- Worsening pandemic news hits stocks Monday afternoon
- U.S./Chinese tensions remain high although U.S. says phase-one trade deal is intact
- U.S. core CPI expected to edge lower
Worsening pandemic news hits stocks Monday afternoon — The U.S. stock market Monday morning rallied sharply on (1) carry-over support from Monday’s +1.77% rally in the Shanghai Composite index, (2) an early rally in Apple on a price-target hike by Morgan Stanley, (3) a +3.8% rally in Pfizer on news that the FDA fast-tracked two of the Covid vaccines it is developing with BioNTech, (4) a +14.3% rally in Moderna after a Jefferies analyst said the company could see over $5 billion of Covid vaccine sales if its vaccine is successful, and (5) M&A news after Analog Devices agreed to purchase Maxim Integrated Products today for $20.9 billion.
However, stocks fell sharply Monday afternoon after negative pandemic news. California reported a record number of people hospitalized with Covid, and Governor Newsom ordered the state-wide closure of indoor dining, bars, and entertainment. For 80% of California, Mr. Newsom also closed churches, gyms, malls, hair salons, and barbershops.
Also, California’s largest school districts in Los Angeles and San Diego said they would have remote learning in the fall. The two school districts with 825,000 students are the largest in the U.S. to abandon plans for a physical return to classrooms when they reopen in the fall.
In Oregon, Governor Kate Brown on Monday announced a mask mandate and also banned indoor gatherings of more than 10 people.
California’s shutdown of bars and indoor dining on Monday was a wake-up call for the markets, which have been assuming that states would not return to the shutdown of non-essential businesses due to public opposition. However, hard-hit states may be forced to engage in more drastic shutdowns if their hospitals start to become overwhelmed by Covid patients and death rates start to rise sharply.
There was, however, some good news on the pandemic front on Monday, mainly related to the two Pfizer vaccines getting fast-tracked by the FDA. Also, Arizona on Monday announced a 2-week low in the number of new Covid cases, although that could have been due to gaps in weekend reporting. In other good news, New York City announced that there were no known Covid deaths on Sunday, ending a 4-month stretch when New York was the epicenter of the pandemic.
U.S./Chinese tensions remain high although U.S. says phase-one trade deal is intact — U.S./China tensions on Monday remained high after the Trump administration declared that China’s territorial claims in the South China Sea are unlawful. Previously, the U.S. took a neutral view with hopes that China would work out the disputes with its neighbors.
Secretary of State Pompeo released a statement saying, “We are making clear: Beijing’s claims to offshore resources across most of the South China Sea are completely unlawful, as is its campaign of bullying to control them.”
The U.S. declaration on the South China Sea provided another measure to rankle Chinese officials. China could respond to the U.S. move by causing new naval incidents in the South China Sea or by engaging in new building operations on disputed islands.
China on Monday took the rather drastic step of slapping sanctions on four U.S. officials, including Senator Marco Rubio (R-FL), Senator Ted Cruz (R-TX), U.S. Ambassador to China Sam Brownback, and House Representative Chris Smith, all high-profile critics of China. The good news, however, was the Chinese retaliation was in proportion to the U.S move last week to sanction four Chinese officials, including a top member of China’s ruling Communist Party, for alleged human rights abuses against the Muslim minority in the Xinjiang region. The fact that China stopped short at sanctioning just four U.S. officials suggested that China did not want to escalate the situation and invite more U.S. sanctions.
There was good news for the markets on Monday after both President Trump and White House economic advisor Kudlow said that the U.S./China phase-one trade deal remains in effect. Mr. Trump said that China is buying U.S. products.
The markets are mainly worried about the U.S./China trade deal. As long as the trade deal remains intact and there is no new threat of tariffs by Mr. Trump, the markets seem willing to mostly overlook the U.S./Chinese tensions regarding the Xinjiang region and Hong Kong.
On the Hong Kong front, there was some good news for the markets yesterday when Bloomberg reported that Trump administration officials have ruled out the idea of undermining Hong Kong’s peg to the U.S. dollar, which could have been a highly disruptive move for the markets and global banks.
U.S. core CPI expected to edge lower — The market consensus is for today’s June CPI to rise by +0.5% m/m and +0.6% y/y, strengthening from May’s report of -0.1% m/m and +0.1% y/y, mainly because of higher oil prices.
Meanwhile, today’s June core CPI is expected to ease to a new 9-year low of +1.1% y/y from May’s +1.2%. The expected decline in the core CPI would provide evidence that the pandemic-related plunge in the economy is hurting business pricing power and is pushing prices lower. However, inflation expectations have recently been on the rise due to the rally in oil prices and the economic recovery. The 10-year breakeven inflation expectations rate is currently at 1.40%, just below last week’s 4-month high of 1.45%.
