Daily Comment (October 14, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today opens with a discussion of the International Monetary Fund’s improved outlook for the global economy, though much of the improvement simply reflects China’s early exit from the coronavirus pandemic.  Other key developments today include Chinese President Xi’s reaffirmation of his economic program, new U.S.-EU trade tensions, and other geopolitical and virus issues that could mean headwinds for risk assets.

Global Economic Conditions:  In the IMF’s latest World Economic Outlook, released yesterday, the organization offered a slightly improved forecast for global economic growth in 2020 and 2021.  According to the new forecasts, the world’s gross domestic product (GDP) will decline by just 4.4% this year compared with a decline of 5.2% in the June forecast.  Global GDP is forecast to grow 5.2% in 2021 compared with 5.4% in the previous estimate.  However, those figures largely reflect the relatively better dynamics in the large Chinese economy, which is expected to be the only major economy to post growth in 2020.  All the same, the modestly improved forecasts should be positive for equities moving forward.

China:  In a major speech marking the 40th anniversary of Shenzhen’s establishment as a special trade zone, President Xi vowed to press ahead with plans to gain the global lead in information technology and other strategic industries, despite expanding efforts from the U.S. and its allies to check China’s rise.  He also urged a greater focus on quality in order to overcome increased global uncertainty and made a pitch for greater “self-reliance.” He also reaffirmed his commitment to “opening up and reform” as a strategy for China to gain economic advantage. Overall, the speech suggested Xi is continuing to move forward with the economic program that has helped put China on a collision course with the U.S. and has raised the risk that the two countries will fall into a costly Cold War in the future.

United States-European Union:  The World Trade Organization ruled that the European Union may impose tariffs on $3.99 billion of U.S. jet airliners and other goods in retaliation for U.S. subsidies for Boeing (BA, 162.24) aircraft.  The decision is part of a long-running trade dispute; last October, the WTO allowed the U.S. to impose tariffs on $7.5 billion of European jet airliners and other goods in retaliation for EU subsidies provided to Airbus (EADSY, 18.60).  In other words, the WTO has ruled that both sides provided prohibited subsidies, but Europe did so to a greater extent. Tuesday’s pronouncement leaves the two sides with the choice of negotiating a solution or fighting a protracted trade battle.  EU officials are reportedly keen to negotiate, but U.S. Trade Representative Lighthizer has been taking a hard line so far.

United States-Russia:  President Trump’s lead arms control negotiator Marshall Billingslea said the U.S. and Russia had reached an “agreement in principle” on a new nuclear arms control deal, claiming a key diplomatic victory that the president has sought ahead of the November election.  However, Russian Deputy Foreign Minister Ryabkov disputed the claim and said the latest U.S. offer is unacceptable.  Driving home the point later, Russian Foreign Minister Lavrov said his government sees no prospects for extending the current New START arms control treaty with the U.S., but it plans to continue with negotiations on the subject.

Norway-Russia:  Norwegian Foreign Minister Ine Eriksen Soereide said her government has concluded that Russia was behind a cyberattack launched against the Norwegian parliament in August.  In the attack, the e-mail accounts of several lawmakers and parliament employees were hacked.

Nagorno-Karabakh:  Turkey has reportedly sent hundreds of Syrian militia fighters to help Azerbaijan in its conflict with Armenia over the disputed enclave of Nagorno-Karabakh, and hundreds more are preparing to go, according to Syrians involved in the effort.  While it has been reported previously that Turkey is helping the Azeris with troops and military equipment, the reports indicate it sent in the Syrians even before the latest flareup in hostilities last month.  Russia, which supports Armenia in the conflict, has warned about Turkish interference but has not taken strong steps to counter it so far.

Mexico:  Documents reviewed by the Financial Times indicate the government of President Andrés Manuel López Obrador is making low-key changes to the country’s energy regulations in order to favor state-owned Pemex and discourage private investors in areas like renewable generation and gas stations.  The news is negative for Mexican stocks because it will likely add to perceptions that the president is making Mexico’s investment climate ever more difficult.

COVID-19:  Official data show confirmed cases have risen to 38,204,270 worldwide, with 1,087,391 deaths and 26,508,893 recoveries.  In the United States, confirmed cases rose to 7,859,417, with 215,914 deaths and 3,124,593 recoveries.  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 52,000 yesterday, pulling the seven-day moving average to more than 49,500.  Daily deaths remained close to their seven-day moving average of approximately 700, but since hospitalizations continue to climb, it appears there is some risk of accelerating deaths as an apparent winter resurgence takes hold.
    • As bad as that is, data show Europe is starting to surpass the U.S. in terms of infections per million residents.  This week, the European Union and the U.K. recorded 152 cases for every million residents, while the U.S. recorded about 150 cases for every million residents.
    • Europe’s coronavirus deaths have risen from about 0.2 per million in mid-summer to 1.0 per million now, coming ever closer to the U.S. death rate of about 2.1 per million.
  • After trials for at least two major vaccine candidates were paused recently due to unexplained illnesses in trial participants, Eli Lilly & Co. (LLY, 150.08) said safety concerns have forced it to pause the clinical trial of its anti-body based treatment known as LY-CoV555.
  • The Mexican government said it has signed purchase agreements for three of the leading coronavirus vaccine candidates in order to secure enough doses for 100 million people by the end of 2021.
    • Under the deals, Mexico will make approximately $159 million in down payments and about $1.7 billion in total payments.
    • The government will buy eventual vaccines for 39 million people from AstraZeneca (AZN, 54.48), as many as 17 million from Pfizer (PFE, 36.90), and 35 million from China’s CanSino Biologics (CASBF, 23.03).
    • Mexico is also participating in the international vaccine alliance Covax, through which it expects to obtain doses for about 26 million people.

 Economic Impacts

  • JPMorgan (JPM, 100.78) and Citigroup (C, 43.68) both reported healthy third-quarter profits yesterday, suggesting their corporate and individual clients fared better than expected during the worst of the pandemic.  However, both banks said they haven’t yet changed their views that significant losses are looming in the future.
    • The banks continue to hold large reserves for potential losses, and they predicted that next year unemployment would remain high and more customers could start defaulting on their loans.
    • JPMorgan CEO Jamie Dimon warned that without more public assistance for the economy, the situation could turn out worse than expected.
  • In another mixed signal for the U.S. economy, the CEO of Delta Airlines (DAL, 31.77) said the company is seeing “steady improvement” in travel demand; however, the gains are so slow that the company will continue to burn cash into next spring.

 Foreign Policy Responses

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