Daily Comment (May 13, 2020)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT]
The general rise in today’s markets comes as multiple countries and states continue to ease their coronavirus restrictions and Democrats in the House released their proposal for another round of fiscal relief, but optimism remains tempered by health officials’ warnings against easing too quickly and signs of increasing tensions between the U.S. and China. As always, we review the key pandemic and related news below.
COVID-19: Official data show confirmed cases have risen to 4,283,885 worldwide, with 292,619 deaths and 1,504,429 recoveries. In the United States, confirmed cases rose to 1,370,016, with 82,389 deaths and 230,087 recoveries. Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.
- Even as multiple states move to further loosen their coronavirus restrictions, NIAID Director Fauci and other top health officials testifying before a Senate committee yesterday warned that prematurely easing the lockdowns could lead to a resurgence in infections and a need to reimpose restrictions. Leading the pushback against them, Kentucky Senator Rand Paul suggested the officials were being alarmist, but the testimony has still taken additional wind out of the recent rally in stocks.
- Now that researchers are gaining a better understanding of the benefits and limitations of the anti-viral drug remdesivir to treat COVID-19, they are starting to launch trials of the drug in combination with other therapies to see if its safety and effectiveness can be improved.
- A century-old tuberculosis vaccine known as BCG is now being tested as a stopgap shield against the new coronavirus.
- U.S. officials said Chinese and Iranian hackers are aggressively targeting American universities, pharmaceutical and other health care firms in a way that could be hampering their efforts to find a vaccine to counter the coronavirus pandemic.
- IMF Director Georgieva warned that since COVID-19 is spreading farther and the economic damage is proving worse than previously expected, this year’s global economic contraction will be even deeper than the 3% the institution forecast last month. Revised forecasts won’t be released until next month, but the news is likely to further dampen the recent rebound in risk assets.
- Some farmers are shifting their planting plans from corn to soybeans as prices for the former plunge faster in response to weakened demand for energy and ethanol.
U.S. Policy Response
- The Democratic majority in the House of Representatives released their proposal for a fifth pandemic relief bill worth approximately $3 trillion, including $1 trillion for state and local governments. House members are expected to vote on the bill this Friday, but negotiations with the Republican-controlled Senate aren’t expected to start until late May.
- Republicans panned the Democratic proposal and insisted they would plan to take a wait-and-see approach to any new bill.
- Concerns about ballooning deficits continue to build, raising the risk that fiscal policy could be tightened before the economy is back on its feet, as happened under the “sequester” after the Great Financial Crisis.
- Although much of the discussion of previous epidemic relief spending has focused on the Payroll Protection Program loans for small businesses, larger companies are now reporting significant cash flow benefits from tax cuts and deferrals in the relief bills.
- The Fed has started to implement its new purchases of corporate bond ETFs, giving a boost to the major funds yesterday. The major corporate bond ETFs continue to have a tailwind so far this morning.
Foreign Policy Response
- In Japan, Prime Minister Abe signaled he would be open to compiling a second supplementary budget to cushion the blow of the country’s virus lockdowns as he was forced to defend his administration’s response to the crisis under pressure from opposition party lawmakers.
- In India, Prime Minister Modi proposed spending $266 billion to offset the economic impact of the country’s pandemic restrictions. The program would amount to about 10% of Indian GDP and would include broad economic reforms in addition to emergency budget funds. Details on the proposal won’t be released until later this week, but from the tenor of the announcement it could be a significant positive for Indian stocks.
- New reports show Chinese health officials were conducting detailed investigations into the origins of the pandemic as early as December, but are now stalling any release of their findings and blocking joint studies with foreign researchers. The reports help buttress a growing sense around the world that China is not being transparent about the virus or any possible missteps it may have made at the beginning of the crisis.
- Citing “the Chinese government’s concealment of critical information concerning the novel coronavirus,” President Trump ordered the federal government’s 401(k)-style Thrift Savings Plan to cancel a project that would allow federal workers to invest their contributions in Chinese stocks. The order is a clear example of how the crisis plays into the administration’s policy of deglobalization and decoupling from China.
- In another black eye for President Putin and his handling of the crisis, the Russian government has suspended the use of a domestic-made ventilator used to treat patients infected with coronavirus after two of the machines reportedly caught fire, resulting in the deaths of six people.
- In an important development for the future of the EU, the judge who authored last week’s German constitutional court decision against the ECB’s bond-buying program and the European Court of Justice’s approval of the program warned that an EU infringement proceeding against Germany over the decision would trigger a constitutional crisis that could endanger the bloc. We would agree that a standoff between the EU and Germany over which one has primacy is a further fracture in the bloc on top of those we discussed in our recent WGRs from March 30 and April 6. The risk of an eventual breakup of the EU continues to grow, which could turn into a serious headwind for European stocks and bonds going forward.
- The crisis is also shifting political fortunes and boosting new potential leaders in key countries:
- In Japan, Osaka Governor Hirofumi Yoshimura has gone from being a locally liked politician known as a team player to a national media darling now being discussed as a possible prime minister in the future. Yoshimura’s rise stems largely from his strong individual leadership and communication skills in dealing with the coronavirus crisis.
- In Germany, new polling shows 53% of voters think Markus Söder, the prime minister of Bavaria, should be the ruling Christian Democrats’ candidate to succeed Chancellor Merkel in next year’s election. Söder’s reputation has been boosted by his willingness to take tough measures against the pandemic. Support for the previous frontrunner, Armin Laschet, has fallen to just 27%.
Israel-China-United States: Responding to U.S. concern about China’s growing influence over the Israeli economy, Israeli Prime Minister Netanyahu will force additional checks on whether a Hong Kong-based company should be allowed to bid for the construction of a $1.5 billion desalination plant in the country.
China: Ahead of two major policy meetings in Beijing next week, Communist Party hardliners are reportedly planting criticisms in state media of January’s “Phase I” trade deal between the U.S. and China. The criticisms likely signal an effort to push back against any further concessions to the U.S. in trade and other bilateral issues.