Daily Comment (September 18, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Friday!  It’s a quadruple “witching day,” the day when stock index futures, single stock futures and their associated options expire.  It is not unusual to see heightened volatility on such days.  Equity markets are mostly stable, so far, this morning.  We begin our coverage with yesterday’s Bank of England meeting, which ended after we wrote yesterday’s report.  China comes next, with more on TikTok.  We update the pandemic news, followed by the latest on Brexit.  A wrap-up of world news comes next and we close with economic news.  Being Friday, there is a new Asset Allocation Weekly, along with the associated podcast and chart book.  Here are the details:

Bank of England:  Normally, we don’t comment on the proceedings of this particular bank; although the U.K. financial system is important to the world, the British economy doesn’t have an enormous impact any longer.  On the other hand, the U.K. is sometimes a harbinger of trends that affect the U.S.  For example, the rise of Tony Blair coincided with a similar figure, Bill Clinton.  And, Brexit itself was a reflection of the rise of American populism.  Although policy didn’t change, the Monetary Policy Committee warned that a return of the virus could trigger another downturn, which led the leadership to hint that the bank was “exploring” negative nominal policy rates.  The GBP fell on the news.  The BoE has, up until now, followed the Fed path, using QE and forward guidance in lieu of negative rates.  The idea that the BoE appears to be preparing the markets for negative policy rates is new.  Although we don’t expect the Fed to follow this path (negative nominal rates bring havoc to the shadow banking system by effectively making money market funds untenable), the fact that the BoE is considering it raises the idea that this may become a trend here as well.

China news: 

 COVID-19:  The number of reported cases is 30,205,226 with 946,673 deaths and 20,548,561 recoveries.  In the U.S., there are 6,676,410 confirmed cases with 197,655 deaths and 2,540,334 recoveries.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high frequency data on various factors.  The Rt data show that 22 states have a reading less than one (infections are not spreading) while 28 are showing the opposite condition.  Hawaii has the lowest reading, Delaware the highest.


 Brexit:  The U.S., on a bipartisan basis, is warning PM Johnson not to create a border crisis in Northern Ireland.  One of the more interesting facets of the U.K.’s recent Internal Market Bill is that it may not have been necessary.  There is a mechanism in the Withdrawal Bill for making adjustments.  In fact, the EU has made several changes to which the U.K. has already agreed.  The Johnson government could have raised its concerns within the current arrangement.  The fact it didn’t may mean the U.K. didn’t think the EU would agree or Johnson may have simply made a mistake.  British creditability has taken a hit, and its behavior may make it more difficult to make future trade agreements.

World news:  Belarus is planning  to close its border with Poland and Lithuania, although reports from the frontiers suggest it hasn’t occurred yet.  It isn’t clear why the borders are being closed, although we suspect Lukashenko is worried about activists fleeing the country.  This announcement may be a precursor for a crackdown.  Peru’s president is facing an impeachment vote; Martin Vizcarra has been under scrutiny over an influence-peddling scandal.  Aleksei Navalny was poisoned in his hotel by a water bottle testing positive for Novichok.  A rare hurricane level storm has formed in the Mediterranean; it is expected to make landfall in Greece.

Economy and policy news:

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