09112020 :: Friday finance week in review

A partial digest of what we learned:

  • There is still no agreement on further stimulus measures or safety nets of any kind for America’s general public or states. For one, US municipalities remain in dire straits and big bond trades are drying up. For another, food insecurity is on the rise, in addition to housing insecurity and other societal ills. The nation’s budget deficit is now in excess of $3 trillion, but its total debt of $20 trillion has become cheaper to service. This reality is supportive of providing more assistance, contrary to the opinions of some politicians.

    Meanwhile, Trump’s payroll tax deferral play is getting the cold shoulder from large corporations such as Costco and UPS, as well as the House of Representatives. Even the Republican-controlled Senate appears unsure of the wisdom of implementing it.

  • The rout in tech continued this week, with the NASDAQ breaching 11k twice, to end in the high 10s. However, the more valuations fall again, the greater another run-up may be down the road. Pandemic rules, especially, dictate reliance on this sector moving forward.

  • Annual systemic inflation in the US ticked up to 1.3% in the month of August, above expectations of 1.2%. Contributing to the rise were used vehicles, gasoline, shelter, recreation, and household furnishings and operations. On the other hand, inflation may be tempered in part by a slowdown in college tuition costs. University education price tags have served as a perfect example of siloed inflation, though, increasing 164% as compared with the CPI’s 50% over the last 20 years.

  • The Fed’s unprecedented support of Corporate America’s debt seems mostly priced in at this point, according to some market observers. If in fact the case, this leaves less room for improved valuations in bond funds like LQD. Nevertheless, the dividend payouts are still healthy (and occur on a monthly basis), enhancing the fund’s appeal over Treasuries as the bond allocation portion of a diversified portfolio.

  • Money markets are under pressure given low rates on account of the Fed.

  • The defrauding of federal PPP stimulus was widespread, the Justice Department is finding, and some of the perpetrators have been formally charged. Guilty individuals may include JPMorgan’s own employees, it appears. The financial institution doled out close to $30 billion of the $659 billion in funds made available under the program.

  • Sovereign matters:

    • Emerging markets continue to heat up. The rotation of capital into emerging market stocks and bonds that was already underway marches on, BofA analysis shows. This is risk-on behavior. Indeed, over the last three months, Vanguard’s emerging markets ETF, VWO, has returned 10%+, their total stock index ex-US fund, VXUS, has returned close to 9%, and Direxion’s triple-leveraged emerging markets fund, EDC, has returned close to 32%. Again, these are three month returns, not annualized ones. Such performance in light of the performance of other sectors speaks to a return to the benefits of international diversification.

    • Index provider FTSE Russell is conducting an annual review of its World Government Bond Index this month. Among the considerations they are taking into account is the inclusion of China’s bonds in the WGBI. Should they reach agreement, the result would be $ tens of billions in additional inflows into the country’s debt market. This would further boost the yuan and make an even stronger case for investing in emerging markets, generally speaking. It may also create stiffer competition for US Treasuries, sapping away investor dollars.Argentina is moving on up with its debt having now been restructured and ratings agencies consequently upgrading the country. This positively impacts high-yield bond funds that hold the country’s sovereign issues further.

    • Turkey has been downgraded by Moody’s.

    • Brexit continues to be a drag on the UK’s economy.

    • The US is seen expanding its blacklist of Chinese firms.

    • Mexico raises gross debt limit to 70% of GDP for rest of president's term, putting it in the crosshairs of ratings agencies.

    • Sudan has declared a state of economic emergency after witnessing a steep decline in its currency. The Sudanese inflation rate (143.78% in July) is second only to Venezuela’s.

  • While AstraZeneca halted its experimental COVID-19 vaccine trials due to a participant in the study becoming inexplicably ill, our understanding of COVID-19 is improving, thanks to a team of researchers and a supercomputer in Tennessee. Takeaways:

    • The disease may produce excessive amounts of the inflammatory molecule bradykinin, among other things.

      A common theme that underpins many of the disease manifestations of COVID-19, such as acute respiratory distress syndrome (ARDS), is inflammation and edema, or fluid build-up. An assorted cast of leaky blood vessels, immune cells (as well as the cytokines and other molecules produced by them), and plasma proteins such as clotting factors, bradykinin, and other kinins assume center stage in this spectacle of acute inflammation.

      Activation of the kinin system in the context of blood clotting—which can be dysregulated in some COVID-19 patients—generates bradykinin and related peptides through two distinct pathways: the plasma kallikrein pathway (activated by a clotting factor called the Hageman factor) and the tissue kallikrein pathway (activated by tissue enzymes and plasmin, an enzyme in the fibrinolytic system that breaks down clots in the bloodstream). Bradykinin is then converted to des-Arg9-bradykinin (DABK). When bradykinin and DABK bind to their corresponding receptors, B2R and B1R, respectively, fluid begins to leak from blood vessels.

      The leaky blood vessels and lung fluid build-up in some COVID-19 patients might be explained by the virus’s corruption of an inflammation safeguard, namely, ACE2’s degradation of DABK. Read the full description of the pathway here.
      TheScientist staff

      The RAS pathway tightly controls the kinin system. ACE breaks down bradykinin, while ACE2 breaks down DABK. ACE and ACE2 therefore act as regulatory brakes in the kinin system. But because ACE2 combines with SARS and SARS-CoV-2 and is internalized into the cell during infection, extracellular levels of the enzyme might drop, and, according to van de Veerdonk’s hypothesis, the bradykinin cascade then goes into overdrive.¹


¹ Dasgupta, Alakananda. “Is a Bradykinin Storm Brewing in COVID-19?The Scientist Magazine (August 26, 2020).