A party outbreak gives scientists clues as to how the Covid pandemic may end. China’s nuclear buildup prompts the U.S. to seek further talks with Beijing. Goldman’s Solomon says market greed is now outpacing fear. Here’s what you need to know today.
The U.S. is seeking ways to discuss "strategic stability" with Beijing to address concerns about China's growing nuclear arsenal. Joe Biden raised the need for conversations on nukes during his virtual summit meeting with Xi Jinping. Also under the microscope was Taiwan, which remains a flashpoint even after the pair lowered the temperature. Singapore Prime Minister Lee Hsien Loong said he's concerned tensions between the superpowers over the island could lead to a dangerous misstep. It doesn’t help that Biden keeps flubbing his lines on the issue — he’s made four gaffes in as many months on Taiwan, which have had to be “clarified” at a later date.
A Covid outbreak that infected more than 1,000 fully vaccinated revelers celebrating the July Fourth holiday has given scientists a new insight into the immunity-bolstering effects of natural infection after vaccination — and is offering clues as to how the pandemic may end. Meanwhile, daily infections in China have fallen to single digits as the country pursues its Covid Zero policy; the U.S. is offering mRNA vaccine manufacturers including Pfizer and Moderna funding to expand annual domestic production capacity by 1 billion doses by the second half of next year; a resurgence in cases in 25 U.S. states has sparked holiday gathering warnings; and FedEx is shutting its crew base in Hong Kong and relocating pilots as the city considers stricter measures on flight crew.
Asian stocks looked set to fall as the prospect of faster monetary-policy tightening to tackle inflation continues to loom over the global economic recovery. Overnight, U.S. shares had a modest pullback amid home building data signaling high materials prices and labor shortages. Treasury yields and the dollar retreated. Futures for Japan and Hong Kong were lower and Australia’s were steady. Elsewhere, gold advanced on the drumbeat of concerns about inflation, while Bitcoin hovered around $60,000.
A consortium led by Alibaba has emerged as the frontrunner to take over Tsinghua Unigroup, in a deal that could fetch more than 50 billion yuan ($7.8 billion) to help keep China’s indebted chip champion afloat. The Chinese central government is leaning towards the Alibaba-led offer given the e-commerce giant’s financial heft and the potential synergies with its own cloud and semiconductor business, people familiar with the matter said.
China’s property market crunch is making it difficult for local governments to cut an estimated $6 trillion of hidden debt even as Beijing shows more determination in cracking down on the problem. Now, Beijing, Shanghai and Guangdong province are planning trials to eliminate the off-balance sheet borrowing that local authorities use to raise funds for spending. The ongoing crackdown on the real estate sector is slowing China’s economy to lows seen way back in the 1990, and the Evergrande slump may be harder for China to shake than Covid.
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What’s caught our eye over the past 24 hours:
And finally, here’s what Tracy’s interested in today
It's clear that debates over inflation — whether it’s transitory or more permanent, and whether supply issues or too much aggregate demand are to blame — are getting lots of attention right now. But Viktor Shvets over at Macquarie points to another debate that's likely to matter for risk assets in the coming months: stock vs flow. As he points out, part of the importance of the Federal Reserve tapering its asset purchases has to do with the idea of sending a bigger signal to markets about the direction of monetary policy. So even if the Fed cutting back on asset purchases (but not stopping them completely) seems like a drop in the bucket of a balance sheet that's ballooned to more than $8 trillion, any changes in the flow of central bank intervention could end up being more important than the total stock accumulated, given today's highly-financialized economy. Or as he puts it:
"It goes to the heart of the debate – is stock or flow more important? Our view remains that flow (or delta) has a far greater impact than stock, which represents nothing more than accumulated past transactions that are gradually defaulting with central banks managing the pace while minimizing disruption. It is the flow that makes this process manageable, and tapering, while not numerically large, can have a major impact on freezing global liquidity, requiring fine-tuning to convince markets to unfreeze. In this role as the ‘conductor of the orchestra,’ central banks exercise their greatest influence. Hence, the next 12 months could be treacherous as central banks move from being easy and highly supportive to tighter and just sympathetic."
The counter argument to this is that the Fed's spent a good amount of time separating the idea of tapering its asset purchases from rate hikes in order to avoid a repeat of the 2013 taper tantrum. Meanwhile, judging by the fall in longer-term rates following the Fed's much-telegraphed taper announcement earlier this month, it looks like markets have, so far, sided with the “stock” side of things, though it's worth noting that 10-year yields have since circled back to where they were before the meeting. Still, “stock versus flow” is a nice way of framing the argument. Does it matter that the pace of liquidity injections is changing at all, or that it's happening against the background of a still very accommodative total?
You can follow Tracy Alloway on Twitter at @ tracyalloway.
— With assistance by Tracy Alloway
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