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

[Posted: 9:30 AM EDT] | PDF

Before turning to the daily news, we want to mention that our latest Confluence of Ideas podcast is now available here.  This edition discusses our outlook for how U.S. foreign policy is likely to develop in the coming years depending on who wins the presidential election next month.

Our Daily Comment today opens with coronavirus news. Resurgent infections around the world have started to weigh on risk markets, as shown by the steep drop in the stock market yesterday.  We also cover items relating to U.S.-China trade and capital flows, followed by news on relations between Turkey and Russia.

COVID-19:  Official data show confirmed cases have risen to 43,587,563 worldwide, with 1,160,960 deaths.  In the United States, confirmed cases rose to 8,705,340, with 225,739 deaths.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• New confirmed U.S infections totaled more than 66,000 yesterday, while the seven-day moving average of new infections rose to an all-time high of 68,767.  In addition, the number of people hospitalized for COVID-19 in the U.S. topped 40,000 for the sixth straight day, pushing some hospitals closer to care rationing.  Daily deaths have started showing signs of rising again.  Overall, the data confirm that a third, autumn-related wave is now hitting with full force.  It’s still too early to know how this wave will affect the economy, but fears are beginning to solidify, which is probably a key reason for the big drop in risk assets on Monday.
• In Europe, newly confirmed infections are also surging, with the seven-day average of new infections in France now six times higher than at the previous peak last spring.  In French hospitals, half of all intensive care beds are now filled with COVID-19 patients.
  • Countries like the U.K., Spain, and Italy are also seeing big spikes, raising fears of increased hospitalizations and deaths.
  • Authorities are still trying to avoid mass economic lockdowns like those imposed earlier in the year, but as their more targeted restrictions expand, the distinction could get lost, and economic damage is likely to increase.  As targeted lockdowns expand and start to look more like the generalized lockdowns of the spring, investors are becoming increasingly concerned about the economic outlook. This goes far toward explaining the big drop in the stock market yesterday.
• Even in China, authorities have discovered more than 100 asymptomatic cases in the western province of Xinjiang.
• Officials at the European Medicines Agency said the regulator would approve a vaccine against the COVID-19, even if trials showed that it was effective in less than half the people who take it.  That’s lower than the minimum 50% “efficacy rate” the FDA is likely to apply in assessing vaccine candidates for the U.S. population.
• Federal health researchers halted clinical trials of an experimental COVID-19 treatment consisting of an antibody drug made by Eli Lilly (LLY, 141.70) and remdesivir, after an independent committee found a lack of benefit.  However, the halt doesn’t apply to other ongoing studies of the Lilly drug by itself.  The antibody drug is still up for authorization as a solitary treatment for patients with mild to moderate COVID-19 who are not hospitalized.
• Even more discouraging, a survey of 365,000 people in England who had tested positive for COVID-19 showed that the proportion testing positive for COVID-19 antibodies declined by more than a quarter between late June and late September.
  • The study suggests that even if antibodies confirm immunity to the disease, such immunity might deteriorate quickly in the months following someone’s illness, much as immunity to the common cold deteriorates quickly once the sniffling and sneezing end.
  • The study also suggests the prospect of widespread, long-term herd immunity to the virus will be difficult to achieve.
• A growing number of countries are trimming the length of time that people potentially exposed to the coronavirus need to self-quarantine to reduce the risk of spreading the disease. Their reasoning is that shorter spells might help manage the pandemic by encouraging greater compliance.

 Economic Impacts

• Economic statistics over the last few months have gradually made it clear that while the pandemic has shut down people’s ability to buy many services, such as tourism, they’ve channeled much of their funds into purchasing physical goods, including autos.  In fact, the CEO of Volkswagen (VWAGY, 16.94), Herbert Diess, now says European governments don’t need to implement any new auto purchase incentives.  Just last spring, Diess had been loudly lobbying for government subsidies to support auto manufacturers.
• In spite of increased business for some goods producers, however, the coronavirus resurgence this fall is already having economic impacts in Europe.  A new ECB survey shows that European banks tightened credit standards in the third quarter due to rising concern about the pandemic’s impact.  The survey showed the banks also plan to tighten credit further in the fourth quarter.
• In the U.S., the end of federal and local eviction moratoriums over the coming months is raising the risk that large numbers of people will lose their apartments, and many landlords will be stuck holding the bag.
  • A study of unemployed workers released last week by the Federal Reserve Bank of Philadelphia calculated outstanding rent debt would reach $7.2 billion before the close of 2020.
  • Moody’s Analytics estimates it could reach nearly $70 billion by year end if there is no additional stimulus spending. The firm calculated that 12.8 million Americans would then owe an average of $5,400 from missed payments.

 U.S. Supreme Court:  By a vote of 52 to 48, the Senate confirmed Amy Coney Barrett as a Supreme Court justice last evening.  The vote was almost entirely on party lines, with every Republican senator except Susan Collins of Maine voting to confirm and no Democrats voting yes.

U.S.-China Trade:  According to a new analysis by the Peterson Institute for International Economics, China accelerated purchases of U.S. farm products last month, and has now bought $58.8 billion of the U.S. agricultural, energy, and manufactured goods it committed to buying this year under the U.S.-China trade accord signed in January.  Unfortunately, China’s purchases should have reached $108 billion to be on track to reach its full-year target of approximately $140 billion.  Any failure to meet that commitment would likely be a risk for U.S. and China stocks because it would further exacerbate the deteriorating U.S.-China relationship.

U.S.-China Capital Flows:  Despite the rising military, economic, and diplomatic tensions between China and the U.S., new Chinese financial reforms are helping draw waves of new investment capital into the country.  According to Fitch Ratings, the amount of Chinese onshore bonds held by foreign institutional investors in the first eight months of 2020 was up more than 20% from the same period one year earlier.  In addition, Refinitiv calculates that foreign investors have accounted for about 12% of all purchases of Chinese government and policy bank bonds this year.

• Some of the inflows into China simply reflect market dynamics; Chinese stocks power ahead, and Chinese bond yields remain much higher than in most developed countries.
• However, China is also probably trying to increase its international financial integration in order to preempt any possible U.S. sanctions against it as U.S.-China tensions worsen.  Over the longer term, opening the financial system is also seen as key to making the renminbi a viable reserve currency.

Syria-Russia-Turkey:  Russian airstrikes reportedly killed dozens of Turkey-backed fighters in northwestern Syria yesterday, putting at risk a fragile cease-fire that has been in place since March.  The attack is being interpreted as a warning from Russia to Turkey that it must withdraw from the area as agreed in the truce.  It therefore highlights the rising tensions between the countries which have also taken opposing sides in the recent fighting in Nagorno-Karabakh.

Turkey-France:  Turkish President Erdogan has called for a boycott of French goods over French President Macron’s vow to crack down on Islamic extremism after terrorists beheaded a French teacher last week.  Several key European leaders immediately came to Macron’s defense, highlighting how Erdogan’s strong Islamism is worsening ties between Turkey and the broader EU.  Worsening Turkish-EU ties will likely be another hurdle for the Turkish economy and its currency.

Nagorno-Karabakh:  The latest U.S.-brokered ceasefire between Armenian and Azeri forces fighting over the enclave of Nagorno-Karabakh has broken down with each side blaming the other.  As noted above, Russia’s backing of the Armenians and Turkey’s backing of the Azeris ensures Russia-Turkey tensions will remain high, but Russian Foreign Minister Lavrov today insisted Russia will still seek to cooperate with Turkey on other international issues.

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