Daily Comment (November 11, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today opens with the latest news on the U.S. presidential transition and yesterday’s Supreme Court hearings on the Affordable Care Act.  We follow that with some unfriendly market news out of China and various other international developments, and we end with our usual update on coronavirus news.  Finally, as a reminder, the bond market is closed today for Veteran’s Day.

U.S. Elections:  The General Services Administration still hasn’t issued its certification on who has won the presidential election, so Vice President Biden and his team still haven’t been able to access the federal office space, funding, and clearances necessary to fully plan to take over the government in January.  However, Biden and his team continue to work on organizational and policy plans to the extent possible and say they have no intention of starting legal proceedings to force the GSA to make its certification.

U.S. Healthcare Sector:  In yesterday’s Supreme Court hearing on the constitutionality of the Affordable Care Act, several conservative justices questioned whether the entire law really must fall because Congress eliminated the penalty for not carrying health insurance in 2017.  The questioning suggested the law may survive its latest test in the high court, which could potentially provide some stability to healthcare firms.

China-Hong Kong:  Most of the pro-democracy lawmakers in Hong Kong’s municipal legislature have resigned to protest the government’s ouster of four legislators on national security grounds.  The development illustrates how Beijing is increasingly taking control of the city and abandoning its traditional “one country, two systems” policy.  In turn, that is likely to continue to sour China’s relations with the major democracies and to raise the risk of a rupture that could weigh on the Chinese economy and Chinese assets.

China:  The vice president of the China Banking and Insurance Regulatory Commission warned that technological advances in the financial industry have risked creating monopolies.  The statement, coming a day after Beijing unveiled new antitrust rules for the nation’s largest internet groups, has added to concerns about a sharp increase in regulation and government control over business firms in China.  The statement, therefore, has contributed to a second down day for the country’s technology stocks.

Nagorno-Karabakh:  Following yesterday’s Russia-brokered peace deal to stop the fighting over the enclave of Nagorno-Karabakh, violent protests broke out in Armenia over the government’s perceived capitulation to Azerbaijan.  Reports indicate protestors even ransacked President Nikol Pashinyan’s official residence.  A key risk is that the protests could force the Armenian government to renew fighting, even though it was seriously losing ground to Azerbaijan.  In any case, the deal’s provision for Russian peacekeepers will put Russian troops in Azerbaijan, just as they are already based in Armenia.  In addition, the deal has strengthened Turkish President Erdogan’s hand in the region because his military assistance was instrumental in giving the Azeris the edge in the fighting.

Turkey:  After this week’s major shakeup of the government’s economic policy team, the main bank regulator said it would reduce restrictions on currency derivatives transactions between local banks and foreign investors in which the lira is traded for foreign currencies such as the dollar, euro, and yen.  The announcement, like a similar one in September, is aimed at unfreezing the market for lira.  However, a more important move for the market would be for the central bank to hike interest rates in order to support the plunging lira.

Peru:  One day after former President Martín Vizcarra was ousted on trumped-up corruption charges (by a bevy of Congressmen the Vizcarra administration had been investigating for real corruption), the little known head of Congress, Manuel Merino, was sworn in as the country’s new president.  By underscoring Peru’s challenges with corruption, the whole affair is likely to undermine the country’s investment attractiveness going forward.

COVID-19:  Official data show confirmed cases have risen to 51,599,927 worldwide, with 1,274,661 deaths.  In the United States, confirmed cases rose to 10,260,282, with 239,695 deaths.  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 more than 136,000 yesterday, setting a new single-day record.  Hospitalizations related to the virus rose to almost 62,000, which was also a record.  The number in intensive care units rose to almost 12,000, but that was still a bit below the level on May 7.  Finally, there were more than 1,400 virus-related deaths.
  • In a sign of surging optimism about the vaccine being developed by Pfizer (PFE, 38.68) and BioNTECH (BNTX, 112.76), the EU has agreed to buy up to 300 million doses of the compound.  Pfizer said deliveries are expected to begin by the end of the year, subject to the vaccine receiving regulatory approval from the European Medicines Agency.  As a side note, the EU’s purchase is part of an evolving effort for Brussels to take the leading role in healthcare throughout the bloc, where individual countries currently manage their own health policy and epidemic preparedness.
  • Not to be outdone by the U.S. and the 90% effectiveness rate reported this week for the Pfizer/BioNTECH vaccine, Russia said its fast-tracked coronavirus shot, Sputnik V, showed an effectiveness rate of 92% in preliminary trials.  The Russian government may be banking on such positive results to dispel Western skepticism over its ability to make a vaccine quickly, but the suspicious announcement so soon after the Pfizer news seems just as likely to increase that skepticism.
  • As a reminder of the challenges ahead, even if safe and effective vaccines are found, Russia’s plan to roll out its coronavirus vaccine to the wider population is progressing at a pace slower than expected as policymakers encounter challenges in ramping up production.
    • Since mass production of Sputnik V began in September, attempts to scale it up have proved difficult; scientists have struggled with fine-tuning the technical processes and have encountered issues with the equipment.
    • Officials have therefore dialed back their earlier forecasts that up to 30 million doses of Sputnik V could be produced this year. They now expect between two million and 10 million doses by the end of the year, and a large-scale vaccination campaign has been pushed out from October to late November or early December.

 Economic Impacts

  • Elke König, the head of the EU agency tasked with winding down failed lenders, warned that European banks need to prepare their balance sheets for massive pandemic-induced, non-performing loans hitting them in the new year.
  • The EU’s commissioner for economic policy, Paolo Gentiloni, said the severe recession caused by the pandemic may require the EU to keep its normal budget deficit rules suspended for another year in order to encourage member countries to keep their fiscal support programs in place as long as needed.  According to Gentiloni, a final decision on suspending the rules through 2022 will be made in the coming months.
  • In OPEC’s latest monthly report, the organization said lockdown measures in Europe and weaker consumption in the Americas will reduce global oil demand in 2020 by more than previously expected.  It now forecasts global demand will drop this year by 300,000 barrels a day to 9.8 million barrels a day, for a 10% decline from last year’s levels. The cartel also softened its forecast rebound in demand for 2021 by 300,000 barrels a day.  Coupled with recovering output in some non-OPEC countries, the report would point toward weaker oil prices in the coming months, despite the sharp rebound in prices seen this week in response to the positive vaccine news.

 U.S. Policy Response

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