Daily Comment (September 2, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Today, on the 75th anniversary of the end of World War II, we discuss the latest signs of new fiscal and monetary stimulus in the U.S. and indications that policymakers in Europe may take steps to weaken the euro. We begin with a focus on the coronavirus pandemic and the various policy responses to it. After that, we discuss several broader international developments that serve as a reminder of rising geopolitical risks.

COVID-19: Official data show confirmed cases have risen to 25,785,890 worldwide, with 857,821 deaths and 17,095,825 recoveries. In the United States, confirmed cases rose to 6,076,425, with 184,697 deaths and 2,202,623 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 increased by more than 43,000 yesterday, but that was still slightly below the rolling seven-day average. Reported deaths remain far below their seven-day average of approximately 1,000.
    • Still, educational institutions like universities, community colleges, and local schools are often facing outbreaks, or find themselves at the center of infection surges. This is forcing an increasing number to delay in-person instruction or return to a totally virtual environment. To avert a threatened teachers’ strike over safety concerns, New York City Mayor Bill de Blasio said municipal schools will delay the start of in-person learning by more than a week, which has been pushed to September 21.
  • For a look at Russia’s efforts to fast-track the development of a vaccine to burnish its geopolitical power, even if that means cutting corners on safety, check out this article from the Wall Street Journal.

 Economic Impact

 U.S. Policy Response

  • In testimony before a congressional committee yesterday, Treasury Secretary Mnuchin urged Congress to appropriate more money to combat the effects of the coronavirus pandemic, saying he was ready to sit down with Democratic leaders to resume negotiations at any time.
    • Mnuchin suggested the gap between the two sides may be narrowing, and mentioned a new, higher number for the administration’s proposed ceiling for a follow-on bill: $1.5 trillion.
      • He also indicated the administration has softened its opposition to a Democratic proposal for more aid to state and local governments.
      • In addition, Mnuchin announced a new, complex moratorium on renter evictions through the end of 2020, based on CDC authorities to fight the pandemic.
    • Though it’s too early to know if Mnuchin’s statements will help get the ball rolling again, they do seem to be moving in the right direction. A significant new pandemic relief bill could be instrumental in keeping the current recovery going and allowing further gains in risk assets.
  • FRB Richmond President Tom Barkin said the Fed will need to continue providing significant and sustained support to the economy, since controlling the coronavirus has proven harder than anticipated, and the labor market recovery is weakening earlier than expected. Barkin also said he was optimistic that elevated personal saving rates would create the potential for a significant boost in spending once people feel safer leaving their homes and spend money on goods and services.

 Foreign Policy Response

 Financial Market Developments

  • The euro is depreciating far today, after briefly surpassing $1.20 on Tuesday for the first time since May 2018. The currency weakened after ECB Chief Economist Philip Lane said the euro’s strength would influence policymakers’ forecasts for the region’s growth and have an impact on monetary policy decisions. Analysts expect the ECB will aim to limit the strength of the euro.

 United States-China:  Global geopolitics continue to be dominated by the rise of China and its challenge to the U.S., which in turn is unsure it wants to maintain its traditional role as the global hegemon. There are various developments related to U.S.-China tensions today:

  • U.S. Space Command Deputy Director of Operations Shawn Bratton warned that the U.S. needs to develop space-based weapons to counter a range of such weapons being developed by China, including its own GPS system known as BeiDou. At potential risk are the military and civilian satellites that play a crucial role in U.S. defense and the global economy.
    • Military planners are particularly worried that with its own GPS, China could seek to disable the U.S. satellite navigation system in the event of a conflict. According to Bratton, “We have so much capability on orbit that we have to be able to defend it.”
    • The warning from Bratton came on the same day the Department of Defense released its latest report on Chinese military power, which also emphasized China’s ongoing effort to rapidly expand its nuclear arsenal and delivery systems.
  • Negotiations to sell the U.S. business of Chinese social media firm TikTok to U.S. investors before President Trump’s threatened ban on September 15 have reportedly hit a snag. The problem is the Chinese government’s decision to require a license to export certain Chinese technologies. At issue is TikTok’s proprietary artificial intelligence algorithms that determine what videos to show users. Some insiders say Chinese officials don’t believe Trump’s stated concern about TikTok transferring information on its U.S. users to the Chinese government; rather, they believe his threatened ban is a way to grab valuable Chinese technology at a fire sale price. Others say the Chinese action is to express Beijing’s displeasure with U.S. moves to unwind past Chinese acquisitions. In any event, if the Chinese government scuttles the deal, the move would be a significant step toward further dividing the global internet into separate Chinese and U.S. spheres, with negative implications for both Chinese and U.S. technology stocks.
  • On a more positive note, China continues to take small steps to open its financial market to foreign firms. Citigroup (C, 51.20) today said the China Securities Regulatory Commission granted it a license to act as a custodian bank in China. That makes Citi the first major U.S. financial firm to receive such a license.

 China-India:  Chinese and Indian troops have had yet another confrontation along the countries’ disputed border in the Himalaya mountains, following a similar incident over the weekend and a fatal clash in June (discussed in our Weekly Geopolitical Report from July 13, 2020). No firm details have been released about the latest confrontation, but each government has issued strong demands that the other side control and discipline their frontline troops. The incident highlights the continued risk of escalation, as both China and India pursue aggressively nationalist policies.

Japan:  Prime Minister Abe’s right-hand man, Chief Cabinet Secretary Yoshihide Suga, confirmed his candidacy to succeed Abe as leader of the Liberal Democratic Party and Japan’s next prime minister. Having gained the backing of key LDP factions, Suga is now widely seen as the frontrunner in the race to succeed Abe. He could become prime minister in the next two weeks or so. In his announcement, Suga promised to continue Abe’s key policies, including low interest rates, a weak yen, and loose fiscal policy. All the same, the transition to a new leader has the potential to shift Japanese policies into new directions and even touch off a rebound in the yen.

France-Lebanon:  In a visit to Beirut, French President Macron pressed Lebanese leaders to form a government within two weeks and deliver long-delayed reforms. He warned that he otherwise wouldn’t support international aid to help the country deal with last month’s catastrophic explosion in the city’s port. By all accounts, however, Macron’s pressure wasn’t totally for the benefit of Lebanon’s citizens. Rather, one of his key goals was to avert a new wave of refugees fleeing into the EU as happened in 2015.

View PDF