Daily Comment (March 15, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Good morning, Monday!  We have an additional sign of spring, the semiannual clock adjustment.  March Madness begins this week, all in one city.  U.S. equity futures are ticking higher this morning as Treasury yields are steady to lower.  Our coverage leads off with international news; German regional elections were negative for the ruling CDU/CSU coalition.  Economics and policy are next, with a focus on bank leverage ratios and Treasury yields.  Immigration is also a growing issue.  China coverage is next, and we close with the pandemic update.

International news:  German regional elections and Myanmar lead our coverage.

  • In the fall, Germany will hold national elections and the CDU/CSU center-right coalition will head into that election without Chancellor Merkel, who is retiring. This weekend, in what was viewed as an early test of the ruling coalition’s popularity, regional elections were held in Baden-Württemberg and Rhineland-Palatinate, two strongholds of the CDU/CSU.  It didn’t go well.  The Greens dominated, with the CDU’s vote share falling to a record low 23% in Baden-Württemberg.  In Rhineland-Palatinate, the SDU dominated with the CDU running second at 26.0%.  The AfD actually suffered losses, suggesting that the right-wing populists were not the cause of the CDU’s problems.  To some extent, this poor showing may be due to regional factors.  The Greens are being seen as a center-left pragmatic party that governs well; that may have been true in Baden-Württemberg, but it may not translate nationally.
  • Protests continue unabated in Myanmar and the death toll is grimly rising as well. Over 50 people were fatally shot over the weekend.  The military declared martial law over the Hlaingthaya district of Yangon over the weekend, the first declaration since the coup.  In an escalation, protestors burned down Chinese factories.  We will be watching to see how patient Beijing will be with Myanmar’s leaders if Chinese assets continue to be threatened.
  • U.S. negotiators are ramping up efforts to bring the Afghanistan war to a close. Afghan officials worry that the talks are more about the end of U.S. involvement and less about stabilizing the country.
  • The conservative government in Australia has been rocked by allegations of rape by members of the administration. The allegations and subsequent protests have started to adversely affect the government’s poll numbers.
  • Although the Biden administration says it will “sit down tomorrow” with the Iranian leadership to restart talks, the reality is that both sides are far apart on numerous issues. We doubt Iran will return to talks until after the June elections.  We are seeing reports that former Iranian President Mahmoud Ahmadinejad is considering a run for his old position; the mullahs are reportedly cool to the idea.  Ahmadinejad has been open to talks with the U.S.
  • The fallout from Brexit continues; about €100 billion of Irish-listed securities left the securities depository in London for EuroClear in Brussels over the weekend.

Economics and policy:  All eyes remain on the Treasury market.

  • Last year, the Fed relaxed the supplemental leverage ratio (SLR), sort of an extra leverage ratio that banks have that acts as a restraint on bank balance sheets. In addition to the capital assigned to various bank assets, the SLR is an overall leverage ratio for all bank assets.  Essentially, it measures the assets relative to cash and equity, including common equity and some forms of preferred equity.  Last March, the Fed granted temporary relief to banks from the Treasuries they held, in that the Treasuries on the balance sheets of banks would not count against the SLR.  In addition, banks had restrictions on dividends and stock repurchases.
    • The dividend and stock repurchase restraints have been eased. The SLR adjustment is scheduled to end on March 31.  Senators Warren (D-MA) and Brown (D-OH) oppose extending the measure.
    • The fear is that if the SLR reverts back to its previous rules, banks will reduce their Treasury purchases. In fact, banks may be forced to reduce their holdings to comply with SLR rules.  This raises questions on who will buy to clear the Treasury markets and at what price (yield).
(Source: IIF and Adam Tooze)

China:  CPC meetings are finished; now, we see how the policy is implemented.

COVID-19:  The number of reported cases is 119,942,311 with 2,655,161 fatalities.  In the U.S., there are 29,439,057 confirmed cases with 534,889 deaths.  U.S. case counts are the lowest since early October.  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 135,847,835 doses of the vaccine have been distributed, with 107,060,274 of doses injected.  The number receiving a first dose is 69,784,210, while the number of second doses, which would grant the highest level of immunity, is 37,459,269.  The FT has a page on global vaccine distribution.


  • The travails of EU vaccine distribution continue. The Netherlands and Ireland have suspended use of the AstraZeneca (AZN, USD, 48.42) vaccine due to blood clotting concerns.  EU officials admit that “mistakes were made” in ordering vaccines; the EU seemed more worried about price than quantity and thus is coming up short to meet the needs of the members.  The grumbling is rising; Austria’s chancellor made calls to other heads of state to complain.
  • Meanwhile, Israeli research shows that the Pfizer (PFE, USD, 34.94) vaccine was 97% effective in preventing illness. Even more importantly, it appears it halts asymptomatic spread, suggesting it grants sterilizing immunity.
  • China and Russia have made diplomatic inroads by providing vaccines to the emerging world. The U.S. and Japan are stepping up foreign distribution efforts.  However, we note that Indian vaccine producers are warning that U.S. policy is slowing global distribution efforts.
    • There have been modest, at best, international efforts to distribute vaccines. For the most part, vaccine nationalism has tended to dominate, even for research.  The experience of South Africa shows that this policy, although reasonable, is short-sighted because the lack of vaccinations in the developed world will tend to foster variants of the virus that could be vaccine resistant.
  • One of the ways we tried to measure the impact of COVID-19 was to compare it to influenza pandemics. The most recent research tends to suggest that COVID-19 was far more deadly.  This analysis potentially resolves a problem in the data; there wasn’t a lot of evidence in the economic data to suggest the 1956 and 1968 influenza pandemics were a big problem.  That wasn’t necessarily the case with the 1918 influenza pandemic, but even that one didn’t seem to have a huge effect.  The most recent data suggests the COVID-19 virus was more virulent than influenza, and thus, had a greater impact.
    • One of the natural experiments we have noted is how Florida has done relative to other states. The Sunshine State had less stringent policies relative to other states, but the performance in dealing with the pandemic appears to be about the same.  It is far too early to tell why this was the case, but the performance should give ample data to see what worked and what didn’t.
    • In addition, in the emerging world, waves of infections tended to dissipate.  It is unclear why this occurred.  Again, this will be another area for further analysis.

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