Daily Comment (March 30, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Today’s Comment opens with an Archegos trading update and the extent to which it might be portending broader risks in the markets.  We next review the latest developments in the U.S. tax policy, where Democrats in the Senate have floated a proposal to tax unrealized capital gains at death, subject to an exemption.  Finally, we review key international news and the latest trends in the coronavirus pandemic.

Archegos:  It now appears that the forced margin calls on hedge fund Archegos, which led to elevated market volatility in the midst of massive block sales in certain stocks over the last few days, related as much to competition among the fund’s prime brokers as to fears about the stocks themselves.  A report by the Financial Times indicated that prior to the fund’s troubles becoming public knowledge, representatives from its trading partners Goldman Sachs (GS, $325.73), Morgan Stanley (MS, $77.88), Credit Suisse (CS, $11.39), UBS (UBS, $15.59), and Nomura (NMR, $5.68) held a meeting with Archegos to discuss an orderly wind-down of troubled trades.  The goal was to implement orderly, coordinated sales that would minimize market impacts and any hit to the banks’ own balance sheets as they worked to sell down stakes in companies that Archegos had amassed through derivatives instruments.  Although it’s unclear whether an understanding was actually reached among the banks, several sources said it was quickly clear that some banks began selling to stem their own losses, triggering a rush to the exits.

  • Those firms that moved quickly, including Morgan Stanley, evidently were able to minimize their losses.  The banks that moved slowly, including Credit Suisse and Nomura, incurred the heaviest losses.
  • Of course, many other issues related to Archegos remain.  These include the extent to which the fund’s risky positions were driven by today’s loose monetary policy and massive amounts of liquidity, whether regulators will now try to close the loophole that allowed the fund to use swaps to amass huge stakes in companies, and whether there was a systematic breakdown in the banks’ risk control processes.

U.S. Tax Policy:  Several progressive Democrats in the Senate have released a draft proposal to tax unrealized capital gains at death, subject to a $1 million exemption.  The tax would aim to raise money from high-income households to help pay for President Biden’s proposed spending on infrastructure and social programs.

  • Under current law, someone who dies with appreciated assets—including homes, businesses, and stocks in taxable accounts—doesn’t have to pay capital-gains taxes on that increase. Instead, the heirs have to pay capital-gains taxes only after they sell and only on gains after the original owner’s death.
  • That “stepped-up basis” is a longstanding feature of the tax code, but it has come under increasing attacks from Democrats who see wealthy people’s profits escaping the income tax.

United States-Taiwan-China:  The Biden administration is reportedly preparing to issue guidelines, making it easier for U.S. diplomats to meet Taiwanese officials.  The new rules, including some adopted by President Trump, would contravene decades-old restrictions meant to avoid provoking China.  The new rules will almost certainly anger Beijing and further worsen tensions between the U.S. and China.

Turkey:  Just ten days after sacking the head of the Turkish central bank for his effort to hike interest rates, President Erdogan has also fired the institution’s deputy governor and replaced him with a lesser-known commercial banker.  With Erdogan once again showing his penchant for taking control of monetary policy, the lira is down approximately 1.8% against the dollar so far today.

Russia:  Amid reports that jailed opposition leader Alexei Navalny is suffering medical issues and not being offered sufficient treatment, some 500 physicians and medical experts in Russia have signed an online petition saying that at a bare minimum, an independent physician whom Navalny trusts should have the opportunity to examine him.  In addition, the petition suggests Navalny be examined by experts from the Charite clinic in Berlin, Germany, where he was treated after he was poisoned in Siberia last year; the current deterioration of his condition may be related to the attack.  The situation illustrates the Kremlin’s balancing act in trying to muzzle Navalny without causing political pushback among Russians.

Brazil:  President Bolsonaro has announced a sweeping reshuffle of his cabinet, including new foreign and defense ministers, as political pressure mounts on him to get a grip on the country’s coronavirus crisis.  Not only did Bolsonaro replace his chief of staff, justice minister, and attorney general, but he also replaced his ministers of defense and foreign affairs.

  • In particular, Foreign Minister Araújo had been under pressure from lawmakers unhappy with Brazil’s efforts to acquire coronavirus vaccines.
  • Critics have blamed Araújo for Brazil’s increasing international isolation.  Just as important, they have complained that his belligerent stance toward China has led to delays in the delivery from China of important pharmaceutical ingredients.

Global Supply Chains:   The skyscraper-sized container ship stuck in the Suez Canal for almost a week was finally freed yesterday, clearing the way for hundreds of backlogged ships to traverse the waterway over the coming days.  The effects of the blockage are likely to linger for weeks or even months.  While the clearing of the canal will ultimately be a positive for the world’s tight and disrupted supply chains, a separate report said the recent fire at a major Japanese facility producing computer chips for the auto industry caused more damage than earlier known, and fully restarting production could take up to four months.

COVID-19:  Official data show confirmed cases have risen to 127,775,460 worldwide, with 2,794,246 deaths.  In the United States, confirmed cases rose to 30,332,358, with 550,073 deaths.  Vaccine doses delivered in the U.S. now total 180,646,565, while the number of people who have received at least their first shot totals 95,015,762.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


  • Newly confirmed U.S infections rose to approximately 68,000 yesterday, surpassing both the seven-day moving average of 63,239 and the 14-day moving average of 58,829.  Infections are now clearly on the upswing again, as factors such as new, more transmissible mutations and the removal of social distancing rules combine to offset much of the advantage of expanding vaccinations.  On the other hand, deaths related to the virus totaled a relatively low 668 yesterday, and they continue to trend modestly downward.
  • In a CDC study of almost 4,000 vaccinated healthcare workers, first responders, and other essential workers, the COVID-19 shots developed by Moderna (MRNA, $123.42) and Pfizer (PFE, $36.62) were confirmed to be 90% effective at reducing the risk of both symptomatic and asymptomatic infection two weeks after a second dose.  The study confirms that the vaccines are highly effective in real-world conditions, which can be more complex and challenging than the conditions in clinical trials.
  • In contrast, the vaccine from AstraZeneca (AZN, $50.81) continues to face ups and downs.  Canadian authorities yesterday recommended a halt on administering the vaccine to people under age 55 in light of evidence from Europe because of potentially serious side effects targeting younger women.
    • The change in guidance marked a sharp shift from Canadian health officials, who until now have said the AstraZeneca vaccine was safe for people of all ages.
    • The Canadian officials had issued their previous positive opinion of the shot as recently as early March, when governments in Europe paused the vaccine’s use due to worries over blood clotting.
  • President Biden said his administration is more than doubling the number of pharmacies in the federal vaccination program and opening additional mass vaccination sites. He said 90% of adults would be eligible for vaccination by April 19, and 90% will have a vaccination site within 5 miles of their residence.
  • New York state will make COVID-19 vaccine shots available to residents 30 years old and up starting today, while New Jersey yesterday expanded eligibility to include more public-facing workers.
  • As more and more people get vaccinated, polling shows vaccine hesitancy is declining quickly.  In a survey of 80,000 adults in the U.S. earlier this month, about 17% said they would either definitely or probably not get vaccinated, down from 22% in January.
    • The decline was almost entirely due to fewer respondents saying they probably would not get the shot.
    • The share that stated they definitely would not has remained essentially unchanged in the past two months.
  • As Japan struggles to procure COVID-19 vaccines from foreign manufactures in a timely manner, the government has backpedaled on its plan to let people choose which vaccine to get.  Its vaccinations chief said nothing has been decided yet.
  • A WHO-led team investigating the origins of the pandemic reported that data provided by China and examined during a recent mission to the country was insufficient to answer the critical questions of when, where, and how the virus began spreading.  The report calls for a closer examination of Chinese hospital records and blood samples from before the first known cases in December 2019.  More extensive testing of farms that supplied wild animals to a market that is linked to many early cases is also recommended.
  • Government leaders from more than 24 countries have joined the head of the WHO, in calling for a new international treaty on pandemic preparedness and response.  It is aimed at improving alert systems, data sharing, and transparency, as well as widening access to vaccines.

 Economic and Financial Market Impacts

U.S. Policy Response

 View PDF