by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST] Episode #3 of our Confluence of Ideas podcast is now available.

Happy Monday!  U.S. equity futures are modestly higher this morning on hopeful trade talk.  PBOC eases. Hong Kong unrest intensifies.  Iran also facing unrest.  Lebanon flirting with banking crisis.  Here are all the details and more:

Trade talks:  USTR Lighthizer and Treasury Secretary Mnuchin conducted a phone conversation with Vice-Premier Liu yesterday.  We have seen a spate of positive comments recently.  For example, the U.S. is expected to grant Huawei (002502, CNY 3.48) a 90-day license extension.   However, one fact remains—China wants a tariff rollback and it isn’t clear that President Trump will agree.  Equity markets continue to ride on optimism surrounding a trade agreement.  If trade hopes are dashed, we could see a sharp reversal in the near term.

PBOC eases:  It wasn’t much of an ease, a mere 5 bps; the PBOC cut its 7 day repo rate to 2.50% from 2.55%.  However, it was the first cut in this easing cycle.  This rate peaked in March 2018.  Although the cut was small, it is expected that there is more to come.  Reports suggesting problems for China’s smaller banks continue to circulate.

Hong Kong:  Violence in Hong Kong was elevated all of last week and it intensified over the weekend.  On Saturday morning, PLA troops entered Hong Kong, armed with brooms to clean up after the previous night’s unrest.  Although the actual action was non-threatening, the symbolism was not lost; the next time, they could be armed.  Yesterday, the focus was on the Hong Kong Polytechnic University, which had been taken over by protestors.  Security forces surrounded the school and were arresting anyone who tried to escape.  The police did try to storm the university, but were rebuffed by students firing arrows, bricks and gasoline bombs.  Unnamed officials in the White House have condemned the use of force.  A bill in the U.S. Congress to support Hong Kong protestors has been fast tracked by the Senate; it isn’t obvious if the White House will sign it.  If passed, it would seriously undermine trade talks.  Despite the violence and weak economic data, Hong Kong equities did lift overnight; it’s not obvious as why this occurred but may be related to the PBOC cut.

Iran unrest:  As is common among OPEC nations, Iran heavily subsidies gasoline.  An Iranian was paying 10k riyals, or about 32 cents per gallon; the new price is 15k riyals, or about 50% increase.  In addition, if a household purchases more than 16 gallons in a month, the price doubles again.  Consumers didn’t take the hike lightly.  Supreme Leader Khamenei tried to ease fears, and at the same time warned demonstrators against violence.  There is clear concern about the anger; Iran has blocked internet access which would be critical in organizing opposition.  We have seen protests around the world over price increases, or reduced subsidies on government supplied goods.  Iran does appear worried.  Although U.S. sanctions have not led to new talks with Tehran, or stopped Iran’s meddling in the Middle East, the Iranian economy has clearly suffered.  The decision to raise gasoline prices smacks of either desperation, or foolhardiness.  We lean toward the former.

A leak:  Yesterday, the NYT ran a long report of what appears to be leaked internal CPC documents regarding the crackdown in Xinjiang.  The information does appear consistent with China’s actions in the region.  To a great extent, the extensive leak gives more details on China’s suppression.  At the same time, we saw few surprises in the report.  The bigger story is who leaked it and why.  It is possible that it is someone looking to undermine Chairman Xi; or perhaps a hardliner that wants to scuttle the trade deal.

Netherlands:  Because of the country’s strict pension funding rules, exacerbated by the ECB’s ultra-low interest rates, some two million Dutch pensioners are facing benefit cuts beginning next year.  Parliament is therefore set to start debating a solution this week, with unions threatening mass protests if relief isn’t provided.  Given that the United States and many other countries face similar pension pressures as a result of population aging, longer life expectancies, and low interest rates, it could be especially instructive to see how the Dutch political process deals with the issue.  Of key importance will be the relative weight put on higher required contributions, benefit cuts, or government support.

Lebanon banks:  Lebanon’s financial system is essentially a dual currency system; USD and the Lebanese pound.  Either specie is used in transactions.  For this system to work the Bank of Lebanon has to maintain a stable exchange rate; most of the time, it trades around 1475 to 1525, pound to dollar.  However, there is a problem with this system; the central bank can only print one of these currencies.  So, to maintain the exchange rate, the central bank either needs to maintain a steady ratio of supply between the two currencies, or the country must have a steady inflow of dollars, mostly through tourism.  Recently, banks have stopped allowing dollar depositors access to their money, leading to panic hoarding of dollars.  To increase the supply of dollars, Lebanon must implement austerity to run a current account surplus; needless to say, the current level of unrest suggests this will be very difficult to manage.

Saudi Aramco:  It does appear the kingdom isn’t going to get the valuation it sought.  The best it can get is $1.7 trillion; the crown prince wanted $2.0 trillion.  At this price, the IPO will raise nearly $26 bn.  Dealers expect the stock to be available on Dec. 12^th.  The kingdom is focusing its selling effort on wealthy Saudis and sovereign wealth funds, including China and Russia.

Korea:  The U.S. and South Korea have postponed military drills in hopes of encouraging Pyongyang to enter talks.  It is not clear if this will be enough.

Brexit:  PM Johnson claims that all the current Tory candidates for MP back his exit plan.  He has also announced new corporate tax cuts.

Global Trade Flows:  The WTO said its September leading indicator of global trade flows improved slightly but still pointed to below-average growth, as improvements in export orders, container shipping and auto shipments were offset by weaker air freight and shipments of raw materials and electronic components.  The news is probably a slight positive for global stocks.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST] Episode #3 of our Confluence of Ideas podcast is now available.

U.S. equity futures are modestly higher this morning.  Lots of data today (see below).  Some optimism on trade.  Hong Kong is still very tense.  Debt is on the rise.  Here are all the details and more:

Trade:  There are a couple positive news themes this morning.  First, Larry Kudlow told the Council on Foreign Relations that a deal was “close,” but President Trump was not ready to sign off quite yet.  Kudlow is part of the establishment wing of the administration and has repeatedly offered optimistic viewpoints on numerous issues including trade.  Earlier this week, the talk on trade was much less favorable.  Although Kudlow may be offering a valuable insight into the path of negotiations, it is also likely he is merely showing his bias.  Second, Speaker Pelosi was optimistic that USMCA may be close to passage.  With a number of distractions on Capitol Hill (impeachment, spending bills[1]), passage of the North American trade pact seems unlikely but moderate Democrats facing tough elections next year are pushing the Democratic caucus to pass the measure.

Debt:  The Institute of International Finance (IIF), a bank-funded research group, reported yesterday that global debt rose $7.5 trillion to a new record of $250.9 trillion.  The group forecasts a number of $255.0 trillion by year-end.

Financial debt is usually less of a concern because it includes some double-counting.  Still the rise in private, non-financial (business and household) and government debt is significant.  There are two issues to focus on.  First, there is the sustainability problem.  Debt by itself isn’t usually a problem; it’s the ability to service it that is the issue.  High debt levels increase pressure on central banks to keep rates low because higher interest rates raise debt service costs.  The implementation of negative interest rates is related, in part, to the issue of debt size.  Second, there is the adjustment problem.  If the debt does become unsustainable, the allocation of “pain” to debtors and creditors becomes the key part of the resolution process.  The decision on the allocation of costs comes from the political system.  It’s important to remember that one party’s debt is another’s asset.  If debt values are going to fall, it’s either because asset values are going to decline, or borrowing is going to reverse (or both).  Reducing debt values has led to historic events.  The Great Depression was one such event.  Japan over the last 30 years is another.   Debt management may be the biggest issue the world faces now because a “sudden stop” in lending can lead to a cascade of defaults and in some nations, this debt may be denominated in some other nation’s currency, which makes resolution much more difficult.  This is one of those “background” issues that always lurks, but occasionally pops up to cause problems.

Hong Kong:  There were rumors that authorities were going to implement a curfew but those have been denied.  Positions on both sides are hardening.  Chairman Xi is pressing the Hong Kong government to bring the unrest under control.  Hong Kong is now in recession as the violence escalates.  In addition, the unrest appears to be spreading; South Korean students in Seoul put up posters supporting Hong Kong and faced a confrontation with students from the PRC.   Adding to pressure for China, Senator Rubio’s (R-FL) Hong Kong pro-democracy bill has made “very significant progress.”  A similar measure has already passed the House.  If it passes, it would likely become a serious impediment to a trade deal with China.  The U.S.-China Economic and Security Review Commission, a bipartisan panel of experts which offers advice to Congress on China, has recommended that if the PRC sends troops to Hong Kong, the U.S. should suspend the former colony’s special economic status.  This same group issued a report yesterday that essentially signals to Congress that the U.S. should be prepared for a “prolonged strategic competition” with China.  Former Secretary of State Kissinger, at an event sponsored by the National Committee on U.S.-China Relations, warned that the United States and China are now so equally powerful that neither can expect to dominate the other.  Because of their equal strength, any significant conflict between them would result in a catastrophe “worse than the world wars.”  Kissinger said the United States and China have to get used to that fact and learn to live together.  If we can’t, globalization is under threat under these conditions.

North Korea:  A day after North Korea threatened a “new path” if the United States and South Korea hold their planned joint military exercises next month, satellite images show dozens of military aircraft parked wing-to-wing at a North Korean civilian airport.  The line-up could be in preparation for a visit by North Korean leader Kim Jong-un, but it could also signal some new kind of air power demonstration.  In any case, it seems to confirm North Korea’s growing frustration with the denuclearization issue and the likelihood that it could soon revert to provocative military steps, which would likely unsettle the financial markets.  Meanwhile, on a visit to South Korea, U.S. Defense Secretary Esper called on South Korea to cover more of the cost of stationing U.S. troops in the country.  The Trump administration is pushing for the South Koreans to quintuple their contribution to $5 billion per year.

France:  As an antidote to all the news about global trade tensions and slowing factory activity, it’s important to keep in mind the power of economic reform, and not just in the so-called emerging markets.  For example, French new business registrations in October were up 15.7% year-over-year, continuing the double-digit increases over the last two years.  The continuing surge is driven by business-friendly reforms under President Macron, including the scrapping of a wealth tax on all assets other than property, a flat tax on capital gains and a special visa to attract start-ups.

Odds and ends:  Google (GOOGL, 1309.15) is facing a widening state-led anti-trust probe.  The U.S. is threatening sanctions on Egypt as Cairo is considering the purchase of Russian arms.

Energy update:  Crude oil inventories rose 2.2 mb compared to an expected build of 1.5 mb.

In the details, U.S. crude oil production rose 0.2 mbpd to 12.8 mbpd, a new record.  Exports rose 0.3 mbpd, while imports declined 0.3 mbpd.  The rise in stockpiles was mostly in line with expectations.

The above chart shows the annual seasonal pattern for crude oil inventories.  We are approaching the end of the autumn build season, which implies we will see a modest drop during the month of December.

We continue to monitor the autumn refinery maintenance season.

This week’s rise is normal, but utilization remains below average.  Run rates should continue to rise into the new year.

Based our oil inventory/price model, fair value is $57.82; using the euro/price model, fair value is $49.07.  The combined model, a broader analysis of the oil price, generates a fair value of $51.25.  We are seeing the divergence between dollar and oil inventories narrow as the dollar weakens and oil stocks rise.  We expect the Saudi IPO process to support oil and any positive news on the trade front would be supportive for oil prices as well.  At the same time, the IEA is warning of a potential supply glut next year due to rising non-OPEC output.  Although we expect output discipline into the IPO, the Saudis may attempt to retake market share post-IPO.  Historically, such events usually lead to much lower oil prices.

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[1] Some optimism is emerging on this front as well.

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST] Episode #3 of our Confluence of Ideas podcast is now available.

Hong Kong is deteriorating rapidly.  Trade talks continue, but friction is emerging.  Global economic data was ‘meh.’  Powell follows up his Congressional testimony today.  Worries about disease.  Here are all the details and more:

Hong Kong:  Conditions in Hong Kong continue to deteriorate.  As we noted yesterday, the protests have moved from being a merely weekend event to daily.  Protestors are increasingly destroying public property, such as tollbooths and vandalizing train stations.  They are also aggressively disrupting auto traffic by lighting up barricades.  Today, the area closed schools due to the civil disruption.   Mainlander students have been threatened and attacked by Hong Kong students; groups are arranging to rescue these students.  Civil order is breaking down in a profound manner; violence by both sides is elevated, and Hong Kong citizens have been remarkably tolerant of the disorder.  So far, Beijing has not cracked down but the increasing violence is reaching a point where a harsh reaction is increasingly likely.  Our take is that a full-blown crackdown will likely make any conciliatory moves on trade by the administration impossible.  The violence, if not quelled soon, is becoming a risk to financial markets.

Trade:  According to reports, trade talks are stalling over agricultural purchases.  On the surface, this doesn’t make any sense.  Chinese food prices are soaring, and a clear remedy is to import agricultural products in massive quantities.  Additionally, U.S. farmers and ranchers have that supply.  The problem comes down to process.  USTR Lighthizer has a long history in forming trade agreements with clear targets and responses if the targets are not met.  The U.S. is demanding that China “provide monthly, quarterly and annual targets for purchases.”  It is likely that if these numbers are not met, the U.S. would be able to retaliate with additional tariffs.  China has good reason to avoid hard numbers; by forcing Chinese buyers to purchase American goods, they could find themselves unable to arbitrage lower prices from other sources.[1]  China is making concessions in other areas, e.g., opening its markets to U.S. poultry.

In addition to farm product issues, China is apparently balking at strong enforcement mechanisms for technology transfers.  At the same time, the U.S. is reluctant to remove any tariffs without clear concessions from China.  China, of course, wants to see the U.S. remove tariffs to begin talks.  It is possible that both sides believe they need a narrative that shows the other side capitulated.  If so, the odds of a deal are much longer than the market currently thinks.

Global economic data:  Japan’s GDP rose an annualized 0.2%, the weakest growth this year.  The data was adversely affected by some one-off events, such as Typhoon Hagibis, but trade friction with South Korea and a slowing Chinese economy are also causing problems.

China’s data mostly disappointed investors.  China’s industrial production came in weaker than forecast, up 4.7% from last year, less than the 5.4% expected.  Private firms showed the most weakness, as state-owned firms’ production was steady.

Investment was also weak, rising 5.2% through the first nine months of the year compared to the same period last year.  Capital spending dipped to 3.7% in October, down from 4.8% in September.  Retail sales disappointed as well, rising 7.2% compared to forecasts of +7.8%.

About the only bright spot was Germany, who saw its GDP rise 0.1%, avoiding the layman’s definition of recession (two consecutive negative quarters of GDP growth) but still very sluggish growth.

Powell:  The testimony was modestly dovish.  In this press conference after the last meeting, Powell seemed to suggest the risks to the economy were balanced.  At the testimony, he seemed to signal that there was perhaps more risk to the downside, suggesting that the odds of the next move being a cut is higher.

Germany-Russia:  The German parliament has passed one of the final legal changes needed for Russia to complete its Nord Stream 2 gas pipeline to Germany.  The law exempts the project from EU rules forbidding one entity to be both the producer and the supplier of natural gas.  If the pipeline is soon completed as expected, the U.S. administration has threatened to impose sanctions on it, which would likely be a source of tension and headwinds for European stocks.

United States-North Korea:  After signaling its frustration at stalled denuclearization talks over the last several months, North Korea yesterday threatened to take a “new path” if the United States and South Korea resume the joint military exercises next month as planned.  Any resumption of North Korea’s provocative acts would likely hurt Asian stocks.

Brexit:  The Liberal Democrats have indicated they would not join a coalition with Labour if Corbyn is the PM.  The Brexit party will still run candidates in key Labour seats, a disappointment to the Tories.

Turkey:  Turkish President Erdogan received a warm welcome from President Trump yesterday.  However, his meetings with Senate leaders did not go well.  The Senate is rather unified on defying Turkey, and could force the president to veto sanctions at some point.

Bugs:  If there isn’t enough to worry about, the CDC warns that new viruses, bacteria and fungi that are resistant to antibiotics are resulting in 35k deaths per year.  China has confirmed at least two cases of pneumonic plague.  This version is a less known type of plague (bubonic caused the Black Death) but is actually more of a problem.  The pneumonic version can be transmitted human to human via the lungs; bubonic requires a flea bite.  So far, the Chinese situation appears under control but if it were to spread, it could be difficult to control.  It is curable with antibiotics.

Odds and ends.  Gang activity, originating in Sweden, has prompted Denmark to reinstitute border checks on ground traffic coming from northern countries.  Supporters of Juan Guaido seized the Venezuelan embassy in Brasilia, creating a standoff with security officials from both Venezuela and Brazil.

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[1] This is a short-run problem.  Agriculture commodities tend to close arbitrage windows fairly quickly; it would not even be unheard of for U.S. supplies to buy Brazilian grain to meet China’s quotas.  But, such arrangements mean that China will likely pay higher prices.

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

We are seeing some risk-off activity this morning as the markets digest the president’s speech yesterday.  Chair Powell goes to Capitol Hill today.  The IEA opines on energy.  Turkey’s leader comes to Washington.  Impeachment hearings begin today.  Spain has a new coalition (sort of).  Here are all the details and more:

The speech:  For the most part, the speech was a campaign event, with the president highlighting the economy.  However, the area that financial markets were focused on, trade relations, was not all that upbeat.  He did say that the U.S. and China were “close” to a deal but did not offer any insights as to what the deal would look like or when it would be signed.  It does appear that tariffs are the issue holding up an agreement.  It appears the U.S. will only reduce tariffs in exchange for actual changes in Chinese behavior.  There is little evidence that China will make substantial changes; in fact, the ones recently offered, changes in foreign investment laws and a stable CNY, are in China’s interest anyway.  However, the capture of intellectual property will likely continue.  What was ominous about the speech was that if no deal is made, the president promised more tariffs to come.  We still have not heard the fate of European auto sanctions, although a postponement is expected.  A couple of other trade items of note.  The White House is threatening to block the approval of the WTO’s budget which might shut down the organization on New Year’s Day.  Long Yongtu, the Chinese trade official who negotiated his nation’s entry into the WTO, is hoping Trump wins reelection because “he is easy to read.”  This comment may offer an insight into the Chinese leadership’s view of the election.  At the same time, Long is a senior leader and the report may simply reflect his views.  Our take is that China would prefer an establishment Democrat to Trump, but would rather have Trump than a populist Democrat.

Powell:   In yesterday’s speech, the president continued to lambaste the Fed; so far, there isn’t a lot of evidence it has had much of an impact.   Today, Powell faces his biannual testimony to Congress.  We expect him to be questioned about the recent rate cuts but also face an inquiry about the balance sheet.  Powell has been at the job long enough now that he probably won’t trigger any market moves.

The IEA:  Two items of note from the organization’s annual report.  First, the group sees peak oil demand in the next decade and second, shale oil will grow in importance, overshadowing OPEC.  The group did warn that energy efficiency gains were slowing, which supports the idea of higher gasoline taxes.

Turkey:  President Erdogan comes to Washington today for contentious meetings with the U.S.  Relations have become strained over arms purchases from Russia and Turkey’s actions against the Kurds.  Congressional opposition to Turkey is mounting, with Congress accusing Turkey of genocide against Armenians and pressing Trump to cancel the meeting.   President Trump is expected to offer Turkey a compromise on trade and sanctions.  Turkey has warned that if the U.S. and EU don’t ease sanctions, IS fighters could be released.

Impeachment:  As readers have likely noticed, we are not spending much time on impeachment because we doubt the president will be removed from office.  However, this doesn’t mean the action doesn’t matter.  The time spent on this issue will reduce bandwidth for other actions; the government could still run out of money later this month.

Spain has a new government:  The Socialists and the populist left party Podemos have formed a tentative coalition arrangement.  Although welcome news (another round of elections would likely be pointless) these two parties do not form a majority, so the coalition will still need support from minor parties that hold seats.

British election news:  Pressure is rising on Nigel Farage to completely withdraw his party from the upcoming election.  Labour has been facing cyber-attacks.  In what might be the most interesting development, videos of Johnson endorsing Corbyn and the latter supporting the former have emerged.  These are examples of “deepfakes” where hackers take video footage and meld it into a fake video that appears to say something rash.  There is rising concern that such videos, which look shockingly real, may become part of elections across the West.  This is the first time we have seen them in a “live” election.

Hong Kong:  Hong Kong violence continues to escalate.  The unrest may affect upcoming local elections, set for November 24^th.

Trouble in Israel:  Israel killed the leader of Islamic Jihad in Gaza yesterday.  Baha Abu al-Ata died in a guided missile attack.  He had been leading a series of missile launches into Israel.  Hamas, who runs Gaza, will probably shed few tears over the assassination.  Islamic Jihad is backed by Iran and is likely causing trouble for Israel to distract it from issues on its northern border.  At the same time, Hamas has little interest in a hot war with Israel at this time.  Meanwhile, relations between Jordan and Israel have definitely cooled, which is a concern for Israeli leaders.

Tech expanding its reach: Big tech’s search for consumer data has spread into healthcare. The Financial Times reports that health websites in the UK have been sharing people’s medical data with advertisers. Big tech firms Google (GOOGL, 1,297,21), Facebook (FB, 194.47), and Amazon (AMZN 1,778.00), as well as smaller ad-targeting agencies were accused purchasing this data. The ability to leverage consumer data is critical to big tech’s growth model, but we fear that its ability to do so may be reaching its apex. Governments across the world are growing distrustful of big tech, especially regarding its usage of data. As a result, there is growing talk about ways to regulate the acquisition and selling of data across the world. So far, it appears that Europe has been at the forefront of this movement, but the U.S. appears to be not far behind. In the U.S. big tech scrutiny has become bipartisan, presidential candidate Andrew Yang has argued that big tech should pay consumers for data access, while Republican Senator Josh Hawley of Missouri has been working on legislation to regulate tech’s ability to monetize data. If this trend continues, it will likely be bad for equities going forward.

The recession is over?  Recession fears in financial markets have clearly receded.  Investor surveys and fund manager cash positions suggest a surge in confidence.  Although we doubt this degree of optimism is justified, it is right on time for a Q4 rally.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

It’s a quiet morning from the cold Midwest.  Auto tariff delay expected.   The president speaks in New York.  Investment may be weakening, and imports offer a warning.  Here is what we are watching this morning:

Tariff delay:  The decision on whether to apply sanctions on European autos is due tomorrow, but all indications suggest that the White House will delay the decision for another six months.  Talks continue and there is some speculation European automakers may move additional production to the U.S.   In an interesting development, it appears USTR Lighthizer was working on a “mini-deal” with European negotiators, which was designed to reduce tariffs on chemicals and fisheries products.  The Europeans turned down the proposal, citing rules that the WTO generally frowns upon such bilateral arrangements.  What we find interesting about this proposal is that it appears Lighthizer may be spearheading efforts to negotiate small trade wins for the administration, likely for political reasons as we head into 2020.  We doubt that the overall position of the administration has changed; trade restrictions are still preferred, but postponements and small trade deals are the likely path for the next year.  After that, we would look for a resumption of hostilities.

The president speaks:  President Trump will give a talk at the Economic Club of New York at noon EST.  We expect mostly a speech highlighting the economic successes of his administration, but the market’s focus will be on anything said about trade talks with China.  We doubt we will hear anything of substance but there is always a chance that something new will emerge.

United States:  With most S&P 500 companies having reported their third-quarter earnings, a new analysis of the reports suggests capital expenditures were up a modest 3.2% in the period.  That’s roughly in line with the tepid growth in the second quarter, but the companies indicated the growth rate will slip to just 1.8% in the fourth period, underlying the continued slowdown spawned by weaker global demand, Brexit, and the U.S.-China trade war.  The news is likely to be negative for U.S. equities.

Import warning?  West coast ports are reporting a sharp decline in import activity; inbound container handling fell 14.1% last month compared to a year ago.  Imports have a close relationship with overall consumption; the decline in imports is being blamed on trade uncertainty but if some of the drop is due to falling orders, it could be a sign of economic weakness.

This chart shows the relationship between the annual average of consumption and import contribution to GDP.  In 1947, the two series were correlated at -57%, but beginning in 1973 the correlation has been -71%.  Since 1970, every recession has included a positive contribution from imports; since imports are a drag on growth, this means that the decline in import growth becomes a positive contributor to GDP growth.  At present, import’s contribution is barely negative at -12 bps, the smallest since Q1 2013 when this segment reported a -6 bps contribution.  If the aforementioned shipping data merely represents trade war fears, it’s likely that the data is merely picking up changes in trade patterns.  In other words, other parts of the world could be making up for losses from Asian trade.  However, if it is reflecting overall weakness, it’s an early warning that there are problems developing.

United States-Japan-South Korea:  A day after the chairman of the U.S. Joint Chiefs of Staff called on South Korea to reverse its decision to end an intelligence-sharing pact with Japan, the Japanese government said Defense Minister Taro Kono and South Korean Defense Minister Jeong Kyeong-doo will discuss the matter on the sidelines of the ASEAN defense ministers’ meeting in Thailand on November 23, just ahead of the pact’s scheduled termination at the end of the month.  There is a significant chance that the two sides will merely use the occasion to repeat their positions in the continued dispute over Japan’s behavior in Korea before and during World War II.  However, given the intensifying U.S. pressure, it wouldn’t be a surprise to see some kind of agreement come out of the meeting, especially as both countries benefit from sharing intelligence on the common threat from North Korea.  If U.S. pressure does result in a cooling of tensions, it will serve as a reminder that even as the United States pulls back from its traditional role as global hegemon, the process will not necessarily be linear.  From time to time, officials will remember the U.S. interests in freezing old tensions like the one between Japan and South Korea and will take steps to cool those tensions.  All the same, the broader trend is for less U.S. engagement in the world rather than more.

Germany:  Despite the continued headwinds from weak global growth and trade tensions, the latest Zew index of investor sentiment in Germany improved much more than expected to -2.1 from -22.8 a month earlier.  Data due on Thursday could still show Germany slipping into recession, but the Zew data raise hopes for a quick turnaround.  The news should be positive for European equities.

Italy:  New data suggest Italian banks have been a prime beneficiary of the ECB’s recent “tiering” of its negative interest-rate system.  Banks’ deposits at the ECB are now exempt from negative rates up to a certain amount, and Italian banks’ deposits at the ECB had been €38 billion lower than their maximum exemption.  In October, the data showed they therefore borrowed some €48 billion at negative rates from banks elsewhere in the Eurozone and increased their deposits at the ECB by some €37 billion, boosting profits through the arbitrage.  Given that the weakness in Italian banks has been a significant reason for pessimism about the Eurozone, any evidence that ECB policy adjustments are helping the sector should be helpful for Eurozone equities.

Hong Kong:  For the past several months, protests have mostly been a weekend affair.  Students and young office workers, the most active in the protests, tended to go to school and work through the week and turn out on the weekends.  This week’s activity suggests the unrest is starting to bleed into the workweek and is becoming increasingly violent.  Increasing anger at the police is the apparent catalyst driving the extension of unrest.  Our position on Hong Kong is that Beijing will only move the PLA into the territory as a last resort.  A massive crackdown would likely push the U.S. Congress to send bills to the White House that would sanction China, putting the president into a very difficult spot.  If he signed the bills, trade talks would likely be over and positions between China and the U.S. would harden.  If he vetoed the bills, he would be open to the charge in the upcoming election of being “soft on China.”  At the same time, what has occurred in Hong Kong is “writing the script” for nationalists in Taiwan, and undermining support for unification.

Evo’s out—now what?  Evo Morales has moved on to Mexico, who granted him asylum, leaving a power vacuum.  Those who opposed Morales were unhappy with his increasingly authoritarian behavior and his violation of the constitution’s ban on a fourth term as president.  Unfortunately, that’s about all the opposition agrees on.  It isn’t clear who will replace him and what kind of support, or mandate his replacement will enjoy.  There is the potential that civil unrest could rise and, in the worst case, spread into neighboring countries.  We continue to monitor events.

Chile:  President Piñera’s effort to end his country’s political protests by offering a rewrite of the constitution appears to be falling flat.  For the protestors, the problem is that Piñera proposed the rewrite be led by the corruption-plagued Congress.  For investors, the problem is that the rewrite creates a risk that Chile’s free-market economic model might be changed.  Chilean stocks fell 1.5% yesterday.

Oil production decline?  Financing difficulties and generally disappointing prices are leading to warnings from domestic oil firms that drilling activity is set to slow.  This may not lead to an immediate supply decline, but by later next year the slowing should become more noticeable.

Odds and ends:  European signatories to the Iran nuclear deal are “extremely concerned” over recent reports of increased uranium enrichment activities.  China is lifting its export quotas for rare earths, perhaps in a bid to prevent the loss of market share to emerging competitors.  China has used rare earths in the past as a political weapon; this increase may suggest an abandonment of that policy.

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