Daily Comment (September 1, 2020)

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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we discuss the latest example of renewed U.S.-Russia military tensions, as well as recent developments in the race to succeed Japanese Prime Minister Abe.  Today’s purchasing managers’ indexes out of China and Europe were generally positive, suggesting continued economic recovery from the coronavirus pandemic and helping give a lift to risk assets. However, broader virus news was a bit mixed.  We review all the key news below.

United States-Russia:  In the second U.S.-Russia military confrontation of the last week, Russian Su-27 fighter jets harassed a U.S. B-52 bomber flying in international airspace over the Black Sea on Friday.  The fighters crossed within 100 feet of the bomber’s path and forced it to fly through dangerous turbulence (for Department of Defense video of the encounter click here).  Last Tuesday, several American troops operating in northeast Syria were injured when a Russian military vehicle rammed its own.

Japan:  The ruling Liberal Democratic Party said the election to select a replacement for Prime Minister Abe will utilize an emergency ballot procedure that excludes rank-and-file members.  The new party leader will be chosen only by LDP members of parliament and regional party chiefs.  That’s likely to be a disadvantage for Shigeru Ishiba, a former minister of defense and regional revitalization, who is popular with the public because of his calls for more income equality, but he is unpopular with national party leaders for his past criticisms of Abe.  The frontrunner in the election now is probably Abe’s chief cabinet secretary, Yoshihide Suga, an experienced and unobjectionable political player with little foreign policy expertise.

Argentina:  The Argentine government announced it has successfully restructured almost all of its $65 billion debt with private creditors, potentially ending the country’s ninth sovereign debt default.  According to Economy Minister Martin Guzmán, 99% of the country’s creditors have accepted the government’s offer, which extends maturities on the debt and lowers interest rate payments from an average of 7% to about 3%.

COVID-19:  Official data show confirmed cases have risen to 25,511,385 worldwide, with 851,154 deaths and 16,850,044 recoveries.  In the United States, confirmed cases rose to 6,031,525, with 183,602 deaths and 2,184,825 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


 Economic Impact

 U.S. Policy Response

 Financial Market Response

  • Reflecting the mantra of “lower for longer” regarding U.S. interest rates and the prospect that mutual EU bonds could make the euro a more viable reserve currency, the U.S. dollar continues to weaken.  Early today, the euro rose to within a whisker of $1.20, a level the common European currency hasn’t reached since May 2018.  As we’ve been arguing, the falling dollar should be particularly bullish for foreign assets and precious metals.
  • Along with consumers’ continued caution about venturing out, delayed office and school re-openings are weighing on crude oil demand.  As a result, crude prices per barrel remain stuck in the low $40s.

View PDF