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

[Posted: 9:30 AM EDT]

Today’s U.S. market strength stems in part from earnings reports showing many companies have been able to adjust relatively well to the coronavirus challenges, albeit with higher costs.  Adding to the positive vibe is news that all 50 states have now relaxed their coronavirus lockdowns, although remaining restrictions vary widely.  Overseas, officials also continue to loosen their lockdowns, or contemplate doing so, including several large developing countries where infections are still rising.  As always, we review all the key pandemic and related news below.

Additionally, our latest podcast episode, “The Lessons of History,” is available, which examines the economic, market and social effects of earlier pandemics.

COVID-19:  Official data show confirmed cases have risen to 4,922,137 worldwide, with 323,855 deaths and 1,706,539 recoveries.  In the United States, confirmed cases rose to 1,528,661, with 91,938 deaths and 289,322 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Despite Monday’s good news of a small study pointing to the possible effectiveness of a coronavirus vaccine being developed by Moderna (MRNA, 71.67), a report late Tuesday on the closely followed medical news website Stat called into question the rigor of the study and prompted fresh doubt over the speed at which a vaccine can be developed.  The news sparked a late-day selloff in the stock market, but it’s important to remember that it’s still early days in the crisis, when the news and confidence can be volatile.  Looking farther out into the future and keeping in mind the amount of brainpower and money being thrown at the problem, there is probably still reasonable hope that a vaccine and/or treatment will be developed and deployed in the coming months, quarters or years.
• As Sweden’s coronavirus death rate per capita ticked higher and surpassed that of the U.K., Italy, and Belgium in recent days, officials in Denmark, Finland and Norway are debating whether to maintain travel restrictions on Sweden even as they ease them for other countries.
• In Brazil, the number of new COVID-19 deaths on Tuesday rose to a record 1,179, compared with the previous high of 881 set last week. Brazil now trails only the U.S. in daily deaths as well as the U.S. and Russia in confirmed cases.
• In Mexico, a report by an anti-corruption think tank accused the Mexico City municipal government of vastly underreporting COVID-19 deaths.  The report claimed actual deaths from the disease in recent weeks were about four times higher than in the city’s official data, prompting a rebuttal from Mayor Claudia Sheinbaum.
• Some scientists looking for ways to prevent a return to exponential growth in infections after lockdowns are lifted are focusing on a new approach: avoiding “superspreading” events such as concerts and other groupings where people gather in close proximity to each other for extended periods.

Real Economy

• The nonpartisan Congressional Budget Office yesterday released updated economic forecasts reflecting only a “gradual and incomplete pattern of recovery” from the virus crisis over the next year and a half.
  • The forecasts call for the economy to grow faster in 2021 than projected last month, but GDP at the end of next year would still be 1.6% smaller than in 2019.
  • The forecasts call for the unemployment rate to remain above 9% through the end of 2021.  The CBO’s reasons for a slow recovery in labor demand are also a handy summary of the key risks for investors:
    • The eventual expiration of the Payroll Protection Program, which could prompt renewed layoffs by smaller businesses.
    • Plummeting tax revenues, which could force state and local governments to lay off large numbers of workers.
    • The possibility that generous unemployment benefits and fear of getting sick could encourage many jobless people to put off looking for work.
• Some big U.S. retailers are ending the extra “hazard pay” they gave to front-line workers as coronavirus-related costs pile up and the ranks of jobless Americans surge, tipping the labor market in employers’ favor.
• In Britain, aircraft engine maker Rolls-Royce (RYCEY, 3.24) said it will cut nearly a fifth of its workforce in a bid to survive the collapse in global aircraft demand caused by the pandemic, which is expected to last for several years.
• In Canada, the state-owned mortgage insurer said the average house price in Canada will fall 9% to 18% in the coming year and won’t fully rebound to pre-crisis levels until 2022.  According to Evan Siddall, chief of the Canada Mortgage and Housing Corp., “The resulting combination of higher mortgage debt, declining house prices and increased unemployment is cause for concern for Canada’s longer-term financial stability.”

Financial Markets

• The U.K. has sold bonds with a negative yield for the first time, reflecting growing investor expectations that the Bank of England may need to cut its benchmark short-term interest rate below zero to support the economy, and push inflation back to its 2.0% target. The development came as Britain reported that its April consumer price index was up just 0.8% year-over-year, half the 1.5% increase in the year to March.
• The Turkish central bank said Qatar has agreed to triple its swap agreement with Turkey, under which Turkey can exchange its lira for Qatari riyal, which are pegged to the U.S. dollar.  The effect of the move is to bolster Turkey’s depleted foreign currency reserves by as much as $10 billion, so it should be a positive for the lira and Turkish assets.

Political Impact

• Now that Spain’s coronavirus infection rates and daily death toll are falling, the country’s polarized political tribes are fighting over the lockdown, its loosening and the aftermath, including nightly protests in Madrid’s wealthiest districts, where protesters have been accompanied by members of the hard-right Vox party.
• An airliner from the United Arab Emirates made the first publicly acknowledged direct flight from Abu Dhabi to Israel yesterday to deliver pandemic supplies for Palestinians.  The flight was a milestone in relations between the two nations, which have no formal diplomatic ties.

China-Taiwan:  In her second inaugural address today, Taiwanese President Tsai Ing-wen reiterated her rejection of China’s efforts to assimilate the island, but she also offered to work with Chinese leader Xi Jinping to stabilize relations in ways that respect Taiwan’s democracy and sovereignty—conditions that China has previously rejected.  To bolster Taiwan’s ability to resist Chinese coercion, she also pledged to further revamp the economy, strengthen the military and deepen ties with friendly countries.  After U.S. Secretary of State Pompeo offered his congratulations to Tsai, the Chinese ministries of foreign affairs, defense, and Taiwan relations lashed out at him for interfering in China’s internal affairs, highlighting today’s increased friction in U.S.-China relations.

United States-China:  More broadly, the increased U.S.-China bickering over trade, the coronavirus and Taiwan are signs that the two countries continue to struggle with the “Thucydides Trap,” or the tension caused when an incumbent power seeking to preserve its position is challenged by a rising power seeking to gain what it perceives to be its rightful place in the world.  As we’ve discussed in the past, this type of situation can eventually lead to military conflict if not managed well.  Reflecting the current defense-oriented stance of the U.S., Senator Josh Hawley (R-Mo.) will lambaste China on the Senate floor today, arguing that the international order must be ripped up to avoid America taking “second place to the imperialists in Beijing.”  Separately, the U.S. Air Force has ramped up flyovers of B-1B Lancer bombers over waters near China, complementing increased military operations by both the U.S. Navy and Air Force in the South China Sea, East China Sea, the Taiwan Strait and the Yellow Sea.

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