Daily Comment (May 12, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
In today’s Comment, we open with an update on the Colonial Pipeline ransomware hack and the panic buying of gasoline that it has sparked in the Southeast. We next cover various news related to U.S. fiscal policy, the energy industry, inflation, and Chinese trade issues (there is more detail on the latest U.S. inflation data in the “U.S. Economic Releases” section below). We wrap up with the latest developments related to the coronavirus pandemic.
Colonial Pipeline Hack: As we warned in our Comment yesterday, motorists worried about gasoline shortages arising from the Colonial Pipeline ransomware attack began panic buying on the East Coast yesterday, resulting in long lines and shortages. Colonial continues to express confidence that it can restart normal operations by the end of the week, but the crisis is already wreaking havoc in the Southeast, where there are fewer alternative pipelines or refineries to serve as backup sources of supply.
- According to the AAA, the average price for regular gas in Georgia yesterday was up $0.11 per gallon from the previous day. In North Carolina, the average price was up $0.05 per gallon.
- Georgia Governor Brian Kemp signed an executive order temporarily suspending the state’s gas tax and Virginia Governor Ralph Northam declared a state of emergency. North Carolina Governor Roy Cooper also declared a state of emergency Monday because of the outage.
U.S. Fiscal Policy: For the first time since his inauguration, President Biden today will meet at the White House with all four of the top Democrats and Republicans in Congress. The purpose of the meeting is to begin hammering out an agreement on the president’s spending plans, including his $2.3 trillion package of spending on infrastructure and other economic programs and his $1.8 trillion proposal to strengthen the country’s social safety net.
- Although Biden quickly gave up on a bipartisan approach to his pandemic relief program earlier this year when he assessed the Republican counteroffer as insufficient, aides say he is likely to be more flexible this time around.
- Even if that’s the case, it’s not entirely clear that the Republicans have been chastised by being shut out of the pandemic program’s process so quickly. There is still a significant chance that they will offer far too little for the administration’s taste, although we would still expect the Democrats to push through some level of new spending addressing Biden’s priorities. Any additional fiscal stimulus would help accelerate the budding economic recovery, although it would also feed into the market’s growing fear about a prolonged new era of high inflation.
U.S. Energy Industry: The Interior Department yesterday gave final federal approval for the nation’s first major offshore wind farm. The Vineyard Wind project, to be built off the coast of Massachusetts, will consist of up to 84 turbines and produce enough electricity to power 400,000 homes and businesses when it becomes operational in about 2023. According to its developers, the project will be the first of many in a broad, new regional energy industry.
Global Inflation Scare: In the latest news feeding into fears of a prolonged new era of high inflation, tin prices have surged to record highs for the first time in a decade. The price jump reflects increased demand for consumer electronics and difficulties shipping the metal out of Asia, resulting in a shortage of tin.
China-Hong Kong: In the latest poll by the American Chamber of Commerce in China, the number of people saying they are considering leaving Hong Kong has risen sharply, with a significant number citing last year’s new national security law as the primary driver. About 40% of respondents said they were considering leaving, which was a bit lower than the share in a poll last August. However, a much larger number of people responded, so the actual number who said they were thinking of abandoning the city increased. The increased response rate also suggests a greater concern and desire to express their views.
China-Sweden: A newspaper affiliated with the Communist Party of China warned that Ericsson (ERIC, USD, 13.29), the Swedish telecom equipment giant, will not be invited to participate further in constructing China’s 5G network unless Sweden reverses its ban on equipment from Chinese telecom giant Huawei (002502, CNY, 3.21). The warning is another instance of China using the heft of its domestic market to pressure foreign countries and companies to respect its interests, just as it imposed import restrictions against Australian products to punish Canberra for proposing an investigation into China’s role in the coronavirus pandemic. As a rising China continues to chafe against the international system crafted by the U.S. and its allies, such punishments could impose heavy costs on the global economy and weigh on investors.
Chinese Financial Industry: The China Banking and Insurance Regulatory Commission today granted final approval for U.S. financial services behemoth BlackRock (BLK, USD, 844.10) to begin operating its 50.1%-owned wealth management joint venture on the mainland. Despite China’s heavy-handed trade and investment policies targeting foes abroad, the government has continued to selectively open parts of its economy to foreign investors. However, that opening is probably aimed, at least in part, at creating a pool of foreign firms that will pressure their home governments to take a soft stance toward Beijing.
- Despite the Chinese government’s lobbying to keep advantageous trade rules in place, the tariffs imposed by the Trump administration and continued under the Biden administration continue to impede U.S. purchases of Chinese goods.
- New data show the tariffs have led to a sharp decline in Chinese imports, with purchases of telecommunications gear, furniture, apparel, and other goods shifting to other countries.
Israel-Hamas: Israel and the militant Palestinian militia Hamas kept up their deadly barrage of rocket launches and airstrikes on Tuesday night, escalating a conflict that a UN envoy warned could spiral into an all-out war. In the worst violence seen since the 2014 war, Israeli airstrikes toppled two high-rise buildings in Gaza City that it said were used by Hamas, prompting retaliatory launches of hundreds of rockets at large Israeli cities.
COVID-19: Official data show confirmed cases have risen to 159,732,343 worldwide, with 3,319,169 deaths. In the United States, confirmed cases rose to 32,779,414, with 582,848 deaths. Vaccine doses delivered in the U.S. now total 334,081,065, while the number of people who have received at least their first shot totals 153,448,316. 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 fell to approximately 33,000 yesterday, well below both the seven-day moving average of 38,826 and the 14-day moving average of 44,222. New deaths related to the virus came in at a moderate 684. Meanwhile, the nation’s mass vaccination program continues to make progress. According to the CDC, 44.7% of all adults in the U.S. are now fully vaccinated against COVID-19.
- Testifying before a Senate committee yesterday, administration officials said there should be enough evidence by late fall to potentially extend the use of COVID-19 vaccines to many children under age 12. Administration medical adviser Anthony Fauci told the panel that such steps to vaccinate younger children would probably occur in stages, progressing younger and younger, as study evidence accumulates.
- A late-stage human trial of China’s first vaccine candidate using mRNA technology will soon be launched in Mexico, according to Mexican Foreign Minister Ebrard. The mRNA technology is the same one used in the highly effective, two-dose vaccines produced by Pfizer (PFE, USD, 39.35) and Moderna (MRNA, USD, 158.99).
- Even though investors are fixated on the huge new waves of infection in places like India and Brazil, a recent resurgence in Taiwan is suddenly getting attention as well. The island has had very few infections over the course of the pandemic, but because of 16 newly discovered cases of domestically transmitted infections, Health Minister Chen Shih-chung warned that Taiwan was very likely to raise its epidemic alert level to its highest level since the onset of the pandemic. The news has sparked fears over the island’s key semiconductor industry and pushed the stock market down sharply over the last few days. The country’s main stock index is now nearly 10% below its record closing high reached on April 27.
- A review panel convened by the World Health Organization issued a scathing report criticizing both the Chinese authorities and the WHO for being too slow to recognize that the novel virus was spreading between people in Wuhan and then warning the world about human-to-human transmission. The report contends that a swift international response could have stopped the 2019 COVID-19 outbreak in China from becoming a global catastrophe in 2020.
Economic and Financial Market Impacts
- Today, the European Commission sharply raised its economic forecasts for the coming two years, as an accelerating vaccination campaign helps the Eurozone recover from the historic blow delivered by the pandemic. The EC now forecasts that the Eurozone’s gross domestic product (GDP) will expand by 4.3% in 2021 and 4.4% in 2022, compared with previous forecasts for 3.8% growth in both years. As a result, all member states are now expected to regain their pre-crisis output levels by the end of next year, following a historic 6.6% slump in 2020.
- In a positive sign for equities moving forward, a data tally by Goldman Sachs shows U.S. companies announced $484 billion in share buybacks in the first four months of this year, the highest such total in at least two decades.
- Not only did firms rush to raise precautionary cash at the outset of the crisis last year, but now they’ve come through a blockbuster earnings season and have much more clarity on the future trajectory of the economy. That’s encouraging firms to put their cash to work through new investments, dividend hikes, or share buybacks.
- While we’ve often mentioned that stocks are likely to be buoyed by continued loose monetary policy, new fiscal stimulus, economic reopening, and rebounding consumer demand, share buybacks could offer further noticeable support for equities this year.