by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy Monday!  It’s the last day of April (which felt more like early March temperature-wise).  Here is what we are watching today:

Trade week: There is a lot of trade action scheduled this week.  First, the trade delegation is in China this week.  Treasury Secretary Mnuchin, NEC Director Kudlow, USTR Lighthizer and NTC Navarro will discuss trade with Chinese negotiators.  This team is divided; the first two tend to support free trade, while the latter two usually want trade impediments.  It’s not clear if much will come of these negotiations.  Since they don’t face a deadline, we would be surprised by a breakthrough.  China will likely try to divide the group, which would appear to be an easy task.  It is interesting to note that Lighthizer didn’t want this trip now.[1]  He wanted to focus on other trade negotiations.  This brings us to the second trade event this week, the steel tariff exemptions, which are expected tomorrow.  Commerce Secretary Ross told Bloomberg that not all nations will get an extension of tariff relief.[2]  Currently, Australia, Argentina, Brazil, Canada, the European Union, Mexico and South Korea were granted temporary tariff exemptions.  South Korea is the only nation on this list that has been granted permanent relief due to its agreement on steel and car imports.  The EU has indicated it will retaliate if steel and aluminum tariffs are applied to the group.  Third, NAFTA negotiations were expected to wrap up this week but it doesn’t appear that will happen, in part, because Lighthizer is in China.  We still expect a deal with NAFTA to be completed soon.

May trouble: PM May has seen her inner circle move to a harder stance on Brexit after her home secretary, Amber Rudd, stepped down and was replaced by Sajid Javid.  Rudd was involved in the Windrush scandal, where the descendants of Caribbean immigrants from Commonwealth nations, originally brought to the U.K. in the 1960s, were subjected to deportation due to their lack of clear documentation.  Rudd misled Parliament on the scale and scope of the deportations.  Rudd was a “soft Brexit” supporter, who leaned toward joining the EU customs union.  Javid is considered a hard liner on the issue.  The shift has contributed to recent GBP weakness.

Iran nuclear deal: There is growing speculation that the Trump administration will likely pull out of the Iran nuclear deal.  President Trump has been a frequent critic of the deal, calling it “the worst deal ever” because it allows Iran to install more centrifuges after 10 years at its Natanz facility as well as enrich uranium at its Fordo facility in 15 years.  In addition, new Secretary of State Mike Pompeo expressed over the weekend a distrust for Iran, describing its activities in the Middle East as “destabilizing.”  EU leaders are trying to keep the deal together; if the U.S. does end the pact, it isn’t clear whether Europe will cooperate on sanctions.  And, it is almost certain that China will not.

A looming threat: President Trump has indicated he will shut down the government in September if Congress doesn’t give him more funding for his Mexican border wall.  Although it’s too early for the financial markets to care, by mid-summer this could become an issue, especially so close to the midterms.  Historically, such turmoil in front of elections hurts the instigating party but this time around we are not so sure it would be all that harmful to the GOP.  The upcoming elections will be “base v. base” and actions that enthuse base voters may be more important than wooing independents.  A case in point:

This is a chart we ran last week that shows the S&P 500 along with Trump’s approval rating. The low in his approval rating came around the time the tax bill passed.  Note that the president’s approval rating has improved as the administration has shifted toward trade impediments.  The congressional GOP wants to run on the tax cut; this data suggests that such a plan probably won’t work because the right-wing populists were not impressed with that bill because most of the benefits go to the right-(and left-)wing establishment.  On the other hand, “going to the mattresses” on the border wall will likely energize the right-wing populists.  Although President Trump’s negotiating style is to stake out an extreme position and then move to a more conciliatory agreement, the secret of his success is that he has no problem with watching the other party become uncomfortable in negotiations. [3]  Thus, the chances of brinkmanship and shutdown threats could become quite rampant by late summer.

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[1] https://www.wsj.com/articles/china-plans-trade-offers-for-u-s-envoys-on-high-stakes-trip-1525029506

[2] https://www.bloomberg.com/news/articles/2018-04-29/ross-says-u-s-to-extend-duty-relief-to-some-allies-but-not-all

[3] https://www.axios.com/one-trick-pony-inside-trumps-negotiating-style-3b60acf3-76e1-4c7d-9c6b-8792ad38479b.html

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It’s a busy Friday.  Here is what we are watching:

Korean leaders meet: In a historic event, the leaders of North and South Korea met and Kim Jong-un became the first DPRK leader to visit the South since the war.  The two leaders vowed to work on denuclearization (with a strong dose of strategic ambiguity) and promised to actually draft a peace accord, which would officially end the Korean conflict.  Currently, the armistice that ended the war is in place but a formal peace has never been negotiated.  The symbolic importance of this meeting should not be underestimated.  It is an important development; not too long ago we were preparing for war.

However, what it means in the end remains in doubt.  One issue to remember is that Koreans, in general, would prefer to reduce outside influence.  The peninsula is valuable land; throughout history, China and Japan have controlled the area to project power.  The U.S. also has an interest.  A potential outcome is one that enhances the independence of both Koreas at the expense of China, Japan and the U.S.  The next big event is the U.S./North Korea summit.

The other big meeting: Overshadowed, but in many ways just as important, is the meeting today between Chairman Xi and PM Modi in Wuhan, in the Hubei province of China.  Relations between the two countries have been tense recently.  There was a flare-up on the northern border several months ago over disputed boundary areas.  India is concerned about rising Chinese investment in its arch-rival Pakistan and is also worried about the one belt, one road (OBR) project that seems to be engulfing the region.  India is facing a difficult path.  If it joins the OBR, it will receive welcome investment and likely gain access to China’s growing consumer market but it will also become a Chinese satellite.  Unfortunately, India does not have a strong enough military or economy to hold out against being surrounded by Chinese allies (purchased with investment from OBR).

Under normal circumstances, India would ally with the U.S.  Geopolitically, this would be a win/win for both nations.  India’s position in the region would be a potential barrier to the OBR and would allow the U.S. to threaten Chinese expansion.  But, the U.S. is in withdrawal mode and Washington may not be reliable.  India’s historical default position is non-alignment.  It was one of the founders of the Non-Aligned Movement and thus would prefer to not team up with either China or the U.S.  Unfortunately, for Modi, remaining non-aligned is probably not an option.  Even if India resists China’s “charms,” it will face a growing threat from Pakistan which will be fueled by Chinese investment.  And, India’s neighbors are increasingly acquiescing to Chinese OBR pressure.  We doubt a resolution will come from this meeting today but the pressure on India is rising.

And yet another meeting: President Trump and Chancellor Merkel meet today in Washington.  Unlike Macron, Merkel does not have a warm personal relationship with President Trump so we would expect a businesslike meeting.  Criticism of Germany’s trade surplus is likely.

A portrait of discontent: A recent Pew poll[1] shows that the political divide is hardening.  Democrats have traditionally preferred officials who compromise.  We believe that’s because Democrats generally see government as a force for good and thus want to see government work, which entails compromise.  The majority of Republicans oppose compromise.  However, this recent polling suggests the majority of Democrats now oppose compromise, a significant hardening of position that will make it very difficult to govern under conditions of gridlock.  But, the most significant finding was that two-thirds of Americans believe their side “loses” more than it “wins” in politics.  Some of this is probably due to a hardening of partisanship; getting partial wins when you think you should get everything you want seems like a “loss.”  But, the most likely reason for this finding is that Americans seem to believe the entire system doesn’t work for them and thus whomever is in office won’t lead to a “win.”  This would explain the attraction of rogue candidates like Obama and Trump.  Our contention is that the voters in 2008 who favored Obama thought they were getting Sanders.  The disappointment was palpable and if the GOP had not run the poster child of the establishment in 2012 then Obama would have been a one-term president.  We would not be at all surprised to see the Democrats repeat the “Romney error” in 2020.

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[1] http://www.pewresearch.org/fact-tank/2018/04/26/key-findings-on-americans-views-of-the-u-s-political-system-and-democracy/?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam&stream=top-stories

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT]

ECB: The statement was dovish.  It indicated that balance sheet expansion is scheduled to end in September but actual tapering won’t start anytime soon.  Interest rates were left unchanged and forward guidance was generally left unchanged, meaning rates are expected to stay low even after tapering begins.  The initial reaction to the statement was muted; the EUR was up modestly before the statement and held its levels after the report.  Market action suggests the markets were expecting a dovish statement.  The press conference did not offer any major surprises.  The lift in the EUR suggests the market was leaning bearish going into the meeting and thus we are seeing some short covering.  In addition, we have seen a drop in U.S. interest rates and a rise in commodity prices.  Those moves are consistent with dovish monetary policy.

China trade negotiations: Treasury Secretary Steven Mnuchin, NEC Director Larry Kudlow, Director of Trade Peter Navarro and USTR Bob Lighthizer are going to China next week to discuss trade.  It’s an interesting group.  The first two are establishment figures and support free trade, while the latter two are protectionists.  If the Chinese can’t divide this group, it will be a diplomatic own goal.  We doubt anything will come of these meetings but headline volatility is possible because the free traders and the protectionists will have different takes on Chinese concessions.  Sending a group that is this divided is unusual for most presidents but not a huge shock for this one; Trump likes improvising and thus sending a group that can’t possibly agree gives Trump room to deal with Xi directly.

Macron recap: The personal chemistry between Macron and Trump appeared very warm.  However, Macron’s comments were diametrically opposed to Trump’s worldview.  Using Mead’s archetypes, Macron is probably closer to Wilsonian, while Trump is almost pure Jacksonian.  These views of foreign policy are completely incompatible.  However, it’s important to remember that Mead’s archetypes are relevant for American administrations.  It’s easy for foreign governments to be Wilsonian when they don’t bear the costs of enforcing human rights across the world.

Confirmation: The South China Morning Post[1] confirms reports that have been circulating that Mt. Mantap has been severely compromised by recent nuclear tests and is no longer safe to use for such tests.  In fact, the article suggests the most recent blast has created a “chimney” that could allow radioactive fallout to rise into the atmosphere.  Thus, the decision to end nuclear tests may not fully reflect a change in policy by North Korea but a necessity brought on by test site conditions.

Energy recap: U.S. crude oil inventories rose 2.2 mb compared to market expectations of a 2.3 mb draw.

This chart shows current crude oil inventories, both over the long term and the last decade.  We have added the estimated level of lease stocks to maintain the consistency of the data.  As the chart shows, inventories remain historically high but have declined significantly since last March.  We would consider the overhang closed if stocks fall under 400 mb.

As the seasonal chart below shows, inventories are usually rising this time of year.  This week’s rise in stockpiles is normal.  We note that next week’s report is usually the seasonal peak in inventories.  If we follow the normal seasonal draw in stockpiles, crude oil inventories will decline to approximately 422 mb by September.

Based on inventories alone, oil prices are undervalued with the fair value price of $64.31.  Meanwhile, the EUR/WTI model generates a fair value of $74.12.  Together (which is a more sound methodology), fair value is $70.86, meaning that current prices are below fair value.   Using the oil inventory scatterplot, a 422 reading on oil inventories would generate oil prices in the high $70s to low $80s range.  At present, we have no reason to believe that inventories won’t follow their usual path so, barring an increase in supply or a sharp rise in the dollar, the case for higher oil prices is improving.

Another factor we are watching is that Yemeni rebels are reportedly[2] targeting Saudi oil facilities using missiles and drones.  So far, the kingdom has been able to intercept the incoming weapons before they do any damage.  However, if we see a successful attack, we would expect a strong upward price move due to current tightness in oil markets.

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[1] http://www.scmp.com/news/china/diplomacy-defence/article/2143171/north-koreas-nuclear-test-site-has-collapsed-and-may-be-why-kim-jong-un?utm_source=emarsys&utm_medium=email&utm_content=20180425&utm_campaign=scmp_china&aid=190131336&sc_src=email_2220763&sc_llid=6483&sc_lid=151052347&sc_uid=U5LNF58jFg&utm_source=emarsys&utm_medium=email

[2] https://www.wsj.com/articles/yemens-rebels-step-up-attacks-on-aramco-oil-facilities-1524656858?mod=ITP_world_0&tesla=y

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Equity market weakness continues this morning after a sell-off yesterday.  The dollar is rising, boosted by the 10-year T-note definitively breaking 3%.  Here is what we are watching this morning:

Did Macron save the Iran deal?  Probably not.  Although it isn’t obvious what “plan B” is if the U.S. kills the agreement, President Trump seems inclined to do so.  We view the Iran deal as flawed.  It doesn’t cover Iran’s missile program or its covert actions in the region.  In other words, it is limited to the nuclear program and it only delays its progress.  However, it has been our position that President Obama viewed the deal as a first step in normalizing relations with Iran to anoint Tehran as the regional hegemon so the U.S. could shift its focus to the Far East.  When Clinton lost to Trump, that extension became impossible (and there is little evidence to suggest Clinton would have followed Obama’s path anyway).  Still, by all accounts, Iran is living up to the letter of the agreement.  So, why end it?  In part, the president’s base loves it whenever Trump kills an Obama era policy.  On the other hand, if the problem is Iran’s behavior in the region then addressing that issue would make sense.  To some degree, Macron also pressed Trump to keep a military presence in Syria.  If the U.S. really wants to curtail Iran’s behavior, it should put more military assets in Iraq and Syria, ally with Turkey and break the “Shiite arc” that is being built from Iran to Lebanon.  However, that policy move would undermine the president’s Jacksonian principles, which is essentially isolationist except when honor is besmirched.  May 12^th is the deadline for reaffirming the current treaty.  If the U.S. withdraws, U.S. sanctions will return.  Of course, the Europeans may decide not to follow U.S. lead, which would undermine the effectiveness of sanctions.  Iran will likely begin the process of restarting its nuclear program.  We would expect oil prices to rise, although some of the current increase is due to the market discounting the potential for an end to the agreement.

Financial markets: The dollar has been rising, while Treasury yields and equities are continuing to struggle in the face of strong earnings.  The key issue is whether or not these trends are the start of a major trend change or simply a short-term situation.  For now, we tend to think much of this is short term.  We note that liquidity levels remain elevated.

This chart shows the level of retail money market holdings along with the S&P 500.  In this bull market, the index tends to stall when money market levels fall below $920 bn.  Current money market levels are just over $1.0 trillion, meaning there is ample liquidity for investors if they choose to purchase equities.  Of course, every indicator exists in an environment of conditions and one of those conditions in this bull market has been very low interest rates.  If equities fail to rally despite ample liquidity, it could mean that rates have increased to a point where cash is seen as an alternative to fixed income or equities.  If that is the case, then this indicator may not be as bullish as it looks.  We believe it’s too early to make that case; the national rate of checking account interest is 5 bps and retail money markets are at a whopping 11 bps, so it is hard to see that as a viable alternative.

However, there is another observation that does raise our concern.  The chart below overlays the president’s approval rating with the S&P 500.  Two items are worth noting.  His approval rating steadily slumped into late December when the GOP was putting the finishing touches on the tax bill.  One would think that passing a historic tax cut would have been popular with the public, but it doesn’t appear that was the case.  Second, as the president has moved to impede trade, his approval ratings have risen sharply while the equity market has corrected.  This should signal to the president that what makes voters like him isn’t a roaring stock market but hope that workers won’t be competing with foreigners.  Protectionism is clearly not popular with equities as evidenced by the slump in the index that coincides with the move toward trade restrictions.   The lesson the president should take from this is that a weaker equity market doesn’t hurt his political stature.

The other longer term takeaway, which has been a concern of ours for a while, is that populism isn’t going to be good for financial markets.  Populism, which eventually entails de-globalization, re-regulation of the economy and higher taxes, will lead to more inflation and weaker margins over time.

This chart shows the shares of national income that go to labor and capital.  One of our contentions is that when communism collapsed, the political class concluded it no longer had to prove that capitalism offered a better life for most people compared to communism.  The constraints on capital, in the form of regulation, were steadily lifted leading to rising capital income and falling labor income in each business cycle.  The share of national income going to capital is now at a postwar high.  The social trends we are seeing suggest this trend may be reaching its acme, meaning margins will begin falling with each business cycle going forward.  We don’t know this with certainty.  As we like to say, “they don’t call it the establishment for nothing,” but when politicians see their approval ratings rise when they push populist policies it is reasonable to expect more of such policies.  This is a long-term problem for equities; the big question we often ponder is when does the long-term become the present?  We don’t think we are there yet, but it is hard to believe we won’t be there in the next five to 10 years.

China’s #MeToo: A backlash is brewing against sexual harassment in China.  Students at some of China’s most respected universities are engaging in coordinated protests against officials who have attempted to cover up scandals on campus.  These protests bear watching because President Xi has been aggressive in quashing any organized activity that isn’t sanctioned by the CPC.  The most reasonable response for Xi will be to try to co-opt the movement, which would mean giving voice to the victims while using the party to crack down on the miscreants.  If past behavior is any guide, Xi will not tolerate an organized movement outside the party so look for a crackdown if the students insist on independence.

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by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It was an unusually quiet night.  After a barrage of tweets recently, the president appears occupied with his French visitor for now, which might account for the current “tweet silence.”  Earnings are coming in stronger than expected (see above), while Treasury yields remain elevated.  Here is what we are watching today:

Early look at the ECB: The ECB meets on Thursday.  We don’t expect too much new information.  Recent economic data out of Europe has been soft, in part due to the strength of the EUR over the past year.  We expect Draghi to have little new to say on forward guidance or tapering.  Reports that the ECB may delay the decision on the timetable for ending QE until July are probably responsible for recent EUR weakness.  Overall, we don’t expect much from this meeting and the drop in the Eurozone currency has probably already discounted that outcome.

Regulation and privacy: The NYT[1] opines that new EU privacy regulations may end up strengthening the market power of the incumbents.  To some extent, this is public policy 101.  Regulation drives up the cost of doing business which acts as a barrier to entry for potential new firms coming into the business.  This article suggests another twist to the idea—regulation may enhance the existing brands because the new regulations will put the idea of privacy into the minds of consumers and make them prone to stay with the familiar, the current dominant firms.

In public policy, there are generally two broad theories of managing excessive market power.  The first is to use anti-trust laws to break up large firms into parts.  This method has drawbacks; some firms are difficult to unwind.  In a vertically integrated firm, some parts may not be able to function as standalone entities.  The classic example of anti-trust is the breakup of Standard Oil in 1911 that created 34 firms.  Several did exceedingly well in the aftermath, suggesting the breakup was good public policy.  The other theory is to allow the monopolist to exist but regulate it heavily.  The original AT&T (not the current one) is the most obvious example.  The key decision input that should decide which policy to deploy is if the industry is a “natural monopoly” or not.  A natural monopoly is an industry with increasing returns to scale; the bigger one gets, the faster the profits.  Industries where redundant infrastructure is inefficient is a good example.  So, for telephones, having competing firms all hanging wires to phones and being unable to send voice “across” different firms’ wires meant that the first mover could gain scale by crowding out new entrants.  It is unclear if the social media firms are natural monopolies.  There is evidence to suggest that due to learning curve costs or grouping (all my friends use a certain social media platform precluding the use of others) they have the characteristics of natural monopolies.  On the other hand, there is a bit of Yogi Berra’s famous line, “Nobody goes there anymore; it’s too crowded.”  We notice that social media platforms rise and fall in popularity, suggesting these markets are not natural monopolies after all.  If they are not natural monopolies then anti-trust would be a better solution.  We suspect the firms would prefer to be regulated on the assumption that they can continue to run their businesses as they see fit and, via regulatory capture, manage the regulatory environment to their advantage.  Anti-trust takes years to implement, whereas regulation can come quickly.  Therefore, the most likely short-term outcome is more regulation on social media which may not necessarily be bad for these firms.

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[1] https://www.nytimes.com/2018/04/23/technology/privacy-regulation-facebook-google.html?emc=edit_mbe_20180424&nl=morning-briefing-europe&nlid=567726720180424&te=1

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It was a very busy weekend.  This morning, 10-year T-note yields briefly touched 3.00% and remain near that level.  The dollar is higher on somewhat soft European PMI data.  Here is what we are watching this morning:

North Korean thaw: Kim Jong-un said his nation would close its nuclear test site and suspend its long-range missile launches but didn’t go so far as to give up his nuclear arsenal, at least not immediately.  In one sense, this is a big deal; the NY Times[1] speculated this may signal an end to the current leader’s signature policy, “byungjin,” which is essentially a “guns and butter” approach to the economy.  Instead, North Korea would allow the civilian side of the economy to prosper by allocating it more resources than the military side.  If true, this signal alone is important because it suggests Kim has enough confidence in his control of the military that he can reduce its resource base.

However, like all complicated issues, this one comes with caveats.  First, the nuclear test site has probably been compromised.  Mount Mantap, the site of six nuclear tests, may have suffered enough damage to threaten leakage if another test occurs there.[2]  Although North Korea has other test sites, this one is clearly the favorite.  We would not be shocked to discover that China has pressured North Korea to stop testing at Mount Mantap.  At the same time, we doubt North Korea has completed enough tests to reliably believe it can build a working warhead, so the agreement to suspend tests is important.  Second, a suspension of missile tests can end quickly.

George Friedman at Geopolitical Futures[3] argues that North Korea is shifting from a “ferocious, weak and crazy” strategy to a “ferocious” strategy.  Kim acknowledged that North Korea is now a nuclear power, thus the weak part of the original strategy is no longer operative.  And, nuclear powers cannot be unpredictable; it invites pre-emptive attacks.  The concessions will offer both the U.S. and North Korea room to bargain but we would not expect North Korea to immediately give up its nuclear weapons program.  But, a runway for integration into the world economy would bolster North Korea’s economy.  The key unknown is Kim’s views on markets.  His grandfather and father saw markets as a threat but it appears Kim does not.  Thus, North Korea may be opting for a Chinese model of development.

Europe visits the White House: President Macron and Chancellor Merkel are visiting the White House this week.  We expect each of them to suggest that allies don’t fight over trade (which really isn’t true—Reagan did with Japan and Germany) and that the U.S. should not simply jettison the Iranian nuclear deal.  President Trump and President Macron seem to get along well on a personal level which might help discussions.  However, we still view the chances that the Iranian deal gets scotched as elevated.  SOS nominee Pompeo will likely not be recommended by the Senate Foreign Relations committee this week but will probably still get the position by a narrow margin in the Senate vote.  His appointment would add another Iran hawk to the administration.

China rumblings: There were four items of note on China.  First, Treasury Secretary Mnuchin tried to lower the temperature on trade tensions with China over the weekend.  At the spring IMF meetings, Mnuchin met with PBOC Governor Yi Gang and informed the Chinese official that he is interested in visiting China.  It appears China was open to talks.  In discussions at the IMF meeting, Mnuchin expressed optimism that a trade conflict would be avoided.  Second, President Xi and PM Modi of India have announced they will hold informal talks on Friday and Saturday of this week.  India and China have a contentious mountain border and the former has looked at the one-belt, one-road project with trepidation, fearing encroachment by China into South Asia.  China has allied itself with Pakistan, India’s arch-enemy.  Although India has improved ties with the U.S., concerns about the stability of American policy may be prompting Modi to seek accommodation with China.  Third, the Pakistani press[4] is reporting that China is “ready to provide security guarantees for the one-belt, one-road project.”  At this point, China doesn’t have the military infrastructure to back such claims.  However, we note that the U.S. didn’t either when it unveiled the “Monroe Doctrine.”  Simply making the claim is important if no outside power challenges the claim.  Fourth, the EU is claiming that China is using criminal groups to avoid VAT in Europe.[5]

Global tensions: Greece is reporting that Turkey has been increasing incursions into Greek airspace and waters recently.[6]  Greece was given islands near Turkey at the end of WWI, which was also the end of the Ottoman Empire.  It appears that Turkish President Erdogan is trying to rebuild at least part of that fallen empire.  He is also encroaching into Iraqi and Syrian territory and the threats to Greece are part of that posture.  In the same region, widespread protests were reported in Armenia.  The former president, Serzh Sargsyan, had to step down due to term limits.  He then took the role of prime minister and transferred all the power of the presidency to his new role.  Anger over Sargsyan’s ploy to extend his rule has led to the unrest.  Widespread protests also continue in Iran.  Much of the unrest is due to deteriorating economic conditions.  A drought is leading farmers to demonstrate against Iran’s water allocation policies.  The nuclear deal was partly done to improve the economic lot of Iranians.  However, lingering sanctions and uncertainty about the future path of the nuclear deal have tempered economic growth.  If President Trump does kill the nuclear deal, Iranian leaders will likely welcome that outcome because it would allow them to blame the U.S. for their economic woes.  The nuclear deal raised expectations that have not been met; reinstituting sanctions would reduce those expectations.

U.S. aluminum prices fall: There are reports that the administration may ease sanctions on Rusal (HKD 0486, 1.52) after its controversial leader, Oleg Deripaska, offered to step down as president.  The news has led to a drop in U.S. aluminum prices.

Saudi scare: Over the weekend, there were reports of massive gunfire in Riyadh.  Although there were unconfirmed rumors of a coup attempt, the official report was that a drone had strayed near the Royal Palace, triggering a wave of anti-aircraft fire.  There were unconfirmed reports King Salman was moved to a secure bunker in the capitol.  At this point, it is unclear if this incident was anything more than the official version of the story.  Clearly, the oil markets are unconcerned as prices are slumping this morning.  We will be watching in the coming days to see if there are any reports of arrests.  However, even if the official version is correct, the reaction observed in Riyadh does suggest that security forces are on elevated alert.

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[1] https://www.nytimes.com/2018/04/21/world/asia/north-korea-kim-jong-un-nuclear-tests.html

[2] https://www.washingtonpost.com/world/after-six-tests-the-mountain-hosting-north-koreas-nuclear-blasts-may-be-exhausted/2017/10/20/ccdfa016-b50d-11e7-9b93-b97043e57a22_story.html?utm_term=.bc0f2e110390

[3] https://geopoliticalfutures.com/north-koreas-strategy-halting-nuclear-program/ (paywall).

[4] http://paktribune.com/news/China-ready-to-provide-security-guarantees-for-the-One-Belt-One-Road-project-280601.html

[5] http://m.scmp.com/news/world/united-states-canada/article/2142760/eu-suspects-tax-fraud-chinas-gateway-europe-state?amp=1&__twitter_impression=true

[6] https://www.nytimes.com/2018/04/21/world/europe/greece-turkey-islands.html