THE DAILY EDGE: 12 MAY 2020

• As Countries Ease Coronavirus Lockdowns, New Cases Crop Up New clusters of coronavirus infections are cropping up in some countries that have already loosened lockdowns, as more governors across the U.S. detailed plans to reopen their states’ economies.
• The coronavirus pandemic likely killed thousands more people in New York City than official tallies show, according to a federal report.
• In China, seven provinces have reported new locally transmitted cases over the past two weeks, said Mi Feng, spokesman for China’s National Health Commission. “Clustered cases continued to rise,” he said. Shulan, a city close to the Russian border, has reported an untraced outbreak that has sickened 15 people since last Friday. The city’s mayor said Monday that Shulan is entering a “wartime state” and has placed 290 people who had been in close contact with infected individuals in monitored quarantine centers.
• Wuhan will test its entire population of 11 million after the Chinese city where the pandemic began reported new infections for the first time since its lockdown was lifted.
• Russia reported more than 10,000 cases for the 10th straight day, taking it past Spain to second place for confirmed infections behind the U.S. The country added 10,899 infections over past day, up 4.9%, taking the total to 232,243. Fatalities rose to 2,116 after 107 people died in past the day.
• The White House directed officials to wear masks at all times inside the building except when sitting at their own desks. The president and vice president are not expected to do so.
• Sweden Revises Covid Strategy After Deaths of Elderly Spiral The nation’s controversial approach is coming under intense scrutiny.
• a group of experts including Dr. Anthony Fauci, the government’s top infectious-disease official, wrote in Science magazine that the search for a vaccine requires more than one approach. “No single vaccine or vaccine platform alone is likely to meet the global need,” the authors wrote.
• Twitter said it would start adding labels to tweets that have disputed information about the coronavirus.

CONSUMER WATCH

New York Fed Finds Big Deterioration in Consumer Views in April

• Of those polled, 31.6% foresaw being worse off financially a year from now, up from the 27.8% the prior month.
• The bank said that 21.9% of respondents project their incomes will outright fall over the coming year.
• Households are also getting more worried about their ability to borrow, with 48% of respondents reporting credit access was harder to get in April, up from the 32% who held that view in March.

America Loosens Up as COVID-19 Continues to Expand

The ninth week of the Axios-Ipsos Coronavirus Index finds social distancing continues to decline as fewer people see visiting friends and family as a major risk. However, about one in eight report knowing someone in their community who tested positive and over three-quarters report wearing a mask when leaving the home.

• 32% of Americans report visiting friends or relatives in the last week, up from 26% last week and 19% in mid-April.
• Additionally, the number who report ‘self-quarantining’ is down to 36% from a high of 55% in early April.
• Two-thirds (64%) of Americans say returning to their pre-coronavirus lives right now would be a large or moderate risk to their health and well-being, down from 72% in mid-April.
• Fewer Americans are also seeing in-person gatherings (81%->68%), going to the grocery store (70%->54%), or doing their job (39%->33%) as a large or moderate risk compared to mid-April. 
• Only about a third of Americans say they are likely to opt-in to cell phone based contact tracing systems established by the federal government (31%), major tech companies (33%), or cell phone companies (35%).
• A bare majority (51%) would join a CDC sponsored cell phone-based system.

PANDENOMICS

• Many policy makers and corporate executives expect a “swoosh” economic recovery–a large drop followed by a painfully slow recovery.
• China’s producer-price index dropped by 3.1% from a year earlier in April, compared with a 1.5% fall recorded in March, the National Bureau of Statistics said Tuesday. Prices for crude oil and other commodities collapsed, contributing to the decline in wholesale prices. Economists polled by The Wall Street Journal had expected the industrial-price gauge to drop by 2.5% year-over-year.
• FIBER: Industrial Commodity Price Declines Stabilize

  

How Did China’s COVID-19 Shutdown Affect U.S. Supply Chains?

This post has illustrated that the disruptions in China due to COVID-19 had significant effects on U.S. supply chains. Imports from China fell by about 50 percent in March relative to January. The disruption led to a shift of U.S. importers to other Asian countries, driven in particular by firms with already established relationships in these countries. While most large U.S. customers continued trading with their Chinese suppliers, smaller U.S. customers appear to have had more difficulty continuing their relationships during the COVID-19 related shutdown.

Going forward, COVID-19 is likely to give further impetus to trends that already began in previous years. It is likely to lead firms to consider bringing some critical activities back to the United States or to set up backup suppliers to reduce the firms’ exposure to any single supplier or country. While introducing such additional safeguards is going to reduce the efficiency of supply chains in normal times, it may well improve performance in the longer run by mitigating the high costs of supply chain disruptions.

• Toyota Forecasts 20% Drop in Revenue From Coronavirus but the car maker said its operations would manage to stay in the black.
• United Airlines will give passengers slated to fly on full flights a chance to rebook, after images of packed planes sparked fears about traveling. Most flights are still relatively empty, as demand for air travel has plunged more than 90% since the coronavirus began to spread. United said 85% of its flights are half full. But the number of passengers has started to climb, according to figures from the Transportation Security Administration. At the same time, those travelers are spread between fewer flights as airlines have slashed their schedules by as much as 90%.

Public Pension-Fund Losses Set Record in First Quarter Public pension plans lost a median 13.2% in the three months ended March 31, according to Wilshire Trust Universe Comparison Service data, slightly more than in the fourth quarter of 2008. March’s stock market plummet led to the biggest one-quarter drop in the 40 years the firm has been tracking.

Stocks bounced back in April, making up a significant chunk of the losses. But absent a full and speedy recovery, pension losses are poised to drive up already-burdensome retirement costs for governments.

“There will be a lot of pressure to cut benefits,” said Don Boyd, co-director of the State and Local Government Finance Project at the University at Albany’s Rockefeller College.

State and local governments “are trying to figure out how to not cut school aid too deeply, not cut Medicaid too deeply, not raise taxes,” Mr. Boyd said. “Pension contributions are pretty far down the list of things they want to pay for.” (…)

Even before the record first-quarter losses, public pension plans were $4.1 trillion short of the $8.9 trillion they will need to cover promised future benefits, according to the Federal Reserve. (…)

Aramco Profit Is Hit Hard by Collapse in Oil Prices Saudi Aramco said its first-quarter profit fell and it would cut spending this year, underscoring the twin impact of an oil-price rout and the coronavirus pandemic on the kingdom’s worsening finances.

Saudi Arabian Oil Co., as the state-controlled company is formally known, said Tuesday that net profit fell 25% to 62.5 billion riyals ($16.7 billion), from $22.2 billion in the first quarter a year earlier. Its revenue fell 16% to $60 billion.

The company expects capital spending between $25 billion and $30 billion this year, down from $32.8 billion a year earlier. (…)

Aramco declared a dividend of $18.75 billion in the first quarter, in line with a pledge made when it listed shares in December to pay dividends to minority shareholders of $75 billion this year. (…)

• Saudi Arabia Imposes Austerity Measures as Its Economy Founders The kingdom said it would triple its value-added tax rate and eliminate allowances for state workers, adopting austerity measures aimed at boosting state finances battered by the coronavirus and lower oil prices.

• BP chief sees risk of oil demand passing peak as pandemic hits Sustained consumption crunch beyond coronavirus crisis cannot be ruled out, says Bernard Looney
• Thyssenkrupp AG said Tuesday that its net loss for the second quarter widened amid the coronavirus pandemic, and warned of a hit to its results next quarter. The German industrial conglomerate reported a net loss of €948 million euros ($1.03 billion) for the quarter ended March 31 compared with a loss of €173 million the same period a year earlier. Quarterly net sales fell to €10.11 billion from €10.64 billion, while orders declined 8% to €9.54 billion for the period.
• BOC Aviation says lessors may have to take back planes later this year Aircraft lessors may need to start taking back some planes in the second half of the year, the CEO of BOC Aviation Ltd (2588.HK) said, adding that the pandemic-hit aviation market could take until 2023 to fully rebound.

PANDEMONIUM

Trump ‘not interested’ in reopening U.S.-China trade deal after report of Beijing discontent

U.S. President Donald Trump said on Monday he opposed renegotiating the U.S.-China “Phase 1” trade deal after a Chinese state-run newspaper reported some government advisers in Beijing were urging fresh talks and possibly invalidating the agreement.

Trump, who himself has considered abandoning the pact signed in January, told a White House press briefing he wanted to see if Beijing lived up to the deal to massively increase purchases of U.S. goods.

“No, not at all. Not even a little bit,” Trump said when asked if he would entertain the idea of reworking Phase 1. “I’m not interested. We signed a deal. I had heard that too, they’d like to reopen the trade talk, to make it a better deal for them.” (…)

The Global Times said malicious attacks by the United States have ignited a “tsunami of anger” among Chinese trade insiders after China made compromises in the Phase 1 pact.

“It’s in fact in China’s interests to terminate the current Phase 1 deal,” a trade adviser to the Chinese government told the Global Times, citing the weakening U.S. economy and upcoming U.S. presidential elections. “The U.S. now cannot afford to restart the trade war with China if everything goes back to the starting point.” (…)

The Global Times is published by the People’s Daily, the official newspaper of China’s ruling Communist Party. While not an official party mouthpiece, the Global Times’ views are believed at times to reflect those of its leaders.

From Raymond James’ Washington Policy group:

Growing Risk of Return to Confrontation in U.S.-China Relations

Tensions in the U.S.-China relationship, currently amplified due to the spread of COVID-19, are trending negatively and are likely to see a return to confrontation later this year due to underlying political tensions, in our view. This dynamic threatens the stability of the “Phase One” trade deal and global supply chains in the medium-term, and accelerated disengagement and economic decoupling by the U.S. and China over the long term.

We believe the threat may be under-appreciated by the market given the focus on the immediate economic disruption driven by COVID-19 and the belief that China’s follow through on the phase one deal is ultimately good for President Trump’s economic record as he makes his general election pitch. However, we are seeing a whole of government mobilization to increase pressure on China, which will be politically amplified by an election campaign, and may entrench a new confrontational dynamic between the two nations for a significant period. (…)

RJ points out 2 clauses in the trade agreement that China can use to its advantage:

• Section 6-2 stipulates that the “purchases will be made at market prices based on commercial consideration and that market conditions, particularly in the case of agricultural goods, may dictate the timing of purchases.”
• Article 7.6 stipulates that “in the event of a natural disaster or other unforeseeable event outside the control of the Parties delays a Party from timely complying with its obligations under this Agreement, the Parties shall consult with each other.”

Another thing getting messy…

Meanwhile, this is phase one of a campaign to restrict U.S. investments in Chinese equity markets:

Trump orders federal retirement money invested in Chinese equities to be pulled The assets at hand number around $4.5 billion in Chinese stocks

President Trump is moving to cut investment ties between U.S. federal retirement funds and Chinese equities, FOX Business has learned in a move that is tied to the handling of COVID 19.

In the first letter written Monday, obtained exclusively by FOX Business, national security adviser Robert O’Brien and National Economic Council Chair Larry Kudlow write to U.S. Labor Secretary Eugene Scalia stating that the White House does not want the Thrift Savings Plan, which is a federal employee retirement fund, to have money invested in Chinese equities that numbers about $4 billion in assets. (…)

The letter directly links China’s handling of COVID-19 as one of several reasons why investment in Chinese companies should not occur. (…)

FYI:

The
ten largest stocks now represent 44% of the Nasdaq market cap — together, these companies collectively command a 47x P/E multiple on 2020 earnings estimates. We have this lopsided market on a price sense too, not just valuation — the Nasdaq may be up for the year, but three-quarters of the index is still in negative terrain. (David Rosenberg)

Speaking of negative terrain:

Despite Recent Bets, Fed Isn’t Likely to Consider Negative Interest Rates

• Never Say Never on Negative Rates The Fed is showing reluctance to go negative, but such a move can’t be ruled out

Last week, futures markets began pricing in the Fed taking overnight rates into negative territory by the end of this year. With Fed officials pushing back against the idea, those bets have moderated but haven’t gone away, with futures now pointing to rates going negative by June of next year. (…)

UBS interest-rate strategists contend that hedging strategies banks are employing against the possibility of rates going below zero are behind the move. Essentially, because negative rates could be so costly for a bank, it is willing to pay up to insure against that risk, leading to an outsize effect on futures pricing. (…)

• Kenneth Rogoff: The case for deeply negative interest rates

NY Fed Says It Will Start Buying ETFs The Federal Reserve Bank of New York said Monday that starting Tuesday one of its emergency market support facilities will begin buying corporate-bond exchange-traded funds, in a notable expansion of the central bank’s efforts to support the economy and financial system in the coronavirus crisis.

(…) The move will be a historic milestone for the Fed, which hasn’t bought ETFs previously. The central bank, recognizing it would take longer to buy bonds, saw ETFs as a fast way to direct money rapidly into credit markets, said people familiar with the matter. (…)

Howard Marks on Uncertainty (Oaktree Capital)

In the Republican Party establishment, Trump finds tepid support As the coronavirus continues to claim lives in the United States, some Republican governors and members of Congress are beginning to waver on their support of President Trump. Elaine Kamarck writes that if the Trump administration’s response to COVID-19 does not change, more party fractures are likely to surface.