by Bill O’Grady and Thomas Wash
[Posted: 9:30 AM EDT] It’s a quiet Wednesday, very typical of late summer. Here is what we are watching today:
Ottawa to Washington: The U.S. has given Canadian negotiators a deadline of Friday to accept the deal negotiated by the U.S. and Mexico. In response, Canada’s foreign minister, Chrystia Freeland, is in Washington to conduct talks. It seems almost impossible that Canada would accept terms on such short notice. If the Canadians join, it would suggest the changes agreed to by Mexico and the U.S. are not different enough to matter. At the same time, not signing off on the pact could be very damaging to the Canadian economy. Politically, it will be hard for the Trudeau government to spin that it didn’t cave to the Trump administration if they accept the deal on such a short deadline. There is also increased grumbling about the deal among U.S. senators. It isn’t completely clear that this agreement could pass Congress. So, yesterday’s declaration of victory may be premature. If the deal fails, it will raise fears surrounding trade and would be bearish for equities and bullish for the dollar.
About last night: A number of primaries were held last night as the primary season winds down for November’s main event. The key takeaway is that the current political coalition continues to fray and the populist insurgency is still growing. We are especially taking notice of the choice Florida voters will be facing, which is between a left- and right-wing populist. The other interesting item of note was the heavy GOP turnout in Florida, which does suggest a higher degree of enthusiasm than would be indicated if a “blue wave” is coming in November.
China and influenza: A new strain of the influenza virus has emerged in China. This is nothing unusual; nearly every year, a new strain mutates and often originates in China, which has a natural reservoir of swine and fowl that propagate new strains. The new virus, called H7N9, has been circulating for over a year. The U.S. would like to get a sample of it to start creating new vaccines for the upcoming flu season. However, China is refusing to share samples of the virus. According to reports, some U.S. laboratories have received samples from Hong Kong and Taiwan, but it is unclear if enough material is available to build ample vaccine reserves. Although neither government is saying much officially, this lack of cooperation appears to be due, in part, to deteriorating relations between China and the U.S.
Russian war games: Russia is conducting the Vostok-2018 war games next month. Beginning on September 11, the games will be the largest conducted since the fall of the Soviet Union. China has agreed to participate. The exercises, held in eastern Russia, used to be designed to prepare for a conflict with China. Thus, the participation of Chinese military units is unprecedented. This show of force coincides with a flotilla of Russian Navy vessels that have moved into the Mediterranean. These ships may be part of a build-up to support Syria in operations against rebel positions in Idlib, Syria.
U.S. war games return: As part of the agreement at the recent U.S./North Korean summit, the U.S. agreed to suspend military exercises with South Korea. Secretary of Defense Mattis announced yesterday that this suspension would be lifted going forward, most likely due to the lack of denuclearization from Pyongyang. It is interesting to note that South Korea has been reluctant to say it would also resume war games.
India boosts defense spending: India has approved the acquisition of $6.5 bn of military hardware, including 111 naval helicopters. There has been an arms race escalation across Asia; current spending is $450 bn, with 44% coming from China alone. This spending is due, in part, to fears that the U.S. is withdrawing from its postwar role of protecting the region. This spending is really not a surprise, but the mounting increase in spending and the arms build-up could lead regional powers to use this military hardware to either project power or resist incursions. What we are seeing in Asia will likely be seen in Europe over time.
A German bailout of Turkey? There are reports that the Merkel government is considering providing emergency economic aid to Turkey, fearful that an economic collapse could destabilize the Middle East and Europe. In our most recent WGR, we speculated that Ankara might use the threat of a migrant overflow into Europe to encourage support from EU leaders. These recent reports may indicate that Turkey is using backchannels to warn Germany and the EU that it might make good on this negative outcome. If so, the odds that Turkey stabilizes would improve, to some degree.