Daily Comment (October 28, 2020)

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 note that our Asset Allocation Rebalance Chart Book for the fourth quarter is now available on Vimeo.  In this video, we review our asset allocation process, detail our quarterly portfolio adjustments, and offer a deep dive into the macro-environment that underlies our decisions.

Our Daily Comment today focuses on the coronavirus pandemic since the recent resurgence in infections is having such a negative impact on investor sentiment.  Not only are increasing infections raising the threat of renewed economic lockdowns, but they’re even sparking violent protests in Europe.  Following our review of the coronavirus developments, we take a quick look at other news items, several of which revolve around U.S.-China tensions.

COVID-19:  Official data show confirmed cases have risen to 44,067,588 worldwide, with 1,168,693 deaths.  In the United States, confirmed cases rose to 8,779,993, with 226,733 deaths.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


  • New confirmed U.S. infections totaled more than 73,200 yesterday, lifting the seven-day moving average to another all-time high of 69,967.  Hospitalizations related to the coronavirus remained over 40,000 for the seventh day in a row, while daily deaths rose further to 985.  New infections and deaths continue to surge in Europe as well, putting its daily deaths-per-million count on par with the U.S.
    • The figures are further feeding fears that authorities across the developed world may be forced to re-impose mass economic lockdowns as they did in the spring, even though they’re trying hard to keep restrictions targeted and localized.
    • With a new U.S. pandemic relief bill off the table, possibly until early 2021, investors are becoming much more concerned about new, mass lockdowns that could undermine the weakening economic recovery and weigh further on corporate profits, all of which helps explain the renewed weakness in risk assets.
  • As France emerges as the new epicenter of infections in Europe, its coronavirus-related deaths reached a six-month high of 523 yesterday.  Aides said President Macron is considering imposing earlier curfews in many parts of the country and weekend lockdowns that would sharply curtail individuals’ movements in hot spots such as Paris.  In Germany, local health authorities are also starting to become overwhelmed.  In the U.K., the government’s scientific advisors are warning that while peak deaths in that country’s new wave probably won’t exceed the first wave’s peak, deaths will remain high for much longer and result in a higher total death toll than in the first wave.  The analysis is raising fears of an England-wide lockdown by Christmas.
  • The renewed restrictions have also sparked a wave of anti-lockdown protests across Europe.  Thousands of furious demonstrators clashed with police in cities in Italy and Spain as they urge their governments to abandon new restrictions on their freedom.
  • Meanwhile, the Chinese government has issued a warning that handling imported frozen or refrigerated foods could increase the risk of contracting the virus.  The warning came after epidemiological investigators pinned down the outbreak in Beijing in June, involving 335 cases, to imported salmon sold from a booth in a wholesale food market.
  • At the individual level, scientists and physicians are learning that a COVID-19 infection can leave people with a range of physical problems that last long after they’ve recovered.

 Economic Impacts

 Foreign Policy Response

  • With infections surging again in Europe, and with Friday’s price data expected to show a third straight month of deflation in the Eurozone, the pressure is likely rising on ECB policymakers to launch new monetary stimulus measures.
    • Many officials and investors fear that Europe is becoming bogged down in a Japanese-style cycle of weak growth, negative interest rates, and sub-zero inflation.
    • It’s still probably too early to expect new measures after Thursday’s policy meeting, but the increasing prospects for new European stimulus measures and the surging case counts around the developed world are already giving at least a temporary boost to the dollar today.

 U.S. Property Taxes:  Even though next week’s elections have us all focused on the presidential and Senate races, it’s important to remember there are also important state-level issues to watch.  In California, for example, Proposition 15 would ease some restrictions on commercial property tax valuations.  Under the measure, assessments on private residential property would continue to be strictly limited, but local governments could begin assessing commercial property based on its current value, rather than capping increases from the last time it was sold.  If passed, the measure could be an additional blow to some REITs holding property in California, which have already faced declining occupancy and rent arrears because of the coronavirus pandemic.  The measure could also hurt non-REIT property owners and their tenants, since many leases require tenants to cover property taxes.

United States-China:  The U.S. and China have narrowly sidestepped a potentially major diplomatic dispute after four political dissidents entered the U.S. consulate in Hong Kong to request asylum but were refused.  The incident happened just hours after the Hong Kong police department’s national security unit arrested the former leader of a pro-independence group as he was planning a similar move.

United States-India:  The U.S. and India yesterday signed an agreement to share geospatial intelligence, paving the way for deeper military cooperation between the two countries as they confront an increasingly assertive China.

China-India:  New reporting reveals that after the China-India military scuffles over disputed borderlands in the Himalaya mountains this summer, New Delhi quietly sent one of its warships into the South China Sea to send the message: “Don’t mess around in my backyard or I’ll mess around in yours.”  Last week, India also invited Australia to join the U.S. and Japan in its annual Malabar naval exercises in the Indian Ocean.  The moves illustrate the surprising extent to which New Delhi is shedding its reticence to unleash India’s maritime power and strengthen its security partnerships as it seeks to counter what it considers Chinese aggressions on its land border.

China:  The China Foreign Exchange Trade System, an arm of the central bank, announced that a countercyclical factor is no longer being used to set the central value of the renminbi for purposes of domestic trading.  The factor made the renminbi’s value more stable than it otherwise would have been, so the move is seen as a liberalization designed to make the currency more appealing to investors.  All the same, as the renminbi continues to appreciate, its recent strength is probably being driven more by China’s early success in overcoming the coronavirus pandemic and its continuing recovery from it.

Nagorno-Karabakh:  Clashes between Armenian and Azeri forces continue despite the recent U.S.-brokered ceasefire.  Importantly, it now appears that Azerbaijan has taken control of significant territory that could allow it to cut a road linking Armenia to the ethnic Armenian-controlled enclave.  The Azeri success evidently owes much to high-tech drones provided to Azerbaijan by Turkey, which have devastated Armenia’s outdated tanks.  That success illustrates Turkey’s ability to make trouble throughout the region as President Erdogan works to increase his influence in the area.

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