"Skeletons are Scary, Markets are Not"

MONETARY

• Fed releases FOMC statement and keeps rates unchanged at current target range of (0 – .25%). Also notes continued pickup in Economic Activity and Employment in recent months, although still below start of year levels⁴
  • Fed also reaffirms its stance to target inflation levels slightly higher than 2% for a period of time in order to anchor long-term inflation expectations at the 2% level⁴
  • Also unveils a loose set of rules-based forward guidance that is dependent on both Employment and Inflation
    • (FOMC) “…maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”⁴
  • Fed will also continue, at a minimum, its current pace of purchasing Treasury Securities and Agency-Backed Mortgage Securities to help foster market functioning and accommodative conditions⁴
• Fed releases a second round of hypothetical stress tests that it will use to help determine how banking institutions would respond to further economic stresses⁵
  • Earlier this year, the first round of stress tests showed that large banks would remain well capitalized under the proposed economic stresses⁵
  • This second round of stress tests will show how large banks would respond under two hypothetical scenarios in which severe recessions take place⁵
    • Hypothetical Scenario 1: (Federal Reserve) “features the unemployment rate peaking at 12.5 percent at the end of 2021 and then declining to about 7.5 percent by the end of the scenario. Gross domestic product declines about 3 percent from the third quarter of 2020 through the fourth quarter of 2021.”⁵
    • Hypothetical Scenario 2: (Federal Reserve) “features an unemployment rate that peaks at 11 percent by the end of 2020 but stays elevated and only declines to 9 percent by the end of the scenario. Gross domestic product declines about 2.5 percent from the third to the fourth quarter of 2020.”⁵
  • Very important to note, these are not the Federal Reserve’s actual expectations for what is likely to occur in the future. Rather, they are hypothetical scenarios of economic turbulence that are used to assess the strength of banking institutions
• Federal Reserve announces that it will extend restrictions on share buybacks and dividend distributions for larger banks with more than $100B in total assets through Q4 of 2020¹⁶
  • Federal Reserve also noted that all banks passed its prior stress test in June and were shown to remain well capitalized in the event of another economic downturn¹⁶

 

FISCAL

• Congress passes temporary stopgap measure to avoid a government shutdown before the September 30 budget year^9,18
  • The stopgap measure will keep the government operating through Dec 11, giving congress time to potentially pass a formal annual budget in the post-election lame-duck session in November and December^9,18
  • Notable highlights from the stopgap bill include $30B in funding for the Dept. of Agricultures Commodity Credit Corp, and $8B for pandemic programs related to feeding children who normally receive school lunches^9,18
• Talks on the next COVID-19 stimulus package slightly edge forward with Democrats now seeking roughly $2.2T in total spending relative to Republicans counteroffer of around $1.62T^14,17
  • House Democrats have revised their prior Heroes Act from a total spend of $3.4T to $2.2T¹⁴
  • Major areas of impediment in discussions surround how much additional aid in federal weekly unemployment benefits to extend, as well as aid to state and local governments¹⁴
  • Notable highlights from Republicans counteroffer include additional $400 per week in federal weekly unemployment benefits (retroactive to September 12 and lasting until Jan 1, 2021), as well as $250B for state and local government aid¹⁷

 

GEOPOLITICS

• Nvidia announces $40B acquisition of Arm Limited from Softbank for $40B¹. As a result of acquisition, Arm Limited will now become part of an American company, and as such, Chinese firms face the possibility of losing access to Arm’s Instruction Set Architecture licenses if placed on U.S.’s Restricted List².
  • This would effectively increase the U.S.’s leverage over trade negotiations with China moving forward²
  • About 90% of the world’s smartphone chips use Arm licenses in some way³
• In response to the aforementioned, China publishes its set of rules for inclusion onto its ‘Unreliable Entity List’^6,7
  • Firms included on the list would be banned from all trading of imports and/or exports with China, and also banned from further investment in China^6,7
  • Language on rules was left strategically vague to allow China flexibility with regards to enforcement
    • Would take retaliatory actions if an individual or business’s actions “harm China’s sovereignty, security and development interests, violate market rules, halt contractual obligations with Chinese companies or individuals, or take discriminatory measures on Chinese companies or individuals to severely hurt their legitimate interest”^6,7
  • S. implements export restrictions on China’s largest chipmaker SMIC, effectively cutting the company off from U.S. technology¹¹
    • Companies are now required to obtain a license in order to supply SMIC¹¹
    • The Commerce Department cited “… an unacceptable risk of diversion to a military end use.”¹²
    • Separately, U.S. lawmakers are said to be considering subsidies of around $25B to encourage U.S. tech firms to relocate their semiconductor production facilities back to the United States¹³

 

VACCINE

• FDA issues Emergency Use Authorization for Visby Medical’s portable PCR test for COVID-19. This is the first company to receive an Emergency Use Authorization for a portable COVID-19 test kit⁴
  • Results from the test kit are to be available in 30 minutes⁴
• Johnson & Johnson’s vaccine candidate enters late stage trials in U.S., making J&J the 4^th company to enter final stage trials for its vaccine candidate in the U.S.⁸
  • AstraZeneca/Oxford, Pfizer/BioNTech, Moderna, Johnson & Johnson are currently the 4 companies in final stage trials⁸
  • Johnson & Johnson’s study is expected to have 60,000 volunteers across the world and is expected to have results by early 2021⁸
    • J&J’s expectation is to deliver more than 1B doses globally through 2021⁸
  • Novavax begins late-stage trials in U.K. for its COVID-19 vaccine candidate¹⁰
    • Trial is expected to enroll about 10,000 participants who are between the ages of 18-84 over the next four to six weeks¹⁰
    • Company plans to begin a late-stage trial in the U.S. sometime in October¹⁰
  • AstraZeneca/Oxford’s COVID-19 vaccine trail resumes in the U.K., however, remains on hold in the U.S.¹⁵
    • Trials were initially put on hold due to a suspected serious adverse reaction in a single patient¹⁵
      • Patient was a woman enrolled in the U.K. trials who exhibited symptoms that are consistent with transverse myelitis¹⁵

 

[ See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

 

ANNOTATIONS

1. Nvidia. “NVIDIA to Acquire Arm for $40 Billion, Creating World’s Premier Computing Company for the Age of AI”. September 13, 2020
2. Global Times. “Chinese regulators may block Nvidia’s $40b Arm buyout: analysts”. September 14, 2020
3. Nikkei Asian Review. “Nvidia’s $40bn Arm deal faces China risks and industry pushback”. September 16, 2020
4. Reuters. “Silicon Valley startup Visby’s portable COVID-19 test gets FDA approval”. September 17, 2020
5. Federal Reserve. “Federal Reserve Board releases hypothetical scenarios for second round of bank stress tests”. September 17, 2020
6. Global Times. “Source: If the United States gets stuck on Huawei, China’s counterattack list will include these US companies”. May 15, 2020
7. South China Morning Post. “Beijing says firms on ‘unreliable entities list’ will be banned from trading with, investing in China”. September 19, 2020
8. The Wall Street Journal. “Johnson & Johnson Begins Final-Stage Testing of Covid-19 Vaccine”. September 23, 2020
9. Bloomberg. “House Passes Stopgap Funding Measure to Keep Government Open”. September 22, 2020
10. CNBC. “Novavax starts late-stage Covid-19 vaccine trial in UK”. September 24, 2020
11. Reuters. “China must prepare for ‘long tech march’ following U.S. restrictions on SMIC: Global Times”. September 27, 2020.
12. Fortune. “The U.S. just undercut China’s best shot at semiconductor independence”. September 28, 2020
13. Nikkei Asian Review. “US lawmakers weigh $25bn subsidies to boost chipmaking”. September 26, 2020
14. Forbes. “Stimulus Update: Mnuchin To Counter Pelosi’s $2.2 Trillion Stimulus Package; Will He Include $1,200 Stimulus Checks And State/City Aid?”. September 30, 2020
15. Statnews. “AstraZeneca resumes Covid-19 vaccine trials in the U.K.”. September 12, 2020
16. Federal Reserve. “Federal Reserve Board announces it will extend for an additional quarter several measures to ensure that large banks maintain a high level of capital resilience”. September 30, 2020
17. Roll Call. “Exclusive: Mnuchin coronavirus relief plan includes more state, local funds”. September 30, 2020
18. NPR. “President Signs Spending Stopgap Measure, Averting Government Shutdown”. September 30, 2020