by Kaisa Stucke & Bill O’Grady

On November 9, the Catalonia region of Spain is due to hold a referendum for independence.  The referendum had previously been approved by the regional government; however, it was ruled unconstitutional by the Spanish Supreme Court.  Currently, it is unclear whether the November 9 referendum would result in a different outcome.

This week, we will look at the separatist movement in Catalonia.  We will start by giving a brief overview of the region’s history and politics, then look at the roots of the independence movement.  We will explore the probability of independence, the potential future relationship between the region and the central government, and the role of the EU and the Eurozone.  As always, we will conclude with market ramifications.

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by Kaisa Stucke & Bill O’Grady

Last week marked six months since the Ebola outbreak was identified in the African country of Guinea.  The current Ebola epidemic is the largest, most severe and most complex outbreak of the disease in the history of the virus.  More cases have been diagnosed and more people have died than in all the prior outbreaks combined.  All 24 of the previous outbreaks have occurred in Central Africa.  The virus was able to spread undetected for months as this is the first episode of the virus to take place in West Africa.  Complicating the initial diagnosis was the fact that the symptoms of Ebola are identical to many other diseases in the region.

Ebola is a viral hemorrhaging fever that attacks the blood vessels, causing internal bleeding and leading to multiple organ failure.  Fast-spreading and fatal in more than half the cases, the virus can be easily spread through direct contact with an infected person’s bodily fluids or contact with contaminated items.  The symptoms start after an incubation period of two to 21 days, and it is believed that a person is only contagious after symptoms appear.

Since the disease is so fast-spreading and healthcare facilities so strained, it is hard to keep an accurate running count but as of the time of this writing the World Health Organization (WHO) estimates the case count is currently at 6,574 and the death count is 3,091.  Global observers believe that this number is underestimated.  The Centers for Disease Control (CDC) estimated last week that the total number of cases could reach between 550,000 and 1.4 million by January 2015.  Without a significant improvement in fighting the disease, the number of cases could double every 20 days.  We note that this estimate does not account for the recently announced funding support from the U.S. to combat the disease.

This week, we will explore the Ebola outbreak, looking at the origin of the disease, how it has spread and how it has developed into a serious epidemic.  Although it is hard to find comparable epidemics due to the complexities of the disease, we will look at a couple of other disease outbreaks in order to gain a better understanding of the scale of the current Ebola epidemic.  As always, we will finish with geopolitical and market ramifications.

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by Kaisa Stucke & Bill O’Grady

When ECB President Mario Draghi was asked at a recent press conference if the central bank would consider a negative deposit rate, Draghi answered that the institution has approached the question “with an open mind.”  This topic is fascinating in terms of alternative options in monetary policy as well as the possible geopolitical ramifications if a major currency country undertakes a below-zero rate program.  Looking back at recent history, there are two examples of European countries that have instituted negative term deposit rates since the 2008 crisis.  Denmark first utilized a negative deposit rate of -0.2% in July 2012 and then adjusted it in January 2013 to slightly less negative, but it has remained at -0.1% since.  Sweden employed a negative term rate between July 2009 and September 2010.  In both cases, the rate cut was a reaction to the appreciating currency due to large capital flows out of the Eurozone and into the perceived safety of non-Eurozone European Union countries.

We will turn our attention to Denmark to study its decision to undertake the below-zero rate, the specifics of the situation that prompted it and the effects of the negative rate on financial conditions and the broader economy.  We will then briefly look at the possibility of a below-zero rate policy for the ECB and, most importantly, the geopolitical ramifications of the decision by the world’s second largest currency block to ease into unknown consequences of negative rates to stimulate the economy.

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by Bill O’Grady

On November 17^th, Chileans went to the polls to vote on a new president and parliament.  Polls correctly forecasted that Michelle Bachelet, who was president from 2006-10, would win a plurality.  She won a whopping 47% of the vote, beating seven other candidates handily.  The second place finisher, Evelyn Matthei, won 25% of the vote.  These two women, who are friends from childhood, will face each other in a runoff election on December 15^th.

In this report, we offer short biographies of the two candidates, focusing mostly on Bachelet.  From there, we will provide a short history of Chile, primarily to highlight the tensions between the forces of liberalization and reaction.  An examination of the Allende-Pinochet period will detail the factors that have affected Chile’s political structure over the past five decades.  Recent student protests frame a significant demographic change that is affecting Chilean politics and moving the country beyond the issues experienced in the 1970s.  As always, we will conclude with market ramifications.

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by Bill O’Grady

Earlier this month, negotiations between Iran and the P5+1 (U.S., U.K., France, China and Russia, the five permanent members of the U.N. Security Council, plus Germany) failed to reach an agreement despite great hopes that one was near.  In fact, on expectations that a proposed nuclear deal was in the offing, U.S. Secretary of State Kerry cut short his talks with Israel and the Palestinians to join the discussions.  However, near the end of the talks, France raised objections to the proposed agreement and its concerns could not be resolved.  And so, the parties agreed to meet later this month but with lower level officials manning the discussions.

U.S. and French relations have seen many twists and turns since the end of WWII.  France refused to join NATO and opted for its own nuclear arsenal.  It tried to hew a line between the U.S. and the U.S.S.R. during the Cold War, upsetting both sides at times.  France was a reluctant ally during the Gulf War and was strongly opposed to America’s war to oust Saddam Hussein in 2003.  However, France strongly backed the effort to protect Libyans from the wrath of Muammar Gaddafi in 2011 and also pressed to use military force against the Assad regime for deploying chemical weapons.  France is one of the best examples of Lord Palmerston’s famous quote, “Nations have permanent interests but no permanent friends.”

In this report, we will examine the reasons behind French objections to a nuclear deal with Iran.  We will begin with an examination of France’s relations with the Middle East, focusing on its relations with Israel.  Using this history as a guide, we will analyze why the French scotched the potential agreement.  A short discussion will follow of the impact of France’s objection on the evolution of U.S. policy with Iran.  As always, we will conclude with market ramifications.

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by Bill O’Grady & Kaisa Stucke

A twice yearly meeting of the Chinese government officials, formally known as the third plenary session of the 18^th Communist Party of China Central Committee, started on Saturday and will end tomorrow.

Officials have indicated that this plenary session could be a springboard for major reforms.  In fact, Chinese General Secretary Xi Jinping has indicated that this session could be as consequential as the plenary session in 1978 which introduced policies that set in motion the Chinese growth engine.  The 1978 meeting was a significant turning point for both the country and the Communist Party itself.

This week, we are going to take a closer look at the changes from the plenary session 35 years ago, the circumstances leading up to the session and how China changed following the meeting.  In understanding the changes associated with the 1978 meeting, we can better assess the statement that this week’s meeting could be just as significant.

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by Bill O’Grady

On October 18^th, Saudi King Abdullah’s government announced that his kingdom would reject an invitation by the U.N. Security Council to occupy a seat on the council.  This rejection is the first in the history of the United Nations and occurred after Saudi diplomats had worked diligently to garner the invitation.  The rejection came as a surprise to the U.N. and to the U.S.

According to reports, King Abdullah decided to reject the seat due to the Security Council’s “double standards.”  He argued that the inability to resolve the Palestinian issue, prevent the proliferation of WMD and stop the Syrian regime from killing its citizens as reasons for the refusal to accept the post.  However, these factors are generally thought to be excuses.  Instead, the Saudi regime, incensed at U.S. policy decisions, rejected the seat as a way to express the kingdom’s displeasure with the American government.  We note that Turkey and Egypt, also unhappy with recent decisions by the Obama administration, supported the kingdom’s decision.

In this report, we will discuss the basic history of U.S. and Saudi relations, focusing on the historical commonality of goals between the two nations.  We will detail how the aims of the two nations have diverged since the Cold War ended and use this to examine America’s evolving plans for the Middle East.  We will discuss how the evolution of U.S. policy is affecting Saudi Arabia and the pressures these changes are bringing to the kingdom.  As always, we will conclude with market ramifications.

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