of its available stimulus.
European Union-United Kingdom: In their video summit yesterday, top leaders from the U.K. and the EU agreed to redouble their efforts to strike a post-Brexit trade deal in the coming weeks. The surprisingly cordial post-summit statements from the likes of British Prime Minister Johnson and European Council President Michel are reassuring, but we note that there is still some risk that the two sides won’t come to an agreement and Britain could be facing a sudden stop in its trade with the EU at the end of the year. Naturally, such a hard break would be negative for European, and particularly British, stocks.
United States-European Union: Following a preliminary investigation, the European Commission said it has opened two formal antitrust investigations into Apple (AAPL, 342.99). The investigations will look into the company’s practice of charging media firms’ large commissions to sell their products through its App Store and Apple Pay payment system, even as it uses the information gleaned to promote its own music and book services. The launch of yet another regulatory move against a major U.S. technology firm is likely to further sour U.S.-EU relations. The move is also likely to sit badly with Washington because, at the same time, the EU is loosening its state-aid rules to make it easier for member governments to help their own tech start-ups.
United States-China: As more evidence of cooling U.S.-China tensions, the Department of Commerce yesterday slightly loosened its sanctions against Chinese telecom equipment giant Huawei (002502.SZ, 2.87). The move will allow U.S. firms to collaborate with Huawei on setting technical standards for 5G and other emerging technologies. Separately, U.S. Secretary of State Pompeo and Chinese Foreign Minister Yang Jiechi will meet tomorrow in Hawaii.
China-India: In a dangerous escalation of tensions, the Indian military said three of its soldiers have been killed in clashes with Chinese troops along the countries’ disputed border high in the Himalayan mountains. The deaths, which were the first since the 1970s in the two countries’ long-running border dispute, came despite multiple rounds of talks by Indian and Chinese military commanders intended to de-escalate tensions. Those talks had pointed to some easing in the latest round of tensions, but the surprising deaths are a sign that things aren’t going as well as previously thought. Therefore, the news has weighed on Indian stocks so far today.
North Korea: In a dramatic display of its frustration with the stalled denuclearization talks and continued sanctions, North Korea has blown up the inter-Korean liaison office near the country’s border with South Korea. The explosion came just hours after North Korea said via state media that its military would potentially enter border areas that had been disarmed after a 2018 summit between Kim Jong Un and South Korean President Moon Jae-in.