Daily Comment (May 26, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
We open today’s Comment with the state of play on President Biden’s proposed spending program on infrastructure and other economic initiatives. We follow with several items related to technology, cybersecurity, cryptocurrencies, and tech regulation. We then address miscellaneous international news items before turning to the latest developments on the coronavirus pandemic. And finally, on a historic note, today is the 125th anniversary of the launch of the Dow Jones Industrial Average. In case you’re wondering, the DJIA has risen by an average of 7.69% each year since it began on May 26, 1896.
U.S. Fiscal Policy: Republicans in the Senate met yesterday to discuss a nearly $1 trillion counteroffer on infrastructure spending to present to the White House later this week. The new proposal would represent a significant increase from their original $568 billion plan and a reduction of President Biden’s offer of $1.7 trillion. While the path to an agreement that can pass Congress remains thin, the significant narrowing in the two sides’ differences will probably help increase the odds of a deal.
- Even a deal in the range of $1 trillion or so would likely provide a noticeable additional jolt to the economy and keep alive fears of rising inflation. Such a spending deal would also help provide additional support to stocks and other risk assets.
- As the negotiations between the six Republicans and the White House progress, other lawmakers are exploring their own bipartisan agreement on infrastructure. Sen. Mitt Romney and a group of Republicans and Democrats have been holding recent discussions on a possible infrastructure plan that Romney said they could release soon.
- As a reminder, however, the administration will still face longer odds on hiking taxes on corporations or wealthy individuals to help pay for the infrastructure spending.
U.S. Cybersecurity: Responding to the ransomware attack against Colonial Pipeline, officials at the Department of Homeland Security said the Transportation Security Administration will soon require notification from pipeline operators when they become targets or victims of cyberattacks. The directive also will require each company to designate a point person for cybersecurity. According to the officials, the action is merely the prelude to a more muscular set of rules that will require pipeline owners to take concrete steps to secure their assets against attacks.
- Other important infrastructure industries, such as electric utilities, have had mandatory cybersecurity requirements for years. Nevertheless, the petroleum industry has already pushed back against any potential new cybersecurity regulations.
- Any new rules could presage even broader cybersecurity regulations across critical industries, potentially increasing compliance costs.
Cryptocurrencies: In their annual oversight testimony before the Senate Banking Committee today, the chief executives of several major U.S. banks plan to express caution regarding the use of cryptocurrencies like Bitcoin. For example, the chief of Bank of America (BAC, $42.01) offered assurances that “Currently, we do not lend against cryptocurrencies and do not bank companies whose primary business is cryptocurrency or the facilitation of cryptocurrency trading and investment.”
- The testimony could further dampen cryptocurrency enthusiasm after other recent indications of a regulatory clampdown. Despite the Bank of America assurances, we have learned of suggestions that some market participants are allowing leverage on cryptocurrencies, with all the volatility and risk to the financial market that implies.
- Meanwhile, in South Korea, many crypto exchanges are facing an existential crisis as they struggle to meet conditions for regulatory approval in a shake-up concerning one of the world’s biggest cryptocurrency markets. To be licensed as a legal trading platform, Korean exchanges are required to partner with local banks and open real-name bank accounts for customers. However, banks are reluctant to participate out of a fear of being held liable for any money laundering in digital currencies.
United States-Canada: The Biden administration yesterday initiated a formal trade complaint against the Canadian dairy industry, triggering for the first time the dispute mechanism contained in the new U.S.-Mexico-Canada Agreement (USMCA). In the complaint, the U.S. alleges that Canada used a complex system of tariff-rate quotas that sets aside a share of its dairy market exclusively for Canadian dairy processors, and that the system violates what Canada agreed to in the USMCA.
- The new trade complaint actually is just one of several that the Biden administration has launched over the USMCA.
- The continued use of the trade agreement’s dispute provisions is another example of how the Biden administration has been happy to continue many of the populist and protectionist policies launched by former President Trump.
European Union: Officials at the EU said the European Commission will soon launch a formal probe into alleged anti-competitive practices by Facebook (FB, $327,79). Specifically, the commission will examine whether the social network is distorting the classified ads business by promoting its Marketplace services for free to its two billion users. Facebook is the only major U.S. technology firm that hasn’t faced a formal antitrust probe by the EU. The new examination shows that the technology sector continues to face regulatory risks.
Iran: The head of the International Atomic Energy Agency, Rafael Grossi, has warned that Iran is enriching uranium at purity levels that “only countries making bombs are reaching,” even as it continues to talk with Western leaders in Vienna about rejoining its 2015 nuclear limitation deal.
Brazil: Finance Minister Guedes, Senate President Pacheco, and House Speaker Lira have agreed to scrap the sweeping tax reform proposed by President Bolsonaro last year because it wouldn’t receive enough support in Congress. Instead, the leaders agreed to simply rework the country’s byzantine fiscal regime through a series of piecemeal changes. Economists have long argued that increasing Brazil’s competitiveness would require a major tax reform and simplification, so the agreement is likely to be taken as a negative for Brazilian stocks.
COVID-19: Official data show confirmed cases have risen to 167,898,407 worldwide, with 3,487,458 deaths. In the United States, confirmed cases rose to 33,166,902 with 590,994 deaths. Vaccine doses delivered in the U.S. now total 359,004,955, while the number of people who have received at least their first shot totals 164,378,258. 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 totaled just 22,756 yesterday, remaining below both the seven-day moving average and the 14-day moving average. New deaths related to the virus totaled 543 and continue to trend lower. Meanwhile, data from the CDC shows 49.5% of the U.S. population has now received at least one dose of a vaccine, and 39.5% of the population is fully vaccinated.
- French counterintelligence agents are reportedly investigating an apparent effort by Russia to discredit the vaccine from Pfizer (PFE, $39.33) by paying high-profile health and science bloggers to publish articles or videos discrediting it. If true, the project would mirror efforts by the developers of Russia’s Sputnik V vaccine.
- In Japan, regional governors in Tokyo, Osaka, and other localities requested that the government extend its pandemic state of emergency and social distancing measures beyond the scheduled end date of May 31, as anticipated. The government is expected to approve the extension into mid-June, which would be just one month before the scheduled start of the Summer Olympic Games in Tokyo.
- In some better news out of India, newly confirmed infections are steadily declining in response to regional lockdowns and increased levels of antibodies among the population, according to public health experts.
- The country’s seven-day moving average of new daily infections has fallen to 237,000 from a peak of 392,000 in early May.
- The country’s test positivity rate has dropped to 9.4% from a high of about 23% earlier this month, although that’s still above the World Health Organization’s benchmark of 5% for having a pandemic under control.
- Meanwhile, the WHO is seeking more data on the CoronaVac vaccine from China’s Sinovac Biotech. According to sources, the WHO has recently asked for more details regarding the safety of the shot. It has requested data about Sinovac’s manufacturing process to assess whether it is compliant with WHO standards. One senior WHO official now expects a decision on authorizing the vaccine to be delayed into June.
- As the WHO’s governing board met yesterday, the Biden administration called for a deeper investigation into China’s role in the pandemic under rules that “give international experts the independence to fully assess the origins of the virus.” As might be expected, however, China pushed back with a strong statement that it considered the investigation in its country to be complete and said attention should now turn to other countries.