Daily Comment (December 23, 2016)

by Bill O’Grady, Kaisa Stucke, and Thomas Wash

[Posted: 9:30 AM EST]

(Note to readers: We are suspending the Daily Comment next week, starting on Tuesday, December 27.  We will restart the report on Tuesday, January 3.  From all of us at Confluence Investment Management, we wish you a warm and blessed holiday season!)

Happy Festivus!

 Although market activity is quiet, there were a number of new items of note.  First, the lead suspect in the Berlin Christmas terrorist event was shot and killed in Milan this morning.  Anis Amri, a Tunisian national that was slated for deportation, is thought to have driven the truck used in the attack.  According to reports, Amri was traveling by train from France to Italy when he was approached during an ID check.  Amri apparently pulled a gun from his backpack and opened fire on security officers who returned fire and killed him.  On the one hand, the fact he was tracked down in less than a week suggests security forces were generally on top of the situation.  On the other hand, the fact Amri passed through at least three borders since the attack (Germany, France and Italy) will raise calls for better frontier security.  Of course, this would undermine Schengen Area policy which allows for free movement within the EU.

It appears that two hijackers have taken control of a Libyan airliner that was forced to land in Malta this morning.  The Afriqiyah Airways plane with 111 passengers (and seven crew members) is on the ground in Malta.  The two hijackers have threatened to blow up the aircraft.  Latest reports suggest the hijackers have released at least 65 passengers with unconfirmed reports that all 111 are now off the plane.  It is unclear what the hijackers want.

Two notable news items emerged from China.  First, the lead story in today’s FT reports that Chinese officials are not happy with the appointment of Peter Navarro to a newly created trade policy office.  Navarro, a Harvard economist and professor at UC-Irvine, holds positions that are strongly anti-Chinese.  One pattern we are seeing from China is that they are reacting quickly to any actions by the president-elect they view as unfriendly.  Navarro’s appointment is a win for the populists in the Trump government.  Second, General-Secretary Xi hinted today that he is open to growth falling below 6.5%; Xi suggested that slower growth is acceptable as long as employment stays firm (which is, of course, the rub).   In general, China can engineer any level of growth it wants as long as it has the capacity to expand its debt.  However, with its total debt at 250% of GDP and rising rapidly, Xi may be simply acknowledging that the only way to slow the growth of debt is by reducing GDP growth.  If China takes these steps, it will reduce global growth.  On the other hand, it will reduce the likelihood of a debt crisis.


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