Daily Comment (August 17, 2018)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy Friday!  It’s a mixed market situation and somewhat less volatile than action earlier in the week.  Here is what we are watching today:

End of quarterly earnings?  President Trump tweeted[1] this morning that he is directing the SEC to study the costs and benefits of going to a biannual earnings reporting system.  The concern is that businesses have become overly focused on short-term results and thus easing the pressure of the earnings focus might make businesses more concerned about longer term growth.  To some extent, this is the argument made by private equity, whose proponents often argue that private firms can concentrate on long-term results even if their actions harm short-term earnings.  Of course, the flip side is that a shareholder is the owner and deserves to know how his business is doing.  We doubt this goes anywhere; moving to a biannual reporting structure won’t necessarily change the term focus because the difference between three and six months isn’t all that significant.  But, this tweet will dominate the news cycle at least for this morning.

Turkey update: The TRY has slumped this morning, which is probably to be expected given the lift in the past few days.  Turkey’s financial markets will be closed next week for holiday, so traders are probably squaring positions.  There doesn’t appear to be much evidence of a thaw.  Treasury Secretary Mnuchin signaled yesterday that the U.S. has prepared new measures against Turkey.[2]  President Trump’s position has clearly hardened as he indicates he won’t “pay anything” for the release of Pastor Brunson.[3]  Turkey does appear to be trying to initiate some sort of resolution; the foreign minister stated that his nation “does not wish to have problems with the U.S.”[4]

Iran sanctions: The administration is threatening to apply sanctions on all nations that buy Iranian oil after November 4, specifically including China.[5]  This threat is a major escalation of tensions between the U.S. and China and probably explains the rise in oil prices this morning.  In general, China has mostly ignored Iranian oil sanctions because it conducts business outside the dollar; Iran can sell to China but doesn’t receive dollars in return.  To make sanctions effective, the U.S. has to penalize China as if it were buying oil in dollars.  That would give the U.S. the power to deny China access to the U.S. banking system.  If China were to comply (which we view as a long shot), the pressure on Iran would be significant and would likely trigger an aggressive response.[6]  Most of Iran’s responses would be bullish for crude oil.

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[1] https://twitter.com/realDonaldTrump/status/1030416679069777921

[2] https://www.ft.com/content/ce39a2ae-a157-11e8-85da-eeb7a9ce36e4

[3] https://www.cnbc.com/2018/08/17/trump-us-will-not-pay-turkey-for-release-of-detained-american-pastor-brunson.html

[4] https://uk.reuters.com/article/uk-turkey-currency-usa/turkey-does-not-wish-to-have-problems-with-u-s-foreign-minister-idUKKBN1L12AJ?il=0&utm_source=POLITICO.EU&utm_campaign=ef9e266c20-EMAIL_CAMPAIGN_2018_08_17_04_42&utm_medium=email&utm_term=0_10959edeb5-ef9e266c20-190334489

[5] https://www.wsj.com/articles/pompeo-announces-new-action-group-to-target-iran-1534445395

[6] To read our discussion of potential responses, see WGRs, Iran Sanctions and Potential Responses: Part I (7/30/18), Part II (8/6/18), and Part III (8/13/18).