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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today opens with U.S. political and policy news.  We also discuss new challenges for both Chinese bonds and Chinese equities.  In the pandemic arena, we note the continued resurgence in infections in both the U.S. and Europe, which has even prompted Sweden to implement tough lockdown measures.  Finally, we discuss a procedural hiccup in the EU parliament today that presents a hurdle for the bloc’s new coronavirus relief fund and common debt.

U.S. Presidential Election:  In Michigan, where Republicans have filed suit to not count votes around Detroit based on accusations of electoral irregularities, the bipartisan Wayne County Board of Canvassers will meet today to decide whether or not to certify the results.  Since a judge has already ruled that the accusations are unsubstantiated, and that decision has been validated by an appeals court, the board could well certify the results, which were heavily in favor of Vice President Biden.  However, that could change based on late appeals to higher courts, though that wouldn’t necessarily erase all of Biden’s 146,000-vote win in the state.

U.S. Federal Reserve:  Senator Lamar Alexander (R., Tenn.) announced he would vote against President Trump’s nomination of Judy Shelton to the Federal Reserve Board of Governors, citing what he termed her insufficient support for central bank independence.  Alexander is the third Republican senator to say he’ll vote against Shelton, suggesting there is a high chance that she won’t get confirmed.  Separately, Vice Chair Clarida yesterday said Fed policymakers have discussed at least two possible adjustments to their asset-purchase programs in the coming months, including giving more detail around how long those purchases might last or increasing the share of long-term securities they are buying.  In any case, adjustments are more likely if longer-term yields continue to rise as they have over the last couple of weeks.

U.S. Financial Markets:  Tesla (TSLA, 408.09) is surging today following the announcement that it will join the S&P 500 Index on December 21.  Separately, Amazon (AMZN, 3,131.06) said it will launch an online pharmacy, pushing its stock modestly higher but pummeling traditional brick-and-mortar drugstore firms.  Taken together, the developments underscore the global economic transformation that technology firms are likely to keep driving even after the coronavirus pandemic passes.

Chinese Financial Markets:  At least 20 Chinese companies have suspended planned bond sales worth approximately $2.4 billion over the past week as the high-profile defaults of three state-owned enterprises and questions about the solvency of a fourth unnerved investors.  Even today, a Chinese financial publication reported that Beijing-based semiconductor company Tsinghua Unigroup had failed to meet a bond payment even though it is seen to have extremely high support from the national government as a “national champion.”  By undermining investor expectations that the government would back the firms through thick or thin, the defaults are denting confidence in the Chinese bond market, which is the world’s largest.

U.S.-China Financial Markets:  Chinese companies with shares traded in America would be required to use auditors overseen by U.S. regulators or face being kicked off exchanges under a plan being drafted by regulators.  If implemented, the rule would be a further headwind for Chinese equities in the U.S. and would underline the risk that Chinese securities might eventually be pushed out of the U.S. if relations between the countries continue to deteriorate.

U.S.-Iran:  President Trump reportedly asked his advisers during an Oval Office meeting last Thursday about potential military options for striking an Iranian nuclear site after a United Nations agency disclosed that Tehran had expanded its supply of low enriched uranium.  Even though the president was dissuaded from pursuing those options by several senior advisers, who argued that a military action could lead to a broader conflict in the region just as the president is trying to end wars in Afghanistan and Iraq, his interest in the potential strike underscores the fact that major unexpected policy moves could still surface before Inauguration Day.

Argentina:  Negotiations between the leftist government and the IMF over the repayment of a $44 billion loan have been thrown into confusion after senators loyal to Cristina Fernández de Kirchner, the radical vice president and leader of the senate, demanded fresh IMF concessions at odds with the demands of the more moderate leaders of the government.

Peru:  Amid deadly protests against the legislature’s ouster of former President Martin Vizcarra on trumped-up corruption charges, and after the nearly immediate resignation of their hand-picked successor, Congress selected lawmaker Francisco Sagasti as caretaker president.  He will serve until the next presidential election in April.  Since Sagasti’s party had voted against the removal of Vizcarra, the move represents an effort by the legislators to diffuse the opposition to their moves, but there is no assurance they will be successful.  For the moment, at least, Peru remains in acute political instability that is likely to undermine Peruvian equities.

Nagorno-Karabakh:  Armenian President Armen Sarkisian has called early parliamentary elections, saying they are needed to resolve a political crisis sparked by his government’s signing of a truce in the war with Azerbaijan over the breakaway region of Nagorno-Karabakh.

COVID-19:  Official data show confirmed cases have risen to 55,174,990 worldwide, with 1,329,875 deaths.  In the United States, confirmed cases rose to 11,207,088 with 247,229 deaths.  Here is the interactive chart from the Financial Times that allows one to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S. infections totaled more than 166,000 yesterday, pushing the seven-day moving average to almost 149,000 and the 14-day average to more than 131,000.  At least 10 states logged record numbers of new infections.  Just as important, the number of people hospitalized with COVID-19 rose to more than 73,000, with approximately 14,300 of those in intensive care units for the first time since April.  Deaths related to the virus totaled 995.
• As new infections also continue to surge in Europe, governments are continuing to tighten economic and social restrictions.  Even Sweden, which gained notoriety in the spring for its exceptionally light restrictions, has now introduced its first mandatory restrictions amid a record surge in new cases, a steady growth in deaths, and a hospitalization rate that is now the highest in Europe.
  • Public gatherings involving more than eight people are now banned, with offenders facing imprisonment.
  • In a speech on Monday, Prime Minister Stefan Lövfen asked the public to avoid all interactions.
• Even though the new restrictions in Europe are milder than in the spring, there is increasing concern that they could still slow the economy and put many firms out of business before vaccines are able to get the pandemic under control.
• Despite the resurgence of infections, doctors who have been treating coronavirus patients from the pandemic’s earliest days in the U.S. say they are now better equipped to face a new rise in hospitalizations, with evidence on drugs that work to combat COVID-19 symptoms, research on treatments, and their own patient experiences over the months.
• In China, the government is cracking down on cold chain goods to prevent any outbreaks of COVID-19 after packaging of frozen Argentine beef, German pork, and Indian cuttlefish tested positive for the virus.

U.S. Policy Response

• An analysis by the Wall Street Journal shows about 300 companies that received as much as half a billion dollars in pandemic-related government loans have filed for bankruptcy.  Many of the companies, which employ a total of about 23,400 workers, say the funds from the Paycheck Protection Program weren’t enough to keep them going as the coronavirus and lack of additional stimulus payments weighed on their businesses.

Foreign Policy Response

• Hungary and Poland blocked a key step toward the EU’s huge new Multiannual Financial Framework (MFF), holding up the budget-plus-recovery-fund designed to turn around the coronavirus-induced economic crisis.  With no evident way out of the stalemate, the vote has thrown the EU back into crisis mode and threatens the launch of the EU’s common bonds backed by the full faith and credit of the member states.

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