Daily Comment (September 22, 2020)

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

[Posted: 9:30 AM EDT] | PDF

In our Daily Comment today, we discuss the latest new sources of tension between the U.S. and China.  That tension remains one of the key risks for global markets, ranking right up there with the economic impact of the coronavirus pandemic, faltering prospects for more pandemic relief from the federal government, and, now, tumult over President Trump‘s new nominee to the Supreme Court.  We discuss the China developments and many of those other risks below.

China:  As we noted in our Daily Comment yesterday, the Chinese government has issued guidance on how it will punish foreign firms named to its new “unreliable entities” list, designed as a way to retaliate against U.S. initiatives against China.  However, Chinese officials are reportedly locked in an internal debate on whether to actually name companies to the list before the U.S. election.  Some officials fear that naming U.S. firms to the list could enflame popular U.S. sentiment against China and prompt even tougher anti-Chinese action by the Trump administration.  Even with the temporary restraint, however, we think the momentum toward publishing the list is a risk to global equities, as those firms named to the list could have their Chinese sales or production processes seriously crimped.  In other key China news today:

Italy:  The populist, anti-immigrant League Party failed to pull off its expected win in the Tuscany regional elections, leaving the center-left Democratic Party in control of the government, just as it has been for the last 50 years.  The League’s failure signals further political challenges for Italian populists, but they scored a win in the constitutional referendum on cutting the size of Italy’s government.  According to preliminary results, some 70% of voters approved a constitutional change to cut the number of national legislators by about one third.

  • The referendum result suggests that while European populists may be losing some support, their ideas still have to be reckoned with.
  • All the same, the combined results strengthened Italy’s current governing coalition, whose main members are the Democratic Party and the Five Star Movement, and reduced the likelihood of early elections that could favor right-wing, EU-skeptic parties. Italian bonds are therefore rallying so far today.

Global meat and dairy industries:  Now that opponents of global warming have gotten traction in their years-long campaign to divest from fossil fuel companies, they are increasingly turning their sights on the meat and dairy industries.  Since those industries also produce a high amount of carbon dioxide and other greenhouse gases, and global warming opponents now have a well-developed playbook to push through divestment, their new focus has the potential to undermine asset values in the food-producing sector.

COVID-19:  Official data show confirmed cases have risen to 31,358,115 worldwide, with 965,575 deaths and 21,525,887 recoveries.  In the United States, confirmed cases rose to 6,858,212, with 199,890 deaths and 2,615,949 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


 U.S. Policy Response

  • Federal Reserve Chairman Powell and Treasury Secretary Mnuchin will testify before the House Financial Services Committee today and the Senate Banking Committee on Thursday, with Powell also making a solo appearance before a special House committee on the federal coronavirus response on Wednesday.
    • In prepared remarks for his testimony today, Powell said much of the rebound in consumer spending since the end of mass virus lockdowns has come from the federal government’s stimulative fiscal and monetary policy.  Going forward, Powell suggested that further progress on the economic recovery would require more fiscal support for both consumer spending and state and local government budgets.  Separately, incoming anecdotal evidence suggests workers who lost the supplemental federal unemployment benefit of $600 per week when it expired in July are now sharply cutting their spending, raising a risk that the rebound in consumer demand could soon peter out.  We continue to believe that weakening consumer demand and/or sharp spending cuts by state and local governments could seriously slow the economy and present a challenge for the equity market.
    • In answer to criticism that the Fed’s emergency lending programs haven’t helped small and medium-sized businesses very much, Powell will say that those firms may be better helped by “direct fiscal support.”

 Foreign Policy Response

  • In a speech to the British Chambers of Commerce, Bank of England Governor Bailey said that even though the BOE has been investigating how it would use negative interest rates if needed, it in no way implies that the policy will be implemented anytime soon.  The statement helped reverse an earlier slide in sterling, leaving the British currency up at $1.2796 in mid-morning trading (London time).

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