Three things send the market higher these days: i) optimism that Congress will finally renew the fiscal stimulus which expired on July 31; ii) optimism that a covid vaccine will miraculously fix the global economy, and iii) in a throwback to 2019 optimism on the US-China trade deal. We got a dose of iii) late on Monday when the USTR reported that top U.S. and Chinese trade officials reaffirmed their commitment to a Phase 1 trade deal which has seen China lagging on its obligations to buy American goods, with a call (originally scheduled for Aug 15) in which both sides saw "progress and are committed to taking the steps necessary to ensure the success of the agreement", and demonstrating a willingness to cooperate even as tensions rise over issues ranging from data security to democracy in Hong Kong.
Given the exchanges between the U.S. and China recently "have been negative, any small bit of positivity is seen as a big step forward, even when it isn’t," said David Madden, market analyst at CMC Markets UK. It was certainly enough to push US equity futures higher for a fourth straight session, with the Emini punching to a new all time of 3,448.75 during the Asian session which saw shares rise throughout most of Asia, before trimming gains to around 3,440 after the European open.
The S&P 500 and Nasdaq both clocked new record highs on Monday, with the benchmark index surpassing its pre-pandemic high last week even as recent economic data pointed to a wobbly recovery from the virus-led downturn. However, even as the ES was up some 0.3%, Nasdaq futures were shockingly in the red sparking panic and hysteria among a generation of retail daytraders who have never seen a red open in a centrally-planned market.
Salesforce.com, Amgen and Honeywell climbed between 3.6% and 4% premarket on news they would join the blue-chip Dow Jones Industrial Average index on Aug. 31. This came at the expense of three companies that are getting kicked out of the DJIA including E&P titan and formerly world's most valuable company Exxon Mobil, Pfizer and Raytheon Technologies which were down between 1.5% and 2.4%. Best Buy dropped despite reporting earnings that beat on the top and bottom line; Folgers coffee maker JM Smucker medical device maker Medtronic are also due to report quarterly results before the opening bell.
Investors also remain focused on vaccine progress as global economies reopen. Moderna said it’s near a deal to supply at least 80 million vaccine doses to the European Union.
"A steady flow of progress with Covid-19 treatments/vaccines is delivering the latest boost to risk appetite," said Oanda senior market analyst Edward Moya, but just like Morgan Stanley, he cautioned that "market breadth however does not support the surge to record high territory for U.S. indexes."
European stocks advanced for a second day after the latest IFO surveys showed German companies turning slightly more optimistic on the economic recovery despite missing expectations on, well, expectations:
- Ifo Expectations 97.5 vs. Exp. 98.0 (Prev. 96.7)
- Ifo Current Conditions 87.9 vs. Exp. 87.0 (Prev. 84.5)
- Ifo Business Climate 92.6 vs. Exp. 92.1 (Prev. 90.4)
The current assessment continues to lag expectations about the future, a reversal to pre-covid days.
The Stoxx Europe 600 Index climbed 0.4% as of 10:28 a.m. in London, with travel stocks advancing more than 2% and leading gains among sectors.
In Asia, markets were broadly higher, with Tokyo, Taipei, Seoul and Sydney all in the green while peers in Hong Kong and Shanghai slipped. South Korea's Kospi Index gained 1.6% and Jakarta Composite rising 1.2%, while Shanghai Composite dropped 0.4%. Japan's Topix gained 1.1%, with Globeride and Land Co rising the most. The Shanghai Composite Index retreated 0.4%, with Jiangxi Hongdu Aviation Industry and Dalian Bio-Chem posting the biggest slides.
In rates, treasuries traded heavy into early U.S. session with yields cheaper by 1bp-4bp across the curve in bear-steepening move. Treasury 10-year yields close to cheapest level of the day at 0.684%, highest in several days; long-end-led losses steepen 2s10s, 5s30s by ~2bp. Factors weighing on the curve include IG credit issuance, start of Treasury auction cycle and grind higher in S&P 500 futures. In Europe, Bunds lag Treasuries by 2bp while gilts trade broadly in line. As Bloomberg notes, concession starts to build into front-end also with $50b 2-year note sale at 1pm ET, ahead of $51b 5-year Wednesday and $47b 7-year Thursday.
In FX, the dollar and yen have softened against most currencies, while the euro has been topping the top-performing list as Action Economics recaps. This dynamic has come amid risk-on positioning in global markets. EUR-USD lifted to the mid 1.1800s, posting an intraday peak at 1.1843, which is 60 pips up on Monday's New York closing level. The euro has also rallied against the yen, which is the day's biggest loser, and most other currencies. While a bout of general dollar selling has helped to lift EUR-USD, there have concurrently been a couple of cues to buy euros, including August German Ifo business climate indicator, which beat forecasts in rising to a headline reading of 92.6, and remarks from German finance minister Scholz, who said there are signs that the German economy is developing above forecasts. USD-JPY, meanwhile, posted an eight-day high at 106.38, which is a gain of just over 40 pips on yesterday's closing level. The biggest mover out of the main currency pairings and crosses was EUR-JPY, which was showing over a 0.8% gain. The cross printed a six-day high at 125.97. GBP-JPY was not far behind, while AUD-JPY was showing a near 0.5% upward advance. Cable pegged an intraday high at 1.3126. USD-CAD posted a five-day peak at 1.3240 in pre-London trading, subsequently settling lower.
In commodities, oil was slightly higher as traders kept a watchful eye on Tropical Storm Laura, which is expected to strengthen into a hurricane before making landfall later this week. U.S. gasoline futures rose to the highest level since March on concern over possible fuel shortages. Elsewhere, gold dipped as low as $1,922 an ounce trading in a narrow range.
Looking at today's calendar, we’ll get the FHFA house price index for June, new home sales or July, as well as the Conference Board’s consumer confidence reading and the Richmond Fed manufacturing index for August. The Conference Board is expected to show U.S. consumer confidence improved slightly in August after falling more than expected in July amid a flare up in coronavirus cases. Otherwise, San Francisco Fed President Daly will be speaking, and earnings releases include Salesforce, Medtronic, Intuit and Autodesk. Investors also await Federal Reserve Chairman Jerome Powell’s address on Thursday for hints on the central bank’s next steps to support an economic recovery.
- S&P 500 futures up 0.3% to 3,439.25
- STOXX Europe 600 up 0.4% to 372.29
- MXAP up 0.3% to 172.99
- MXAPJ up 0.2% to 572.19
- Nikkei up 1.4% to 23,296.77
- Topix up 1.1% to 1,625.23
- Hang Seng Index down 0.3% to 25,486.22
- Shanghai Composite down 0.4% to 3,373.58
- Sensex up 0.06% to 38,824.20
- Australia S&P/ASX 200 up 0.5% to 6,161.39
- Kospi up 1.6% to 2,366.73
- German 10Y yield rose 2.1 bps to -0.47%
- Euro up 0.3% to $1.1817
- Italian 10Y yield unchanged at 0.819%
- Spanish 10Y yield rose 3.3 bps to 0.36%
- Brent futures up 0.3% to $45.28/bbl
- Gold spot down 0.1% to $1,926.57
- U.S. Dollar Index down 0.3% to 93.06
Top Overnight News from Bloomberg
- The U.S. and China reaffirmed their commitment to the phase-one trade deal in a biannual review, demonstrating a willingness to cooperate even as tensions rise over issues ranging from data security to democracy in Hong Kong
- Germany’s coronavirus daily new cases increased at a pace not seen for almost four months
- Moderna Inc. has announced it is close to a deal with the EU to provide at least 80 million vaccine doses
- Storm Laura is expected to be upgraded to a hurricane when it makes landfall on the American gulf coast in the next few days, leading U.S. gasoline futures to rise to their highest since the start of the pandemic on fears over potential fuel shortages
Courtesy of NewsSquawk, here is a quick recap of global markets:
Asian equity markets were mixed after trading mostly higher as the region initially took impetus from the fresh record highs on Wall St where cyclicals outperformed and with risk appetite also spurred by COVID-19 plasma treatment hopes, as well as reports US and China’s top trade negotiators held a constructive conversation on the Phase 1 agreement. ASX 200 (+0.5%) was led by tech and financials although gains in the benchmark index were capped by resistance at the 6200 level and amid headwinds from a deluge of earnings, while Nikkei 225 (+1.4%) outperformed as exporters cheered recent currency weakness and with the government to ease the ban on foreign residents returning to the country. Hang Seng (-0.3%) and Shanghai Comp. (-0.4%) also began higher after the PBoC boosted its liquidity efforts with a total CNY 300bln of reverse repo operations and following talks between USTR Lighthizer, Treasury Secretary Mnuchin and China’s Vice Premier Liu He in which both sides saw progress and were committed to taking the next steps required to ensure the success of the deal. However, gains later faded given that discussions were not much of a surprise and with the PBoC distancing itself from lowering capital requirements for bank, while Hong Kong was also cautious ahead of Chief Executive Lam’s announcement on social distancing arrangements later today as the current restrictions which limits public gatherings to two people are set to expire. Finally, 10yr JGBs were lacklustre with price action contained below the 152.00 level after weakness in T-notes and demand sapped by the gains in stocks, with the 20yr JGB auction doing little to spur prices despite printing improved results.
Top Asian News
- U.S., China Signal Progress on Trade Deal as Relations Fray
- Hong Kong to Relax Social Distancing Rules as Virus Cases Drop
- Credit Suisse’s Head of Asia Technology to Join Xiaomi as CFO
- Thai Cabinet Approves Extension of Emergency for Another Month
Stocks in Europe trade with modest gains (Euro Stoxx 50 +0.6%) albeit off highs, as sentiment somewhat improved following the mixed APAC lead. Some suggest that the “constructive” US-Sino trade call is spurring risk assets. However, it is worth remembering that there has been no new progress/developments in terms of trade, and in the grand scheme of things, US-Sino relations remain at all-time-lows on a number of fronts – e.g. geopolitics, capital markets and technology. On the data front – the German Ifo survey showed optimism in the country has increased, but economists noted that the German recovery is fragile and stocks were largely unfazed by the release. Sectors are mostly in the green, although the cyclical tilt seen at the open has somewhat faded, but nonetheless, financials and travel & leisure hold their top positions in the region, whilst materials and energy lag amid the price action in their respective complexes. In terms of individual movers, Aveva (+3.9%) holds onto gains after announcing a proposed acquisition of Osisoft for an enterprise value of USD 5bln. Nokia (+0.5%) and Ericsson (+1.2%) remain firm after reports noted that the Indian government is looking to phase out equipment from Chinese companies including Huawei from its telecoms network amid border tensions – with Nokia and Ericsson potentially to gain from this. On the flip side, Swisscom (-1.0%) is subdued after Swiss competition watchdog opened a probe into the Co. amid suspected abuse of market position within the broadband sector.
Top European News
- German Businesses Signal Optimism Recovery Is on Track; Germany Closes In on Agreement to Extend Job-Preserving Aid
- Credit Suisse to Cut Branches, Staff by Merging Swiss Unit
- Vanishing Jobs and Empty Offices Plague Britain’s Retailers
- Italy Clashes With Ex- Monopoly Over Future of Phone Network
In FX, as the DXY hovers just above the 93.000 level within a confined 93.012-351 band, major Dollar counterparts are also sitting close to big figures awaiting firm breaks or clearer direction, like the Euro in wake of an encouraging German Ifo survey on balance. To recap, 2 out of the 3 metrics exceeded expectations, but the more forward looking outlook reading missed consensus remains the institute was reserved in describing the economic recovery as fragile. Hence, Eur/Usd was toppy ahead of yesterday’s peak and hefty option expiry interest close by at 1.1850 in 1 bn. Meanwhile, Cable continues to pivot 1.3100 ahead of CBI trades and amidst the ongoing threat of Britain leaving transition without a Brexit trade deal, and the Franc is still tethered to 0.9100 after a dip in Swiss Q2 payrolls was largely nullified by an upward revision to the previous quarter. However, the Yen has retreated through 106.00 and into a lower range on a loss of safe-haven premium and with US Treasury yields backing up before this week’s auctions amidst curve re-steepening.
- NZD/AUD/CAD - The Kiwi is holding above 0.6500 in advance of NZ trade data and the Aussie has gleaned more indirect support from another firm PBoC CNY fix that in turn has given the CNH fresh impetus to test 6.9000 vs the Greenback. Aud/Usd is meandering between 0.7152-82 following mixed independent impulses overnight via an improvement in ANZ weekly consumer confidence in contrast to labour data revealing a 1% decline in jobs for the month to August 8 and 2.8% drop in the state of Victoria for a national fall of 4.9% relative to mid-March (pre-pandemic or the ‘first’ wave as such). Conversely, the Loonie is licking wounds beneath 1.3200 and detached from choppy oil prices following Canada’s appeal to the WTO against US soft lumber levies.
- SCANDI/EM - Marginal Nok outperformance even though Norwegian GDP was a bit weaker than forecast in Q2, but the Try has not derived much traction on the back of a rise in Turkish manufacturing sentiment and the Rub is not tracking the firm tone in Brent against the backdrop of ongoing geopolitical/diplomatic tensions that are also weighing on the Lira.
In commodities, WTI and Brent front month futures remain relatively flat in early European trade, with the benchmark only some USD 0.2-0.3/bbl off overnight lows. Traders are keeping a keen eye on the developments in the Gulf of Mexico as Tropical Storm Laura is forecast to evolve into a major hurricane before making landfall late-Wednesday, whilst Marco was downgraded to a Tropical Depression. On that front, the latest update from the Search Results Bureau of Safety and Environmental Enforcement (BSEE) estimates around 82.4% of current oil production shuttered – with the next release scheduled for 1400ET/1900BST. WTI Oct resides around USD 42.50/bbl (vs. low ~42.30/bbl), whilst its Brent counterpart trades around USD 45.25/bbl (vs. low USD 45.08/bbl). Traders will now be eyeing the weekly release of the Private Inventories in the absence of macro headlines – albeit price action could be muted as hurricane developments are timelier. Elsewhere, spot gold trades choppy within a tight range on either side of USD 1930/oz whilst spot silver sees similar action around 26.50/oz – both moving in tandem with the Buck ahead of Fed Chair Powell’s speech on Thursday. In terms of base metals, Dalian iron ore prices fell some 3.5% whilst Shanghai steel rebar edged lower as downstream demand recovery missed market forecasts. Conversely, Shanghai nickel prices rose almost 2% at one point amid dwindling Chinese port inventories.
US Event Calendar
- 9am: FHFA House Price Index MoM, est. 0.3%, prior -0.3%; House Price Purchase Index QoQ, prior 1.7%
- 9am: S&P CoreLogic CS 20-City MoM SA, est. 0.1%, prior 0.04%; YoY NSA, est. 3.6%, prior 3.69%
- 10am: Conf. Board Consumer Confidence, est. 93, prior 92.6; Present Situation, prior 94.2; Expectations, prior 91.5
- 10am: New Home Sales, est. 790,000, prior 776,000; MoM, est. 1.8%, prior 13.8%
- 10am: Richmond Fed Manufact. Index, est. 10, prior 10
DB's Jim Reid, freshly back from vacation, concludes the overnight wrap
If you’d have told me at the start of the year that at the end of August I’d be quarantining with my family and not allowed to leave the perimeter of my garden then I’d have been extremely worried and assumed that one of my children had dug up the bubonic plague. Thankfully it’s less worrisome than that and instead because I was on holiday in the French Alps and new travel rules now apply back to the U.K from France. Ironically the French Alps have hardly seen new cases rise even if they have in say Paris and parts of the South of France. So if you’d have got back two days before me from Paris you wouldn’t have to quarantine but I do from the Alps. We still had to cut our holiday short by a week to ensure the children didn’t miss their first days at school next week. Elite athletes are exempt from these rules but after trying to show the customs officer at the Channel Tunnel my golf swing I wasn’t given special dispensation.
So we’ve been looking after three young terrors at home over the last week and it’s been painful with nothing to do or nowhere to go. Bronte also doesn’t understand why she doesn’t get walked. All first world problems admittedly but I really don’t understand those that say the best thing about Covid is that you get to spend more time with your family. I love them all dearly but an hour or two a day is ideal (that doesn’t include my wife by the way).
So I actually mean it when I say it’s good to be back in my home office mentally and physically quarantining from the kids. Over the holiday I’ve been thinking a lot about the virus and the way forward and I continue to scratch my head about the end game. Within the next few weeks we should know much more about the state of play with regards to the leaders in the vaccine race (supportive news yesterday for the AstraZeneca/Oxford Uni version as we’ll see below). That’s probably going to be the most important newsflow of the next month or so. We’re trying to collate as much info as possible on the current state of play with vaccines and will try to put out a piece next week on where we are at. Obviously if a vaccine gets approved in the coming weeks then we’ll likely have a realistic end game within months as I’m sure we’ll go into mass production very quickly.
However without a vaccine it feels like global strategies are very difficult to decipher. When lockdowns started back in March the main rational was to ensure health services did not get overrun. Five months on, the number of Covid cases in hospitals are relatively low in many areas and yet many countries seem to be trying to keep cases as low as possible as a badge of honour and the world has got so scared that such a strategy seems to meet high approval. Countries that are seeing cases rise are looked at with great suspicion even if hospitalisations are still relatively low. However is such suppression a sustainable strategy? Given this is happening in the northern hemisphere summer I can’t help wondering where we’ll be in two or three months time and what the reaction will be from the authorities.
The good news is that there continues to be plenty of evidence that those catching the virus seem to be from younger, less vulnerable cohorts and this seems to be contributing to a lower and lower case fatality rate across the globe alongside better treatment and possibly the virus mutating. To be fair listening to politicians the bar to renewed full lockdowns seems to be high around the world, but equally the bar to getting to anything resembling normality also seems very high. So we are in Covid limbo until a vaccine or a yet unidentified master plan materialises. All ahead of a northern hemisphere autumn and winter when life will naturally move more indoors.
To be fair all of this continues to be a passing curiosity to the US equity market which continues to hit new highs even if the breadth of the winners has narrowed further in recent weeks. Yesterday showed some signs of rotation and catch up from the laggards though, which helped push the S&P 500 up a further +1.00%, having already risen for 7 of the last 8 weeks. The move took the index to another record high and puts it +6.03% on a YTD basis. The airline industry led the S&P yesterday, gaining +8.23% as optimism on a possible vaccine buoyed the beaten down industry higher. In fact American Airlines (+10.53%), Carnival (+10.17%), United (+9.93%), Delta (+9.28%) and Norwegian Cruise Line (+7.58%) were five of the seven best performing stocks in the index. Elsewhere, tech stocks underperformed as there was some rotation out of biotechs (-0.47%) in particular. The Nasdaq closed +0.60% higher yesterday (also to a new record) with the tech-dominated index now standing at an astonishing +26.83% higher YTD.
On the vaccine news, AstraZeneca shares were up +2.06% following the FT report that the Trump administration could bypass normal regulatory standards for the Oxford vaccine. As the election approaches it seems inevitable that Mr Trump will want to encourage as much positivity on the virus as is in his power. So one to watch.
Oil prices were buoyant as well yesterday, with Brent crude up +1.76% to $45.13/bbl in a move that wiped out all of last week’s declines and helped energy stocks lead the equity advance on both sides of the Atlantic. Over in Europe, equities saw even bigger moves higher, with the STOXX 600 up +1.58% and the DAX up +2.36%.
The rotation into risk assets saw sovereign bonds lose ground somewhat yesterday, and yields on 10yr Treasuries were up +2.6bps by the close. With market participants awaiting Fed Chair Powell’s speech at Jackson Hole for any policy hints, our global head of rates research Francis Yared wrote a blog post yesterday (link here) in which he says that a lot of the expected dovishness is already priced into markets. As a result, only a material upsizing in QE should have a material market impact. There was a similar pattern for European rates too yesterday, where yields on 10yr bunds (+1.6bps), OATs (+0.9bps) and gilts (+0.7bps) all rose. And in line with this retreat from safe assets, gold extended its falls from the previous week with a further -0.60% decline. It’s now -6.53% off its highs 3 weeks ago.
Overnight the key news has been that the US and China’s top trade negotiators discussed the Phase 1 trade deal last night and the US concluded that both sides saw progress and are committed to its success. The US statement said that “The parties also discussed the significant increases in purchases of US products by China as well as future actions needed to implement the agreement,” while adding that China has made progress on other commitments like taking steps to ensure greater protection for intellectual property rights and removing impediments to American companies in the areas of financial services.
Asian markets are mostly positive this morning outside of China and HK which are seeing the Hang Seng (-0.53%) and Shanghai Comp (-0.19%) both down. The Nikkei (+1.84%), Kospi (+1.44%) and Asx (+0.42%) are up though alongside futures on the S&P 500 (+0.46%). Elsewhere, gold and silver prices are also up +0.39% and +0.49% and in agriculture commodities, CBT soybeans and corn future prices are up +1.10% and +1.52% respectively.
On the coronavirus and as alluded to at the top, countries around the world continue to re-implement restrictions at the first uptick in cases. Zurich has announced new limits on social gatherings of up to 100 unless masks are worn and have mandated that masks must be worn within shops. This followed news that the Netherlands have issued 10-day quarantine measures on all travelers from Spain, as well as the majority of travelers from France. This comes as Spain posted four month highs in cases last week. In what may be a harbinger for the colder month’s ahead, Germany is planning to stop testing people returning from hotspots, citing a lack of testing capacity for the virus. Those travelers will still have to undergo quarantine measures and will have to get tested themselves in order to exit their quarantine early. These measures weighed on the STOXX 600 Travel and Leisure stocks (-0.09%), which did not see the same performance as their American counterparts on the upbeat vaccine news.
We did get further signs of stabilisation in new cases in the United States though, with Florida reporting the lowest number of new cases since mid-June yesterday, while New York state saw their infection rate fall to 0.66%, the lowest since the beginning of the pandemic. In a sign of further normalization following the recent uptick in cases, Apple announced plans to reopen some of the over 120 stores that they had reclosed during the summer outbreak. This could happen as soon as the end of this month. Across the other side of world, Singapore has identified a total of 58 cases in the country’s largest foreign workers dormitory which houses c. 16,000 people and as a precaution has placed another 4,800 workers from the same dormitory on stay-home notices. Meanwhile, South Korea added a further 280 cases in the past 24 hours up from 266 a day earlier and also ordered kindergarten, elementary, middle and high schools in the greater Seoul area to shift to online classes from partial attendance. Elsewhere, Qantas Airways said overnight that it will cut an additional 2,500 jobs due to the COVID impact on top of the earlier announced plans to eliminate 6,000 jobs or 20% of the workforce.
To the day ahead now, and data highlights from Germany include the Ifo business climate indicator for August along with the final reading of Q2’s GDP. Meanwhile in the US, we’ll get the FHFA house price index for June, new home sales or July, as well as the Conference Board’s consumer confidence reading and the Richmond Fed manufacturing index for August. Otherwise, San Francisco Fed President Daly will be speaking, and earnings releases include Salesforce, Medtronic, Intuit and Autodesk.
Old Ideas and the New New Deal
Over the past decade and a half, virtually every branch of the federal government has taken steps to weaken the patent system. As reflected in President Joe Biden’s July 2021 executive order, these restraints on patent enforcement are now being coupled…
Over the past decade and a half, virtually every branch of the federal government has taken steps to weaken the patent system. As reflected in President Joe Biden’s July 2021 executive order, these restraints on patent enforcement are now being coupled with antitrust policies that, in large part, adopt a “big is bad” approach in place of decades of economically grounded case law and agency guidelines.
This policy bundle is nothing new. It largely replicates the innovation policies pursued during the late New Deal and the postwar decades. That historical experience suggests that a “weak-patent/strong-antitrust” approach is likely to encourage neither innovation nor competition.
The Overlooked Shortfalls of New Deal Innovation Policy
Starting in the early 1930s, the U.S. Supreme Court issued a sequence of decisions that raised obstacles to patent enforcement. The Franklin Roosevelt administration sought to take this policy a step further, advocating compulsory licensing for all patents. While Congress did not adopt this proposal, it was partially implemented as a de facto matter through antitrust enforcement. Starting in the early 1940s and continuing throughout the postwar decades, the antitrust agencies secured judicial precedents that treated a broad range of licensing practices as per se illegal. Perhaps most dramatically, the U.S. Justice Department (DOJ) secured more than 100 compulsory licensing orders against some of the nation’s largest companies.
The rationale behind these policies was straightforward. By compelling access to incumbents’ patented technologies, courts and regulators would lower barriers to entry and competition would intensify. The postwar economy declined to comply with policymakers’ expectations. Implementation of a weak-IP/strong-antitrust innovation policy over the course of four decades yielded the opposite of its intended outcome.
Market concentration did not diminish, turnover in market leadership was slow, and private research and development (R&D) was confined mostly to the research labs of the largest corporations (who often relied on generous infusions of federal defense funding). These tendencies are illustrated by the dramatically unequal allocation of innovation capital in the postwar economy. As of the late 1950s, small firms represented approximately 7% of all private U.S. R&D expenditures. Two decades later, that figure had fallen even further. By the late 1970s, patenting rates had plunged, and entrepreneurship and innovation were in a state of widely lamented decline.
Why Weak IP Raises Entry Costs and Promotes Concentration
The decline in entrepreneurial innovation under a weak-IP regime was not accidental. Rather, this outcome can be derived logically from the economics of information markets.
Without secure IP rights to establish exclusivity, engage securely with business partners, and deter imitators, potential innovator-entrepreneurs had little hope to obtain funding from investors. In contrast, incumbents could fund R&D internally (or with federal funds that flowed mostly to the largest computing, communications, and aerospace firms) and, even under a weak-IP regime, were protected by difficult-to-match production and distribution efficiencies. As a result, R&D mostly took place inside the closed ecosystems maintained by incumbents such as AT&T, IBM, and GE.
Paradoxically, the antitrust campaign against patent “monopolies” most likely raised entry barriers and promoted industry concentration by removing a critical tool that smaller firms might have used to challenge incumbents that could outperform on every competitive parameter except innovation. While the large corporate labs of the postwar era are rightly credited with technological breakthroughs, incumbents such as AT&T were often slow in transforming breakthroughs in basic research into commercially viable products and services for consumers. Without an immediate competitive threat, there was no rush to do so.
Back to the Future: Innovation Policy in the New New Deal
Policymakers are now at work reassembling almost the exact same policy bundle that ended in the innovation malaise of the 1970s, accompanied by a similar reliance on public R&D funding disbursed through administrative processes. However well-intentioned, these processes are inherently exposed to political distortions that are absent in an innovation environment that relies mostly on private R&D funding governed by price signals.
This policy bundle has emerged incrementally since approximately the mid-2000s, through a sequence of complementary actions by every branch of the federal government.
- Starting with its 2006 decision in eBay, Inc. v. MercExchange LLC and through its 2017 decision in Oil States Energy Services LLC v. Greene’s Energy Group LLC, the Supreme Court has repeatedly weakened patent protections. The court adopted a similar policy perspective in its April 2021 decision in favor of a broad understanding of copyright’s “fair use” exemption in Google LLC v. Oracle America Inc.
- In 2011, Congress enacted the America Invents Act, which enables any party to challenge the validity of an issued patent through the U.S. Patent and Trademark Office’s (USPTO) Patent Trial and Appeals Board (PTAB). Since PTAB’s establishment, large information-technology companies that advocated for the act have been among the leading challengers.
- In May 2021, the Office of the U.S. Trade Representative (USTR) declared its support for a worldwide suspension of IP protections over Covid-19-related innovations (rather than adopting the more nuanced approach of preserving patent protections and expanding funding to accelerate vaccine distribution).
- President Biden’s July 2021 executive order states that “the Attorney General and the Secretary of Commerce are encouraged to consider whether to revise their position on the intersection of the intellectual property and antitrust laws, including by considering whether to revise the Policy Statement on Remedies for Standard-Essential Patents Subject to Voluntary F/RAND Commitments.” This suggests that the administration has already determined to retract or significantly modify the 2019 joint policy statement in which the DOJ, USPTO, and the National Institutes of Standards and Technology (NIST) had rejected the view that standard-essential patent owners posed a high risk of patent holdup, which would therefore justify special limitations on enforcement and licensing activities.
The history of U.S. technology markets and policies casts great doubt on the wisdom of this weak-IP policy trajectory. The repeated devaluation of IP rights is likely to be a “lose-lose” approach that does little to promote competition, while endangering the incentive and transactional structures that sustain robust innovation ecosystems. A weak-IP regime is particularly likely to disadvantage smaller firms in biotech, medical devices, and certain information-technology segments that rely on patents to secure funding from venture capital and to partner with larger firms that can accelerate progress toward market release. The BioNTech/Pfizer alliance in the production and distribution of a Covid-19 vaccine illustrates how patents can enable such partnerships to accelerate market release.
The innovative contribution of BioNTech is hardly a one-off occurrence. The restoration of robust patent protection in the early 1980s was followed by a sharp increase in the percentage of private R&D expenditures attributable to small firms, which jumped from about 5% as of 1980 to 21% by 1992. This contrasts sharply with the unequal allocation of R&D activities during the postwar period.
Remarkably, the resurgence of small-firm innovation following the strong-IP policy shift, starting in the late 20th century, mimics tendencies observed during the late 19th and early-20th centuries, when U.S. courts provided a hospitable venue for patent enforcement; there were few antitrust constraints on licensing activities; and innovation was often led by small firms in partnership with outside investors. This historical pattern, encompassing more than a century of U.S. technology markets, strongly suggests that strengthening IP rights tends to yield a policy “win-win” that bolsters both innovative and competitive intensity.
An Alternate Path: ‘Bottom-Up’ Innovation Policy
To be clear, the alternative to the policy bundle of weak-IP/strong antitrust does not consist of a simple reversion to blind enforcement of patents and lax administration of the antitrust laws. A nuanced innovation policy would couple modern antitrust’s commitment to evidence-based enforcement—which, in particular cases, supports vigorous intervention—with a renewed commitment to protecting IP rights for innovator-entrepreneurs. That would promote competition from the “bottom up” by bolstering maverick innovators who are well-positioned to challenge (or sometimes partner with) incumbents and maintaining the self-starting engine of creative disruption that has repeatedly driven entrepreneurial innovation environments. Tellingly, technology incumbents have often been among the leading advocates for limiting patent and copyright protections.
Advocates of a weak-patent/strong-antitrust policy believe it will enhance competitive and innovative intensity in technology markets. History suggests that this combination is likely to produce the opposite outcome.
Jonathan M. Barnett is the Torrey H. Webb Professor of Law at the University of Southern California, Gould School of Law. This post is based on the author’s recent publications, Innovators, Firms, and Markets: The Organizational Logic of Intellectual Property (Oxford University Press 2021) and “The Great Patent Grab,” in Battles Over Patents: History and the Politics of Innovation (eds. Stephen H. Haber and Naomi R. Lamoreaux, Oxford University Press 2021).congress covid-19 vaccine oil
Mandatory COVID-19 vaccines on university campuses: An obvious solution or a problem?
Mandating vaccines risks turning a highly effective public health intervention into a contentious battleground — but it also may save lives.
The University of Toronto has announced that in addition to requiring vaccination for students living in residence, it will “require students, faculty, staff and librarians who participate in activities that carry a higher risk of COVID-19 transmission to be vaccinated — and require all community members to self-declare their vaccination status” on an online platform. The university will use “anonymous, aggregate data on vaccination status, by campus,” to inform health and safety measures.
As September approaches, more post-secondary institutions will announce how they are managing COVID-19-related decisions.
We are two researchers with an interest in social and structural determinants of health who have been discussing and writing about the pandemic for the last 16 months.
We are involved in research about increasing COVID-19 knowledge and protective behaviours, and reducing pandemic stress among diverse LGBTQ+ and racialized people, and how harm-reduction programs for people who use drugs, and other addiction services and HIV prevention have changed in response to COVID-19.
While one of us is more supportive of mandatory vaccination on campuses — given voluminous evidence for COVID-19 vaccine safety and effectiveness — we are both nevertheless concerned about mandatory vaccination.
Avoid ‘battleground’ scenario
Our shared experience in social work, public health and ethics, including sexual health and HIV research, leads us to believe that mandating vaccination can risk turning a highly effective and routine public health intervention into a contentious battleground.
What otherwise might be an everyday health behaviour becomes increasingly loaded with stereotypes and assumptions about political motivations that can divide communities and marginalize individuals and their lived experiences.
Our research has shown us that reasons for engaging in practices often not condoned by health researchers and public health officials — such as sharing drug-using equipment — are often complex. And they often make sense in the context of people’s daily realities.
In the case of people living with HIV and people who use drugs, they often have sophisticated understandings and complex interactions with the health-care system. These communities often have innovative ideas about how to better meet the needs of their peers.
Mandatory in public sectors?
We have personally followed public health requirements and have been vaccinated. We also recognize that vaccines have been the most impactful public health intervention of the last century. Vaccines save millions of lives every year.
But we also understand that while everyone who lacks antibodies to new coronavirus strains is at risk, the risks of infection, morbidity and mortality are influenced by broader socio-political and economic systems. In this way, COVID-19, like many other infectious diseases that concern public health experts, is rooted in inequity.
Social contexts, inequities
The COVID-19 pandemic has exacerbated pre-existing inequalities among racialized (“visible minority”) communities because of systemic racism in the health-care system, workplaces and living conditions.
Communities that experience the brunt of systemic racism and ongoing colonization, including in the health-care system, may be understandably reluctant or hesitant to get vaccinated. Black and Indigenous communities are navigating especially painful histories with harmful state-sponsored medical interventions.
Engaging these communities about vaccination requires cultural humility and respect.
Then there are those considered “anti-vaxxers,” who reject vaccinations despite the evidence for their safety and efficacy.
In Canada, 70 per cent of the population has received at least one vaccine dose. Fifty-six per cent are fully vaccinated.
Risk of infection on campus
We share concerns about the risk of infection on campus and the importance of students getting vaccinated.
We also see rates of vaccination among young people ages 19 to 29 (69 per cent at least one dose, and 46 per cent fully vaccinated) in a positive light, considering they only became eligible recently, and with challenges in vaccine availability across Canada. Assuming single doses translate into fully vaccinated, we are left with questions about the remaining 31 per cent.
We consider two possible stances: mandatory vaccination and vaccine promotion.
In scenario one, post-secondary institutions view the nearly one-third unvaccinated as a threat — to the health and safety of themselves, other students, faculty and staff on campuses.
Putting aside the small subset unable to be vaccinated for medical or religious reasons, we are left with young persons who may be vaccine-hesitant. Or possibly anti-vaccination.
With the rapidly spreading Delta variant, the unvaccinated are at considerable risk for infection, and transmission to others. Clusters of infection increase risks of further mutations. Mandatory vaccinations might be necessary in this case. But is anything owed to the unvaccinated?
As many people return to workplaces, they want flexibility. Many universities adopted online learning platforms. If the unvaccinated are not permitted to attend in-person classes, they should be offered online alternatives.
Concerns that this will breach students’ privacy and open them up to shaming from instructors and classmates need to be addressed. Shaming people for health choices often backfires, sometimes intensifying their beliefs. We imagine online options being extended to all students during this transition period.
Scenario two, vaccine promotion, considers the role our respective universities have played during the pandemic.
Both the University of Toronto and the University of Windsor host vaccine clinics and offer expert advice.
The University of Windsor (UW) does not require students to be vaccinated to return to campus at this time. It is partnering with UW Students’ Alliance and WE-Spark Health Institute to promote vaccination through peer-engagement and accessible information.
The approach means vaccination is made readily available, including on-campus clinics, and students are given time to make the decision about vaccination.
Incentive-based approaches are another option; they may lead some students “on the fence” to be vaccinated, but are unlikely to sway the truly hesitant.
Scenario two creates options for diverse students from across Canada, with different levels of vaccine access, to return to campus. This approach may be in keeping with the role of universities as bastions of critical debate. As COVID-19 continues to evolve, it will require ongoing vigilance.
In considering a highly consequential policy, we both support dialogue and community engagement, for which our research in Canada and globally has afforded ample evidence. An important way forward is for higher education leaders to consult with students, faculty and staff.
Universities have a short window to be proactive about the fall and winter semesters. They need to consider what a gentler return home for students might look like this time compared to 2020.
Significantly, they should also be considering how they can meaningfully support students, faculty and staff to return and recover from this exceptionally challenging period — one that is not yet over.
Peter A. Newman receives funding from the Canadian Instututes of Health Research, the Social Sciences and Humanities Research Council, the International Development Research Centre, and the Canada Foundation for Innovation.
Adrian Guta receives funding from the Canadian Institutes of Health Research, the Social Sciences and Humanities Research Council, and the University of Windsor Humanities Research Group.vaccine antibodies pandemic coronavirus covid-19 mortality transmission canada ontario
Fear that the spread of the Delta mutation of the covid would disrupt the global economy spurred the unwinding of risk-on positions. Interest rates fell, and the traditional funding currencies: the US dollar, Swiss franc, and Japanese yen, strengthened..
Fear that the spread of the Delta mutation of the covid would disrupt the global economy spurred the unwinding of risk-on positions. Interest rates fell, and the traditional funding currencies: the US dollar, Swiss franc, and Japanese yen, strengthened most in July. While major US indices set new record highs, as did Europe's Dow Jones Stoxx 600, the MSCI Emerging Markets Equity Index fell 7%.
The preliminary July PMI reports were below expectations in the US, UK, and France. Japan's composite PMI has been contracting since February 2020. There has been some re-introduction of social restrictions in parts of Europe. The UK's "Freedom Day" (July 19), when mask requirements and social restrictions were supposed to be dropped, turned into a caricature as the Prime Minister and Health Minister were in self-quarantine due to exposure, and the number of cases reached the highest level in 5-6 months.
Given the large number of people in the world that remain unvaccinated, the challenge is that the virus will continue to mutate. Moreover, even in high-income countries, where vaccines are readily available, and stockpiles exist, a substantial minority refuse to be inoculated. This is encouraging the use of more forceful incentives that deny the non-vaccinated access to some social activity in parts of the US and Europe. In the US, the vaccines have been approved for emergency use only, and broader approval by the FDA could help ease some of the vaccine hesitancy. Yet, rushing the process would be self-defeating. An announcement still seems to be at least a couple of months away.
In some countries, the surge in the virus even where not leading to hospitalizations and fatalities, maybe tempering activity and postponing more "normalization" like returning to offices. The increase in the contagion has also prompted several companies to postpone plans to have employees return to offices. In other countries, like Australia, the virus and social restrictions are having a more dramatic economic impact. Its preliminary July PMI crashed to 45.2 from 56.7, the lowest since last May. Although many countries in East Asia seemed to do well with the initial wave, they have been hard hit by the new mutations. For some, the recovery already had appeared to be in advanced stages.
Floods in China, India, Germany, and Belgium add to the economic angst. A freeze in Brazil sent coffee prices percolating higher. Wildfires in Canada stopped the downside correction in lumber prices. While rebuilding is stimulative, in the first instance, the natural disasters could be inflationary as transportation and distribution networks are impacted.
The market reacted by pushing down nominal and real interest rates. In late July, the US 10-year inflation-protected note yield (real rate) fell to a record low near minus 1.13% Ten-year benchmark yields in the US, Europe, Australia, and China were at 4-5 month lows. Expectations for rate hikes by high-income countries eased, and Beijing surprised investors by cutting reserve requirements by 50 bp (freed up ~$150 bln of liquidity).
Still, other central banks, like Russia who hiked rates by 100 bp in late July, are pushing forward. In Latin America, Brazil, Mexico, and Chile are likely candidates for rate hikes in August. The market anticipates additional rates hikes from the Czech Republic and Hungary. On the other hand, Turkey's central bank meets under much political pressure to cut rates. Inflation is not cooperating, and it reached 17.5% in June, a new two-year high. Yet, the Turkish lira downside momentum eased, and this alone, in the face of a stronger dollar, meant it was the best performing emerging market currency last month, up about 3.0%. Its 12% loss year-to-date still makes it the second-worst performing emerging market currency so far this year, behind the Argentine peso's nearly 13% decline.
The Federal Reserve does not meet in August, but the Jackson Hole symposium (August 26-28) may offer a window into official thinking about the pace and composition of its bond purchases. Under that scenario, a more formal statement would be provided at the end of the September FOMC meeting (September 21-22). Chair Powell has pledged to give ample notice about its plans to taper. This means that the initial timing of the beginning of the tapering may be vague by necessity. Many expect the Fed to begin reducing its bond purchases either later this year or early next year.
The debt ceiling debate may add another wrinkle. The debt ceiling waiver expired at the end of July. There are several different ways that Treasury can buy time. There are many moving parts, and it is hard to know exactly when Secretary Yellen would run out of maneuvers, but she probably has around two months. In the past, the uncertainty was reflected in some T-bill sales. Recall it was the debate over the debt ceiling (the government has already made the commitments or spent the funds and now has to pay for them) that prompted S&P to remove its AAA rating for the US in 2011.
Meanwhile, Beijing is waging an internal battle to retain control in the technology and payments space. It has also stepped up its antitrust actions and moved to make it more difficult for internet companies to have IPOs abroad. At the same time, the US threatens to de-list foreign (Chinese) companies if they refuse to allow US regulators to review their financial audits. This is more than quitting before getting fired, though at the end of July the US announced that concerns over risk disclosures have prompt it to freeze applications for Chinese IPOs and the sale of other securities. Its efforts to turn the private schools into non-for-profits are driven by Beijing's domestic considerations, but foreign investors--hedge funds, a couple US state pension funds, and provincial pensions in Canada appear to have been collateral damage. Even the Monetary Authority of Singapore had exposure.
The jump in Chinese yields and the drop in equities that pushed the CSI 300 (an index of large companies listed on the Shanghai and Shenzhen exchanges) 21% below the February peak prompted some remedial measures by officials. They succeeded in steadying the bonds and stock markets, and the yuan recovered from three-month lows as July wound down. However, both the disruption and the salve, the selling of industrial metals, coal, and oil from its strategic reserves, demonstrate the activist state that gives foreign investors reservations about increasing allocations to China. To draw foreign capital, officials may be tempted to engineer or facility a strong recovery in shares and the yuan.
Beijing is also meeting resistance from abroad. Its aggressiveness in the region, including the aerial harassment of Taiwan and rejection of the Arbitration Tribunal at the Hague regarding the United Nations Convention on the Law of the Sea (that pushed back against Chinese claims in the South and East China Seas). Over the past few weeks, the situation has escalated. The UK announced it will station two naval vessels in the area. Japan has promised to defend Taiwan should it be attacked by China. The US has not been that unequivocal. The EU has been emboldened. Latvia became the first EU member to open a representative office of "Taiwan" instead of Taipei.
Many wargame scenarios are premised on China attacking Taiwan, but this does not seem to be the most likely scenario. Top US military officials have testified before Congress that Beijing wants to have the ability to invade and hold Taiwan within six years based on comments from President Xi to the People's Liberation Army. Yet, if China senses that the status of Taiwan is truly changing, it could move against the Pratas Island, which is off the east coast of China and the south tip of Taiwan. It is closer to Hong Kong than Taiwan. It is an uninhabited atoll with a garrison. Taking this island would send a signal about its determination, with the costs and risks of invading Taiwan. It is true to the ancient Chinese idiom about killing a chicken scares the monkeys.
Bannockburn's World Currency Index, a GDP-weighted basket of the top dozen economies, rose fractionally after falling 1% in June. The two largest components after the dollar are the euro and yuan. The former slipped by was virtually flat near $1.1860 and the latter softened by less than 0.1 %. The yen, with about a 7.3% weighting in the basket, was the strongest, gaining about 1.25% against the US dollar. Sterling was almost eked a 0.5% gain. The Indian rupee slipped 0.1%, while Brazil's real was the weakest currency in the index, falling by about 4.6% in July.
Dollar: The greenback's two-month uptrend stalled in the second half of July, sending the momentum traders and late longs to the sidelines. The dollar's pullback had already begun before the FOMC meeting at which the Fed lent support to priors about a tapering announcement in the coming months. The next opportunity is in late August. The weaker dollar tone that we expect to carry into August could create the conditions that make a short-covering bounce ahead of the Jackson Hole symposium more likely. Some assistance, like the moratorium on evictions, ended on July 31, and others, like the federal emergency unemployment compensation (where states continue to participate), are finishing in early September. Meanwhile, the Biden administration appears to see some of its infrastructure initiative approved in a bipartisan way and the other part through a reconciliation mechanism that it can do if there is unanimous support from the Senate Democrats. Inflation remains elevated, and Treasury Secretary Yellen and Federal Reserve Chair Powell warned it may remain so for several more months but still expect the pressure to subside. The price components of the PMI have eased in the last two reports. There appears to have been some normalization in used car inventories that also reduce the pressure emanating from the one item alone that has accounted for about a third of the monthly increase of late.
Euro: The leg lower that began in late May from around $1.2265 extended more than we had expected and did not find support until it approached $1.1750 in the second half of July. A trough appears to have been forged, and the euro finished near the month's highs. Technical indicators favor a further recovery in August. Overcoming the band of resistance in the $1.1950-$1.2000 shift the focus back to the highs. The low for longer stance by the ECB may be bullish for European stocks and bonds. The Dow Jones Stoxx 600 reached new record highs in late July. Bond prices are near their highest levels since February-March. The IMF raised its 2021 growth forecast for the euro area to 4.6%from the 4.3% projection in April and 4.3% next year from 3.8%. The economy seemed to be accelerating in Q3, but the contagion and new social restrictions may slow the momentum. Inflation is elevated about the ECB's new symmetrical 2% inflation target, but it pre-emptively indicated it would resist the temptation of prematurely tightening financial conditions. The debate at the ECB does not seem about near-term policy as much as the commitment and thresholds for future action.
(July 30, indicative closing prices, previous in parentheses)
Spot: $1.1870 ($1.1860)
Median Bloomberg One-month Forecast $1.1885 ($1.1950)
One-month forward $1.1880 ($1.1865) One-month implied vol 5.3% (5.6%)
Japanese Yen: The correlation of the exchange rate with the 10-year US yield is at its highest level in a little more than a year (~0.65, 60-day rolling correlation at the level of differences). The correlation of equities (S&P 500) and the exchange rate is in the unusual situation of being inverse since early this year. In early July, it was the most inverse (~-0.34) in nine years but recovered to finish the month almost flat. The yen rose by about 1.4% in July, offsetting the June decline of the same magnitude. Its 5.7% loss year-to-date is the most among the major currencies and the second weakest in the region after the Thai Baht's nearly 9% loss. The JPY110.60-JPY110.70 represents a near-term cap. The JPY109.00 area should offer support, and a break would target JPY108.25-JPY108.50. The extension of social restrictions in the face of rising covid cases is delaying the anticipated second-half recovery. The preliminary composite PMI fell to a six-month low in July of 47.7.
Spot: JPY109.85 (JPY111.10)
Median Bloomberg One-month Forecast JPY109.85 (JPY110.70)
One-month forward JPY109.80 (JPY111.05) One-month implied vol 5.4% (5.4%)
British Pound: Sterling reversed lower after recording a three-year high on June 1 near $1.4250 and did not look back. It dipped briefly below $1.38 for the first time since mid-April on the back of the hawkish Fed on June 16 to finish July at new highs for the month and above the downtrend line off the early June highs. A convincing move back above $1.40 would confirm a low is in place and a resumption of the bull move, for which we target $1.4350-$1.4375 in Q4. The postponement of the economy-wide re-opening until the middle of July, and a central bank looking past the uptick in CPI above the 2% medium-term target, weighed on sentiment. The central bank will update its economic forecasts in August, and both growth and inflation projections likely will be raised. The furlough program ends in September, and it may take a few months for a clear picture of the labor market to emerge. Nevertheless, the market has begun pricing in a rate hike for H1 22.
Spot: $1.3905 ($1.3830)
Median Bloomberg One-month Forecast $1.3930 ($1.3930)
One-month forward $1.3910 ($1.3835) One-month implied vol 6.6% (6.5%)
Canadian Dollar: The Canadian dollar reached its best level in six years in early June (~$0.8333 or CAD1.20) but has trended lower amid profit-taking and the broad gains in the US dollar. The usual drivers of the exchange rate: risk appetites, commodities, and rate differentials were not helpful guides recently. Canada has become among the most vaccinated countries, and the central bank was sufficiently confident in the economic outlook to continue to slow its bond purchases at the July meeting despite losing full-time positions each month in Q2. Speculators in the futures market have slashed the net long position from nearly 50k contracts (each CAD100k) to less than 13k contracts in late July. The downside correction in the Canadian dollar appears to have largely run its course, and we anticipate a better August after the heavier performance in July. Our initial target is around CAD1.2250-CAD1.2300.
Spot: CAD1.2475 (CAD 1.2400)
Median Bloomberg One-month Forecast CAD1.2435 (CAD1.2325)
One-month forward CAD1.2480 (CAD1.2405) One-month implied vol 6.8% (6.5%)
Australian Dollar: Since peaking in late February slightly above $0.8000, the Australian dollar has trended lower and by in late July briefly dipped below $0.7300, posting a nearly 9% loss over the past five months. The 50-day moving average ~$0.7570) fell below the 200-day moving average (~$0.7600) for the first time since June 2020, illustrating the downtrend after the strong recovery from the low near $0.5500 when the pandemic first stuck. The combination of a low vaccination rate and the highly contagious Delta variant forced new extended lockdowns for Sydney and social restrictions that have sapped the economy's strength. It will likely slow the central bank's exit from the extraordinary emergency measures. Indeed, the Reserve Bank of Australia is likely to boost its weekly bond-buying from A$5 bln to at least A$6 bln. A convincing break of $0.7300 could open the door for a return toward $0.7000, but we suspect the five-month downtrend is over and anticipate a recovery toward $0.7550 over the next several weeks.
Spot: $0.7345 ($0.7495)
Median Bloomberg One-Month Forecast $0.7425 ($0.7610)
One-month forward $0.7350 ($0.7500) One-month implied vol 8.9 (8.5%)
Mexican Peso: The dollar chopped higher against the peso in July and reached a high near MXN20.25 on July 21. It trended lower and, in late July, fell below the seven-week trendline support near MXN19.90. After finishing June less than 0.1% weaker, the greenback lost about 0.4% against the peso in July, which was the fifth consecutive month without a gain. The other notable LATAM currencies were the weakest three emerging market currencies (Chilean peso ~-4.1%, Colombian peso ~-4%, and the Brazilian real ~-3.8%). If the upper end of the dollar's range has held, a break of MXN19.80 may warn a test on the lower end of the range (~MXN19.50-MXN19.60). The 5.75% year-over-year CPI for the first half of July and the highest core inflation for early July in more than 20-years keep expectations for another rate hike intact when Banxico meets on August 12. The market has another hike priced in for the September 30 meeting as well. The dispute with the US over measuring domestic content for auto production under USMCA could undermine Mexico's role in the continental division of labor, but instead, producers in Mexico may choose to pay the WTO auto tariff standard of 2.5%. The IMF's latest economic forecasts revised the projection for Mexican growth this year to 6.3% from the April projection of 5%.
Spot: MXN19.87 (MXN19.95)
Median Bloomberg One-Month Forecast MXN19.94 (MXN19.97)
One-month forward MXN19.95 (MXN20.02) One-month implied vol 10.5% (10.7%)
Chinese Yuan: The dollar spent most of July within the trading range that had emerged in late June found roughly between CNY6.45 and CNY6.4950. The range was maintained even after the PBOC unexpectedly cut reserve requirements by 50 bp (announced July 9). However, Beijing's more aggressive enforcement of antitrust, discouragement IPOs abroad, making private education non-for-profit without foreign investment triggered sales of Chinese shares. It helped lift the dollar in late July to around CNY6.5150, its highest level in three months and just shy of the 200-day moving average. The pursuit of domestic policy objectives appears to be putting at risk strategic goals. A drying up of capital inflows from spooked foreign investors may have slow efforts to liberalize capital outflows that could eventually lead to making the yuan convertible. At the same time, China's actions give a timely example of what holds the yuan back from a significant role in the world economy and why a technology solution (e.g., digital yuan) will not suffice. As the dollar briefly traded above the upper end of its recent range in July, the risk is that it slips through the lower-end range, which could spur a move toward CNY6.40.
Spot: CNY6.4615 (CNY6.4570)
Median Bloomberg One-month Forecast CNY6.4555 (CNY6.4360)
One-month forward CNY6.4780 (CNY6.4815) One-month implied vol 4.0% (4.7%)
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