Daily Comment (September 23, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today discusses the state-of-play on Supreme Court politics in the U.S. and the initial passage of a vote that is keeping the federal government funded through December.  Those developments are positive and are probably helping to give risk markets a boost so far this morning.  However, we also note several continued risks, such as a potential problem for the TikTok deal and worsening coronavirus infections around the world.

U.S. Supreme Court:  After Senator Romney’s commitment yesterday to immediately consider and vote for President Trump’s next Supreme Court nominee, it appears the Democrats won’t be able to stop a quick vote on the pick.  In fact, many Republicans are now pushing to vet and vote on Trump’s eventual nominee before the election on November 3.  Trump is expected to name his nominee on Saturday.  Even though such a quick confirmation process has the potential to anger and energize Democratic voters more than Republicans, the White House may have decided the risk was worth it. This will put an additional conservative judge on the panel in case a disputed election has to be decided by the Supreme Court.  In any event, the moves highlight the growing risk of disruptive, confidence-sapping political disputes and delayed election results that the markets will have to contend with over the next few months.  It should not be a surprise if the financial markets remain volatile until things get sorted out.

U.S. Fiscal Policy:  The House of Representatives last night passed a short-term spending bill keeping the federal government funded through December 11.  The Senate is now expected to approve the bill next week, averting a partial shutdown when the government’s funding expires on September 30.  Given that the economic recovery from the coronavirus has been losing steam, a government shutdown could have been a crippling blow to confidence.  We therefore consider the likely passage of the bill to be a notable positive for the markets.

U.S.-China Relations:  Critical editorials published by several Chinese state-media outlets suggest Beijing might not approve last weekend’s deal to sell a stake in Chinese social media app TikTok to U.S. investors in an effort to avoid a Trump administration ban on the app due to data security concerns.  Coupled with apparent disagreements over the deal’s ownership and control provisions, it looks like TikTok is not out of the woods yet.  If the deal fails, it would further add to U.S.-China frictions that have unnerved financial markets over the last couple of years.  Separately, in his video speech to the U.N. General Assembly yesterday, President Trump again called out China for its role in allowing the coronavirus pandemic to start, and he demanded that Beijing be “held accountable” for its actions.

Russia:  Opposition activist Alexei Navalny has been discharged from the German hospital where he was treated for poisoning by the Russian chemical weapon Novichok.  According to officials at the hospital, Navalny has a chance of “complete recovery,” which suggests he will be able to carry on as a political thorn in President Putin’s side once he returns to Russia.

Global auto industry:  Tesla (TSLA, 424.23) held its big “Battery Day” event yesterday, with CEO Elon Musk predicting that advances in cell manufacturing and chemistry would allow the firm to slash battery costs and eliminate the price advantage of gasoline-powered cars in about three years.  Investors were evidently disappointed in that timeline, but that shouldn’t detract from the major impact electric vehicles are likely to have on the world economy if Musk is right.  Given the auto industry’s huge economic footprint, the implied switchover to electric vehicles could portend a major restructuring of the world’s industrial sector and labor market.

COVID-19:  Official data show confirmed cases have risen to 31,647,930 worldwide, with 971,711 deaths and 21,776,599 recoveries.  In the United States, confirmed cases rose to 6,897,661, with 200,818 deaths and 2,646,959 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


  • Confirmed U.S. infections rose by only about 39,000 yesterday, but the seven-day moving average of new infections remained on its recent uptrend and topped 43,000.  New deaths linked to the virus remain at approximately 750 per day.  Elsewhere, major European countries continue to face resurgent infections, raising the risk of targeted new lockdowns and financial market disruptions.
  • Johnson & Johnson (JNJ, 144.21) said it has started a 60,000 person clinical trial of its single-dose COVID-19 vaccine on three continents.  That means Johnson & Johnson has the fourth experimental vaccine to enter final-stage testing in the U.S., further increasing the odds that a viable vaccine will be available, at least in limited quantities, in the coming months.  The company’s single-dose format could be especially important in easing logistics for getting people vaccinated and increasing uptake of the shot.
  • The Food and Drug Administration has reportedly developed draft guidelines that would require any new COVID-19 vaccine to meet strict safety and effectiveness standards before it could gain quick use authorization.  Among the proposed requirements is that a coronavirus shot reduce the rate of infections by 50% compared with a placebo, which the regulators have already required for regular approval of any COVID-19 vaccines.
    • The White House must sign off on the plan, but if it does so, it would make it difficult for a vaccine to be authorized for emergency use before Election Day.
    • Some observers have accused the federal government of politicizing its virus policy and guidelines.  We take no position on that issue, but we do note that if quickly approved vaccines are seen as having been rushed to market without proper testing, many people might be reluctant to get the shot.
    • If uptake of the vaccine is low, the virus could continue to spread and disrupt economic activity longer than would otherwise be the case, with negative implications for risk assets.

 Economic Impacts

  • The IHS Markit flash composite purchasing managers index for the Eurozone unexpectedly declined to a seasonally adjusted 50.1 in September, only slightly above the 50-level that signifies increasing economic activity (see data tables below).  The figure for September was a significant decline from the 51.9 reading for August.  On the bright side, the sub-index on manufacturing rose to a two-year high of 53.7 from 51.7 in the previous month.  The problem was that the sub-index on the service sector, which has been hit especially hard by the pandemic, fell all the way to 47.6 from 50.5.
    • In the U.K., the IHS Markit/CIPS flash PMI fell to 55.7, from a 72-month high of 59.1 in August, as business leaders reported a fall in optimism and consumer confidence.  Some flash PMIs in Asia also pointed to a faltering recovery.
    • Taken together, the data appear to reflect the negative impact from Europe’s resurgent coronavirus cases, in addition to the natural moderation in growth following the big bounce after severe restrictions were lifted over the summer.

 U.S. Policy Response

 Foreign Policy Response

  • The European Central Bank has urged the EU to consider making its new €750 billion pandemic recovery fund permanent in order to ensure “stronger economic support for more vulnerable countries.”
    • Not even including the loans in the program, ECB economists estimated the €390 billion in grants would provide a net benefit worth more than 10% of the pre-crisis Croatian and Bulgarian GDP and almost 9% for Greece.  Other net beneficiaries of the grants include Portugal, which would gain 5.4% of its pre-crisis economy, Spain with a gain of 3.4%, and Italy with a gain of 1.9%.
    • As we’ve argued before, the introduction of common EU debt backed by the full faith and credit of the bloc’s member states, which is how the recovery fund is to be financed, would go far toward making the euro a more viable reserve currency.  If making the fund permanent implies continued large-scale borrowing over time, the impact would be even greater, and the euro could start to appreciate even further compared with the greenback.

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