Daily Comment (June 17, 2020)

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

[Posted: 9:30 AM EDT]

Risk assets have wind in their sails today, in large part due to easing coronavirus lockdowns, signs of rapid economic recovery and continued policy support around the globe.  However, those positives are being offset to some extent by serious new geopolitical tensions between China and India, as well as a worrisome new outbreak in Beijing.  We review all the key news below.

China-India:  It now appears that yesterday’s China-India military clash along the countries’ border in the Himalayan mountains was substantially more lethal than first known.  The Indian government now says 20 of its soldiers died, including not just the three direct fatalities that we reported yesterday, but also 17 more who perished after falling into a deep ravine, or succumbing to the freezing temperatures.  To minimize the risk of a shooting war along the disputed border like the major 1962 confrontation, Chinese and Indian troops patrolling the area don’t carry firearms.  The current tensions have evolved from fistfights last month to attacks with rocks and clubs wrapped in barbed wire this week, resulting in the border troops’ first fatalities in decades.

  • Ultimately, the confrontation can be traced back to the heightened nationalist disposition of Chinese President Xi Jinping and Indian Prime Minister Narendra Modi.  Both leaders want to assert their country’s sovereignty to the fullest extent possible, including in disputed areas like the Himalayan border.
    • Xi’s efforts to assert control in Hong Kong, Taiwan and the South China Sea are well known.
    • Modi has also been working to assert India’s control over the Kashmir region.  India’s warming ties with the U.S. and an ill-timed decision to postpone a major military exercise in the area probably also tempted Xi to take a tougher stance.
  • According to Indian sources, several Chinese troops also died in the melee, so a key risk now is that if the Chinese losses were substantial, Xi may find it hard to back down.  On the Indian side, Prime Minister Modi warned today that his country would provide a “befitting reply” if China tried to worsen the situation.
  • As a result of the initial fistfights last month, high-level Chinese and Indian military officers have been meeting to diffuse the situation, and they reportedly met again as recently as yesterday.  Calming tensions and averting a downward spiral in the conflict may require Xi and Modi to swallow some pride and pull back from the precipice.  If they don’t, any shooting conflict in the area would be a major risk to local and global financial markets.

COVID-19:  Official data show confirmed cases have risen to 8,199,838 worldwide, with 444,368 deaths and 3,978,358 recoveries.  In the United States, confirmed cases rose to 2,137,731, with 116,963 deaths and 583,503 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


Economic Impact

United States:  Congress will scrutinize the Trump administration’s aggressive international trade initiatives today, as U.S. Trade Representative Lighthizer, appears before House and Senate committees.  Lighthizer’s testimony will give lawmakers an opportunity to question how the administration’s recent trade deals are playing out.  We also expect them to probe how the administration sees the U.S. economic relationship with other trading partners, including the European Union and the United Kingdom.

United States-United Kingdom:  Even as the U.K. and the EU struggle to develop a post-Brexit trade agreement, with EU demands for a “level playing field” with lower-regulated Britain, it turns out that many British farmers are worried that the U.K.-U.S. trade deal now being negotiated will leave them unable to compete with even lower-regulated U.S. producers.  The result?  They’re also hoping for a “level playing field” with the U.S.

Hungary:  Parliament voted to end a controversial state of emergency that gave Prime Minister Viktor Orban the right to rule by decree, after leaders in the U.S. Congress and the European Union accused him of using the coronavirus pandemic to amass authoritarian-like powers.  However, the legislators left in place some of the measures the government took during the height of its outbreak to concentrate fiscal control over the country’s largely liberal cities.

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