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:

• A court in Beijing sentenced an influential businessman known for his outspoken criticism of China’s leader, Xi Jinping, to 18 years in prison, meting out harsh punishment in a corruption case that is likely to chill dissent within the Chinese political elite and further stoke anti-China sentiment in the major democracies.
• In New York, federal prosecutors charged a New York City police officer, who is also a U.S. Army reservist, with acting as an illegal agent of China since 2018. According to the complaint, Baimadajie Angwang served as an intelligence asset to officials stationed at the Chinese consulate in New York, and he used his position to provide them with access to senior members of the New York Police Department. Angwang, a community affairs officer, also reported on “the activities of ethnic Tibetans” in New York and scoped out potential intelligence sources to recruit from the local Tibetan community.

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.

Virology

• Confirmed U.S. infections jumped by approximately 52,000 yesterday, marking their biggest gain since August 14.  The seven-day moving average of new infections has now risen to more than 40,000 for the first time since early September.  The seven-day average of deaths has also risen a bit, though it remains below 800 per day.
• According to a new study, colleges and universities that reopened for face-to-face instruction may have caused tens of thousands of additional infections in recent weeks.  The researchers estimated that an extra 3,200 cases a day occurred in the U.S., which likely wouldn’t have happened had schools kept classes online.
• In the U.K., Prime Minister Johnson will reverse his recent efforts to persuade people to go back to work.  With British infections now in full resurgence, Johnson will instead urge people to return to working from home.  He will also order all pubs, restaurants and bars to close daily at 10:00 pm. There is no indication that he will bring back the dramatic travel restrictions imposed during the spring.
• In Spain, the regional Madrid administration imposed new mobility restrictions on some districts to fight resurgent infections there, and Prime Minister Sánchez warned the national government would impose tougher restrictions if necessary.
• In case you’ve been wondering, the pandemic has also prompted major changes in how organized crime syndicates operate.  According to the European Monitoring Center for Drugs and Drug Addiction, crime groups have increasingly turned to home delivery services, the dark web, and social media platforms as alternatives to street dealing.
  • The pandemic has also led to reduced consumption of drugs commonly used in social settings, such as cocaine and ecstasy.
  • However, it has also prompted an increase in the use of cannabis and new forms of tranquilizers.
• In yet another confusing change in the federal government’s pandemic guidance, the U.S. Centers for Disease Control revoked new recommendations issued just last Friday stating the virus can be spread through tiny “aerosol” particles that linger in the air, without continued, close contact with someone infected.
  • According to the CDC, the revoked guidance was a draft version posted on the agency’s website in error.
  • Coupled with other reversals and contradictory statements, such as those related to wearing masks and testing asymptomatic people who were in contact with an infected person, the latest about face could further fuel concern that the federal guidance is being politicized.
• Meanwhile, the Advisory Committee on Immunization Practices, a group of external medical experts who advise the CDC, said they will put off a planned Tuesday vote on how the limited initial doses of any new coronavirus vaccines should be allocated.  According to insiders familiar with the decision, the members wanted to see more information on the characteristics of the vaccines before deciding who should get them first.
• Medical experts are increasingly convinced that taking someone’s temperature isn’t a good way to know if they might have COVID-19, given problems such as the natural variation in people’s normal temperature and potentially inaccurate readings from thermometers.
• Because of an apparent drafting error in the CARES Act, federal officials believe Medicare would be precluded from covering any coronavirus vaccine approved under an emergency-use authorization.  The Department of Health and Human Services is looking into a fix that would prevent Medicare participants from having to pay out-of-pocket for the shot, but correcting the error may require legislative language–potentially a tough project in competition with the looming election and confirmation hearings for President Trump’s Supreme Court nominee.

 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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