Friday, October 23, 2020 Headlines

1. European markets higher despite PMI miss

2. Vietnam is the latest market to break out

3. EU spending spikes as economy sputters

4. Goldman pays record fine for 1MDB Malaysia scandal

Markets Today

Global markets are mixed to higher to end the week, with European indexes in rally mode and U.S. futures pointing to a higher open. Worse than expected economic data from Europe is not deterring investors, even as the virus continues to spread across Spain and France.

The FDA’s approval of Gilead’s remdesivir yesterday, the first and only fully approved treatment in the U.S. for COVID-19, may be adding optimism this morning as investors look for signs of hope wherever they can. Or, maybe investors heard what they wanted to hear from President Trump and former Vice President Biden in last night’s final presidential debate before the election. More spending is coming, no matter who wins.

Massive government spending and borrowing has been a dominant theme for global investors in 2020 as countries are digging deep to keep their economies afloat. The U.S. budget deficit is at highs not seen since World War II, and Europe is not far behind (more below). But that spending, along with rock-bottom interest rates, has been working for most global equity markets since April. Those markets that are more closely tied to a global economic recovery, are starting to break out.

Good morning Vietnam!

Chart courtesy: YCharts

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Headlines

Wells Fargo & Co is exploring a sale of its asset management business, according to Reuters. The unit managed $578 billion on behalf of customers as of the end of June and could fetch more than $3 billion in a sale. The bank has reportedly discussed a potential deal with asset management companies and private equity firms.
Intel stock is sliding this morning after its data center sales disappointed investors. Total Q3 revenue was $18.3 billion, down 4% year over year. Data-centric revenue declined 10% while PC-centric revenue was better than expected, up 1%. It expects $17.4 billion revenue next quarter, down 14% from the same period last year.
Walmart is suing the Trump administration to clarify the roles and responsibilities of pharmacists and pharmacies under federal U.S. drug policy. A opioid-related civil lawsuit against the retailer from the Justice. Dept (DOJ) is currently pending and it complains of being simultaneously targeted by the DOJ and state health regulators for either interfering too little or too much in filling prescriptions. OxyContin maker Purdue Pharma recently reached an $8.34 billion settlement with the DOJ.
Tesla is recalling about 30,000 imported Model S and Model X vehicles in China because of suspension problems, according to the country's State Administration for Market Regulation. The electric car maker, which only began manufacturing at Giga Shanghai this year, has refused to comment on the matter.
The U.K. has signed a trade deal with Japan, the first agreement with a major economy since Brexit. The bilateral deal largely preserves the terms under which the U.K. traded with Japan when it was part of the EU, but is expected to boost British trade by £15 billion and GDP by 0.07% over the next 15 years. It will also make it easier for British companies to operate in Japan, with tariff-free trade on 99% of exports to the country.
Uber and Lyft must classify their drivers in California as employees, according to a state appeals court ruling that is a direct challenge to their business models. The order makes the two even more dependent on Proposition 22, a ballot initiative in California set for Nov. 3 that would supersede any court rulings. If they lose the appeal, both companies have threatened to leave the state.
Shares in Gilead Sciences are up over 4% in pre-market trading after the U.S. Food and Drug Administration approved its remdesivir antiviral drug for treatment of COVID-19. The FDA already granted emergency use authorization for the medication in May. The news comes a week after a WHO trial determined remdesivir appeared to have little or no effect on the length of time COVID-19 patients spent in the hospital or their survival. Gilead also added UnitedHealth Group veteran Anthony Welters to its board yesterday.

Remdesivir's chemical structure. Image courtesy: National Library of Medicine

Image courtesy: IHS Markit

The Big Story

EU Activity Shrinks As Fear Creeps Back

Europe is currently confronting a second wave of the COVID-19 virus and reimposing lockdown measures that strangled its economic growth this year. Adding to the gloom are signs that the resurgence is already impacting its economies. Flash estimates show business activity reversed and fell back into decline for the first time since June at the start of the fourth quarter. "Accelerating growth of manufacturing output was overwhelmed by a steepening deterioration in the service sector amid rising COVID-19 worries," according to IHS Markit.

The flash IHS Markit Eurozone Composite PMI dropped from 50.4 in September to 49.4 in October. Germany continued with a steady recovery on the back of its mighty manufacturing sector whose output grew at a rate surpassed only twice in the survey’s nearly 25-year history. Service sector activity fell for the first time since June in the country. In the bloc’s second-largest economy, France, the economic deterioration sped up with Composite PMI falling deeper in contraction territory to 47.3. from 48.5 in September.

Images courtesy: Eurostat

Yesterday the statistical office of the European Union announced historic borrowing figures for the region. In the second quarter, government deficit (seasonally adjusted) was at 11.6% of GDP in the 19-country euro area and 11.4% of GDP in the 27-country European Union as a whole. These represent both the highest deficits and the sharpest quarter on quarter increases since 2002 when records began.

Government debt to GDP ratios rose to 95.1% and 87.8% in the euro area and EU, respectively, at the end of the second quarter. Compared with the first quarter of the year, all of the EU countries registered an increase in their debt to GDP ratio. The largest increases were observed in Cyprus (+17.1 percentage points – pp), France (+12.8 pp), Italy (+11.8 pp), Spain (+11.1 pp), Croatia and Belgium (both +11.0 pp), Slovakia (+10.6 pp) and Greece (+10.5 pp).

The asymmetric effect the pandemic has had and precarious economic situations in countries like Spain and Greece raises the question of whether the EU should become a fiscal union or at least a temporary fiscal union to share the burden.

Image courtesy: Fox/Giphy

The Big Number: $2.3 billion

That's the biggest fine in U.S. history for a violation of the Foreign Corrupt Practices Act which prohibits the payment of bribes to foreign officials to assist in obtaining or retaining business. Wall Street giant Goldman Sachs has the dishonor of being slapped with it yesterday for its role in Malaysia's 1MDB corruption scandal.

In total, the bank will pay $2.9 billion as part of the deferred-prosecution agreement with the Justice Dept., including fines and disgorgement credits paid to other U.S. agencies and foreign authorities. Globally, the affair has cost it more than $5 billion and much embarrassment. Two bankers have been criminally charged. Blame has also been assigned to the highest rungs of the firm $174 million in pay being clawed back from former CEO Lloyd Blankfein, current CEO David Solomon and other executives. Read more about this movie-worthy and movie-funding (ironically The Wolf of Wall Street) case here.

The Foreign Corrupt Practices Act was enacted in 1977. Here are the top corporate sanctions under it since then, according to Stanford Law School**:

Airbus SE (France) - $2.09 billion
Petróleo Brasileiro S.A. (Brazil) – Petrobras - $1.78 billion
Telefonaktiebolaget LM Ericsson (Sweden) - $1.06 billion
Telia Company AB (Sweden) - $965 million
Mobile Telesystems Public Joint Stock Company (Russia) - $850 million

**Brazils's Odebrecht and Braskem originally held the top rank here with a fine of $3.5 billion, but the penalty was later reduced due to "inability to pay." The companies used a hidden but fully functioning Odebrecht business unit, a "Department of Bribery," so to speak, according to a former Deputy Assistant Attorney General. It systematically paid hundreds of millions of dollars to corrupt government officials in countries on three continents.

The chart below shows the countries where bribes were offered or paid, based on allegations in Enforcement Actions initiated within the last ten years.

Image courtesy: Stanford Law School Foreign Corrupt Practices Act Clearing House

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