Daily Comment (September 9, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today includes a discussion of the recent rout in large cap tech stocks and where we go from here, as well as an update on the latest coronavirus news.  As always, we also discuss the day’s key geopolitical developments, particularly those involving China, India, and the U.K.

United States:  Large cap technology equities are rebounding so far this morning, after the NASDAQ index fell into correction territory yesterday, but we still want to say a few words about their recent rout and where we go from here.  Reporting over the last few days suggests the runup in large cap tech during the spring and summer stemmed largely from a massive purchase of call options by Japan’s SoftBank Group (SOBKY, 12.58) and other investors.  Those purchases forced the trading counterparties to hedge their positions by buying the underlying equities.  According to the Wall Street Journal, SoftBank alone bought billions of dollars of the calls and the underlying stocks as well.  It also sold call options at far higher prices, which would allow SoftBank to profit from a near-term runup in stocks and then reap those profits by unloading its position to willing counterparties.  In a word, it’s possible to sniff a bit of market manipulation in the air.  That goes far toward explaining the quick sell-off in large cap tech stocks and other risk assets once some investors started to head for the exits.  All the same, looking at the longer term, we still think the impact of continued ultra-low interest rates and expansive fiscal policy is profoundly bullish for risk assets.  Once the markets reach a support level (for the S&P 500, yesterday’s close near the previous market peak would be one candidate, while another potential support level might be at about 3,215), we would not be surprised to see the beginning of a new uptrend, even if it might be more disciplined than the one that ended last week.

COVID-19:  Official data show confirmed cases have risen to 27,610,660 worldwide, with 898,297 deaths and 18,567,842 recoveries.  In the United States, confirmed cases rose to 6,328,154, with 189,699 deaths and 2,359,111 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 26,000 yesterday, helping drag the rolling seven-day moving average below 40,000 for the first time since late June.  The U.S. death toll related to the virus also declined, bringing its rolling seven-day average farther below 1,000.  Abroad, India continues to show some of the worst virus dynamics, with new infections yesterday rising by almost 90,000 and deaths topping 1,100.  In the U.K., the government banned social gatherings of more than six people as a surge in new cases suggested the country could be on the verge of a second wave of the pandemic.
  • British drug giant AstraZeneca (AZN, 54.71), which is developing one of the leading candidates for a coronavirus vaccine with researchers from Oxford University, said it is temporarily suspending its Phase III trial of the substance because of an unexplained illness in one of the participants.  Despite the setback, the stock is down only moderately so far this morning, even though the disappointment could favor one of the competing vaccines under development.  Amid the heightened geopolitical competition to come out with a workable vaccine, it’s even possible that a state actor like China or Russia could have sabotaged the British project in order to make their own candidate look better.  In any case, a key risk is that the news could feed into public distrust regarding the safety of any quickly developed vaccine.  That could reduce the public’s willingness to get vaccinated and prolong the pandemic to the detriment of the global economy and financial markets.
  • In an effort to assure the public that they’re not compromising safety to get a vaccine out quickly, the CEOs of AstraZeneca and eight other major drug firms signed a pledge promising not to file for regulatory approval or authorization of their experimental vaccines until the shots have been shown to work safely through late-stage clinical testing.
    • In the pledge, the companies say that the safety and well-being of vaccinated individuals would always be their priority.
    • The firms also say they will keep following scientific and ethical standards in clinical trials and manufacturing.
  • In contrast with the effort to demonstrate caution by U.S. and European drug firms, the Russian health ministry said the first batch of the country’s Sputnik V vaccine has been released for civil distribution.  According to the ministry, a countrywide vaccination campaign will begin next month following post-registration tests, even though more than half of the doctors surveyed by the polling agency Doctor’s Manual said they did not trust the new vaccine.

 U.S. Policy Response

  • Senate Republicans proposed a new “skinny” pandemic relief bill with a total cost of around $650 billion (and a net cost of $300 billion after taking into account the use of $350 billion in unspent funds from earlier coronavirus packages).
    • The bill includes supplemental federal unemployment benefits of $300 per week through December 27, liability protections for businesses, and new funding for schools, among other measures. It also adds new tax credits for private school scholarships and homeschooling expenses.
    • Notably, the bill doesn’t include funding for a new round of stimulus checks to be sent directly to individuals, and it includes no broad aid for state and local governments.  The bill would also eliminate $200 billion in funding to support the Fed’s emergency lending programs.
    • In sum, the package remains far below the levels demanded by congressional Democrats, suggesting the bill is no more likely to pass than the $3.5-trillion bill being pushed by House Democrats.  The stalemate continues.

 China-India:  The Chinese and Indian armed forces accused each other of firing warning shots in a new skirmish along the countries’ disputed border in the Himalaya mountains, marking a dangerous new escalation in the border crisis.  If any of the accusations are true, it would mark the first use of firearms between the countries since an agreement was signed decades ago to outlaw them in the region.  Moreover, the Indian military said it would station thousands more troops in the region during the brutal winter than it normally would, which is likely to keep alive the risk of further escalation and a potential geopolitical crisis.

United States-China:  We often talk about the long-term pressures pushing back against globalization and the U.S. pullback from its traditional role as global hegemon, but it’s important to remember that these trends can proceed slowly, in fits and starts.  As evidence of that, the American Chamber of Commerce in Shanghai has published a survey showing that fewer than 4% of its members were relocating some production capacity back to the U.S.  More than 70% said they had no plans to relocate any manufacturing out of China despite higher tariffs from President Trump’s long-running trade war with the world’s second-largest economy.

United Kingdom-European Union:  Confirming what we reported in yesterday’s Comment, the U.K.’s Northern Ireland Secretary admitted in parliament that the government will abrogate its Brexit agreement with the EU regarding Northern Ireland customs procedures and state aid to private companies.  However, in a failed effort to mollify the MPs, the official assured them that the action would only “break international law in a very specific and limited way.”

Belarus:  Police have apparently arrested yet another member of the Coordination Council, which is leading the political opposition against President Lukashenko after his apparently fraudulent reelection.  That means five of the seven members of the council have now been detained as Lukashenko cracks down on his opponents.

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