Daily Comment (May 28, 2020)

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

[Posted: 9:30 AM EDT]

Good morning!  Global equities are steady to higher this morning after a continued strong march higher.  We update the COVID-19 situation; the U.S. death toll now exceeds 100k.  We discuss the Hong Kong/China situation.  The Beige Book was released yesterday.  We are monitoring hostilities on the China/India border.  The EU creeps closer to a Eurobond.  The weekly energy update report will be out tomorrow as the DOE data was delayed due to Monday’s holiday.  Here are the details:

COVID-19:  The number of reported cases is 5,716,271, with 356,131 deaths and 2,367,292 recoveries.  In the U.S., there are 1,699,933 confirmed cases, with 100,442 deaths and 391,508 recoveries.  For those who like to keep score at home, the FT has an interactive chart that allows one to compare cases and fatalities between nations, scaled by population.  Here is an Axios map showing state infection rates.

Although we are seeing the media roll out headlines as the U.S. crosses the 100k fatality level, it should be noted that the U.S. uses a reporting method similar to Belgium, where doctors can assign the cause of death on either a test or symptoms.  If nations are reporting fatalities on tests alone, it is highly likely they are underreporting virus deaths.  Comparing overall death rates to normal death rates is probably a better way to estimate actual fatalities, but no method is perfect.  The bottom line is that focusing on a particular number isn’t necessarily a true picture for comparison purposes.

The virus news:

  • The good news:
  • The bad news:
    • One issue we have been watching for a while is that COVID-19 may become endemic, meaning it really never goes away. Many infectious diseases have this characteristic, even when a vaccine is available.  We still see outbreaks of measles, mumps, pertussis, etc.  Thus, learning to live with it may simply be part of life going forward.  That doesn’t mean constant lockdowns, but it does mean the precautions for preventing the spread of the virus could become part of life.
    • International hackers are pinging U.S. research facilities to steal medical research on treatments and vaccines. This development shows (a) the potential nations see in being the first to provide treatment, and (b) worries that “vaccine nationalism” may prevent them from getting a new treatment in a timely fashion.  Vaccine nationalism is also on the minds of pharmaceutical companies.
    • Brazil continues to suffer from rising COVID-19 fatalities.

The policy news:


  • NY FRB President Williams, in an interview yesterday, said the Fed is “thinking very hard” about yield curve control. This would mean the Fed would set rates for the entire Treasury curve.  If the Fed moves toward funding fiscal activity, such control will likely be necessary.
  • The EU is moving toward a limited Eurobond to fund virus recovery. The EU has proposed a €750 billion fund to support recovery, part of a larger effort, that will be funded by a special EU bond serviced by a series of special taxes.  The “frugal four” remain cautious, but Germany’s support for the measure could cajole them from a veto.  The selling points are that the bonds (a) are special purpose and not for general fiscal activities, and (b) have their own services flows.  But it is a mutual debt instrument and may move the EU toward a true Eurobond, a bond that funds fiscal operations backed by the full faith and credit of the EU.

The finance news:

  • Although LIBOR continues to be used, policymakers are moving to end the life of the benchmark. The alternative, the Secured Overnight Financing Rate (SOFR), will be its replacement.  We will be watching to see when the CME moves the Eurodollar futures to the SOFR futures as the “finishing touches” of the process.  This shift will require millions of loan documents to be repapered to the new rate.  Here is the timeline.
  • Bullion banks took a hit on their hedging when futures prices rose above the cash price of gold. Bullion banks usually hedge their positions by shorting futures, which usually trade at a discount to the cash prices to cover the interest cost.  During the March turmoil, investors piled into futures contracts, driving the futures price above the cash gold price.  In response, banks have backed away from hedging in the futures markets.

The economic news:

  • The Fed’s Beige Book confirmed what we all have seen—economic activity is down significantly. However, there is evidence in some districts that conditions are starting to stabilize.  The districts of Cleveland, New York and Dallas reported that although conditions remain dire, they are not getting worse.  The problems in hospitality were mentioned often.  One other concern that was raised was that generous unemployment insurance, fear of infection and the lack of child care is preventing workers from returning to their jobs.
  • Slow-to-arrive stimulus checks and job losses are putting millions of renters at risk of eviction. Although most state and local governments are not enforcing evictions at present, landlords will likely be forced to move quickly to evict once regulations ease unless the Fed offers landlords and mortgage companies similar relief.

The foreign news:

India/China:  There has been a long history of tensions on the Indian/Chinese border.  However, because the frontier is high in the Himalayas, the ability of the two countries to conduct military operations is severely limited.  Flare-ups are fairly common on the border.  Recently, both sides have been increasing their military readiness around eastern Ladakah.  The region is very remote and, on the ground, borders are somewhat indeterminant.  New Delhi claims that China has moved fighter jets to air bases in the region.  China claims that India has built new roads in the area and worries that the infrastructure would allow India to mobilize troops.  History would suggest that neither side really wants a full-blown military conflict in the region due to the difficulty of conducting military operations in such harsh terrain.  However, both countries have modernized their militaries and may want a skirmish to test their forces.  The U.S. has offered to mediate talks to ease tensions.  We will continue to monitor this situation.

Russia:  Two Russian Su-35s intercepted a USN P-8A reconnaissance aircraft in the Eastern Mediterranean.  The U.S. accused Russia of “unsafe, unprofessional” conduct.

Nord Stream:  The Nord Stream pipeline, which would transfer natural gas from Russia directly to Germany, is back in the news.  The project had been stalled due to U.S. sanctions but the arrival of a special drillship, the Akademik Tscherski, has restarted the project.  The U.S. is considering additional sanctions against Germany and Russia over the project.

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