Daily Comment (September 30, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today provides a short recap of last night’s presidential debate, as well as an update on the fighting in Nagorno-Karabakh.  Next is a discussion of today’s positive economic data out of China. We also discuss some new developments in global monetary and regulatory policy, and finally, a few sundry other interesting tidbits.

U.S. Elections:  President Trump and Joe Biden had their first debate of the presidential campaign last night, although you could be forgiven for thinking the debate was between Trump and moderator Chris Wallace, given their extended sparring.  Our initial impression was that both Trump and Biden avoided any major campaign-killing gaffes, without scoring any knockout punches.  Everyone from political analysts to individual citizens will now be assessing how things went, and a different consensus might arise over the coming day or two.  For now, however, the most likely scenario is that the event will do relatively little to change the character of the race.  All the same, the name-calling and insults did highlight the risk of political instability surrounding the election, which helps explain the modest pullback in stocks so far today.

Nagorno-Karabakh:  For the fourth straight day fighting continues in Azerbaijan’s breakaway region of Nagorno-Karabakh, with Azeri forces and ethnic Armenian rebels launching attacks in several directions along the so-called Line of Contact dividing them.  The fighting is now spreading well beyond the borders of the enclave and threatening to spill into all-out war between the former Soviet republics of Azerbaijan and Armenia.  Even worse, the conflict has also threatened to draw in Russia, which has a security alliance with Armenia, and Turkey, which said today that it will back Azerbaijan with “every means available” in the conflict.

China:  The country’s official Purchasing Managers’ Index for manufacturing rose to a seasonally adjusted 51.5 in September, beating both the expected level of 51.2 and the August reading of 51.0 (see data tables below).  Like most major PMIs, the index is designed so that readings over 50 indicate expanding activity, so the gauge suggests the Chinese factory sector is continuing to recover from the coronavirus disruptions earlier this year.  Since that means the Chinese economy could help power the global recovery, the news should be bullish for risk markets, although perhaps not enough to offset the growing concerns about resurgent infections and political tensions.

  • A separate private gauge of activity, the September Caixin Manufacturing PMI, fell slightly but was still robust at 53.0.
  • The official nonmanufacturing PMI, which includes both the service and construction sectors, jumped to 55.9 in September, its highest result since November 2013 and better than the previous month’s reading of 55.2.

 Global Monetary Policy:  For the first time, European Central Bank President Lagarde said the ECB would consider following the lead of the U.S. Federal Reserve by committing to let inflation overshoot its target after a period of sluggish price growth.  However, she also sounded skeptical of the more flexible approach to monetary policy, adding, “Make-up strategies may be less successful when people are not perfectly rational in their decisions — which is probably a good approximation of the reality we face.”  Of course, another concern with the new approach is that it could help fuel asset bubbles, as discussed recently by Dallas FRB President Kaplan.

Global Technology Industry Regulation:  In an effort to improve competition and reduce the dominance of big, multinational technology firms (many of which are U.S. companies), a draft of the EU’s proposed Digital Services Act would require those companies to share data collected on their platforms with competitors if they want to do business in the EU.  Meanwhile, the House Antitrust Committee is completing a probe that could result in legislation forcing the separation of online platforms. The developments highlight the growing regulatory risks faced by multinational tech firms, despite their strong outperformance in the stock market until recently.

European Union-United Kingdom:  The U.K.’s chief Brexit negotiator, David Frost, conceded that the EU has refused to provide preferential import terms to British auto manufacturers in the trade deal he’s negotiating with Brussels.  With four out of five British-made cars being exported, mostly to the EU, it raises prospects that the industry would face major disruptions even with a trade deal.  The auto provision and other stumbling blocks continue to suggest a hard Brexit without a deal is becoming more and more likely.

Kuwait:  The government announced that the country’s ruler, Sheikh Sabah al-Ahmad al-Jaber al-Sabah, died yesterday at the age of 91.  He has been succeeded by his half-brother, Crown Prince Sheikh Nawaf al-Ahmad al-Jaber al-Sabah, but he is 83 and in poor health. He isn’t expected to make dramatic changes to Kuwaiti policies.  The real issue for Kuwait is the battle to succeed him as crown prince, which could prove divisive and drawn out.  A key question is whether Kuwait will now continue its steadfast support for Palestinian statehood or follow the lead of the United Arab Emirates and Bahrain in finally recognizing Israel.

Cuba:  The Cuban government is stepping up plans to devalue the peso for the first time since the 1959 revolution, as a dire shortage of tradable currency sparks the gravest crisis in the communist-ruled island since the fall of the Soviet Union.

COVID-19:  Official data show confirmed cases have risen to 33,700,008 worldwide, with 1,008,874 deaths and 23,426,047 recoveries.  In the United States, confirmed cases rose to 7,191,406, with 206,005 deaths and 2,813,305 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


 Economic Impacts

  • The Walt Disney Company (DIS, 125.40) said it would lay off about 28,000 employees at its U.S. theme parks who had been on furlough since April.  In a statement, the firm said a key reason for the decision was the California state government’s pandemic restrictions, which would keep its Disneyland resort closed for the foreseeable future.

 U.S. Policy Response

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