Daily Comment (March 3, 2020)

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

[Posted: 9:30 AM EST]

It’s Super Tuesday!  By late this evening, we should have a better sense of who is really competitive in the Democrats’ race for a presidential candidate.  In the meantime, the COVID-19 virus remains in the spotlight.  We provide our usual update and discuss the evolving regulatory, fiscal, and monetary policy responses.  We also provide an update on the Turkish-Syrian military conflict.

COVID-19:  Official data show confirmed cases have risen to 91,320 worldwide, with 3,118 deaths and 48,166 recoveries.  In the United States, there have been 105 confirmed cases, six deaths, and seven recoveries.  A hotspot of cases centered on a nursing home in Washington State is of particular concern.  However, despite the continuing spread of the virus, investors have begun to get more encouraged by signs of concrete government action to tackle the epidemic.

  • FDA Commissioner Stephen Hahn said last night that up to a million U.S. citizens could be screened for the virus by the end of this week.  In the U.K., Prime Minister Johnson said the “vast majority” of Britons should go about their business as usual, but he also unveiled a response plan focused on containing the virus, delaying its spread, researching its origins, and mitigating its impact.
  • In the realm of fiscal policy, countries are also marching forward.  Most notable so far is Italy, which has launched a $4 billion stimulus program including deploying tax credits, support for exporters, and increased liquidity to businesses.
  • In monetary policy, Bank of England Governor Carney told a parliamentary committee that the central bank would try to help businesses and households manage through the crisis, echoing hints of looser monetary policy from the U.S. Federal Reserve, the European Central Bank, and the Bank of Japan.  The Reserve Bank of Australia today became the first central bank to lower interest rates in an effort to bolster demand in the face of the crisis.  The bank cut its benchmark short-term interest rate to a record low of 0.50% from 0.75% previously.  The Malaysian central bank also cut rates, and the Bank of Japan injected liquidity into the financial system for a second straight day.
  • With the emergence of more concrete government action to tackle the epidemic and hints of coordinated fiscal and monetary policy to counter any damage to demand, investors are clearly regaining their wits.  A statement by G7 finance ministers after their emergency meeting this morning was a bit disappointing as it stopped short of announcing new actions.  There is some disagreement about the best ways to counter the epidemic.  There is also some silliness, like the NBA directive that players should avoid high-fives with fans or strangers.  All the same, the short-term trend still seems to be for improved sentiment toward risk assets.  That view is consistent with our continuing assessment that the crisis will likely be limited to three or four months, even if the economic impact might be greater than we earlier expected.
  • Even though investors are looking hopefully toward policy response against the coronavirus, not all governments are being given the benefit of the doubt.  In Iran, officials will send 300,000 “medical” teams to screen the population for the coronavirus and offer assistance, but the move is getting pushback based on the risk that door-to-door visits could actually spread the virus further and the fact that the teams will include members of the Revolutionary Guards and paramilitary basij enforcers.

Super Tuesday:  Primary elections will be held in 14 states today.  The main focus will be on the Democratic races, which will pick about one-third of the delegates to its national convention in the summer.  Over the last two days, several moderate candidates have dropped out and/or endorsed former Vice President Joe Biden, but it’s still not clear whether he can overtake Vermont Sen. Bernie Sanders when the counting is done.  We expect to have greater clarity on the results in our Daily Comment tomorrow.

Turkey-Syria-Russia:  The Turkish military claims it has decimated the Syrian forces trying to crush the last pockets of rebel resistance in Idlib province.  According to the sources, Turkey’s high-tech F-16s and drones have destroyed some 135 tanks, 77 armored personnel carriers, eight helicopters, and two jet fighters, not to mention killing 2,500 Syrian troops.  The officials claim Turkey has already rendered Syria unable to defend its front-line armor and artillery units.  To date, Russia has been unwilling to come to the aid of its Syrian allies, perhaps demonstrating the limits of Russian aggressiveness when faced with superior technology and firepower.  If Turkey can quickly stop Syria’s advance against the remaining rebels in the area, it could obviate any need for assistance from NATO or the EU.  It might then close its border again to Syrian refugees trying to cross into Europe (state media has claimed the opening is temporary; tens of thousands of refugees have massed on Turkey’s border with Greece, and several thousand have already entered).  However, as long as the fighting continues, there is always a chance of miscalculation, escalation, and further destabilizing refugee flows into the EU.

Israel:  With more than 90% of the vote in yesterday’s parliamentary elections now counted, it appears Prime Minister Netanyahu and his center-right Likud Party won 59 seats in the 120-member Knesset, while challenger Benny Gantz and his coalition won no more than 54.  Netanyahu would still have to ally with another party to win control of the government.  Making matters even more fluid, he will go on trial for corruption in two weeks.  All the same, the prospect for continued rule by Netanyahu is probably positive for Israeli assets.

United States-China:  Following on the Trump administration’s decision last month to designate Chinese state media companies as foreign government representatives, the State Department yesterday ordered the firms to cut their employees in the U.S. to 100 in total from 160 currently.  The move should dispel any notion that the U.S.-China Phase One trade deal will necessarily put an end to tensions between the countries.

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