Daily Comment (February 19, 2019)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Welcome back!  The three-day weekend is now past and it’s back to work.  Global equities are weaker this morning and U.S. equity futures are too.  Here is what we are watching this morning:

The world goes dovish: The FOMC is reconsidering its balance sheet policy[1] and it looks like the reduction will end sooner than originally planned.  It also appears the rate policy is on hold.  But, the Fed isn’t the only central bank considering easier policy.  The BOJ warns that a weaker JPY could trigger additional stimulus,[2] the ECB says it will react to slowing growth[3] and the PBOC is signaling further stimulus.[4]  Where will all this lead?  We wonder if the actions of foreign central banks are hinging on preventing dollar weakness.  If the world’s central banks all move to stimulate growth, we would expect gold to benefit.

Trade: Trade talks with China resume this week.  Although the administration’s policy is designed to change America’s trade relationship,[5] this goal is running into the issue of the 2020 elections.  A change in policy that puts up trade barriers to reduce inequality will have an adverse effect on the economy, at least initially, while the system recalibrates.  If that coincides with the election, it could doom the president’s hopes for reelection.  Thus, we expect the president to take a deal rather than the comprehensive agreement trade hawks are hoping for.  However, if we are wrong and the president stays the course, then the economy could face a shock that would weaken growth and undermine market confidence.

Taiwan tensions: Although they never really go away, we are seeing rising tensions between China and Taiwan.[6]  When the Nationalists fled to the island after Mao won the mainland, both governments maintained that they were the legitimate government of China.  However, as the years have passed, more people in Taiwan view themselves not as Chinese but as Taiwanese.  Beijing views Taiwan as a renegade province.  For the most part, both governments deploy strategic ambiguity to maintain peace.  But, Chairman Xi has made nationalism part of his governing strategy and thus he is becoming increasingly intolerant of Taiwan’s defiance.  We note the U.S. is increasing freedom of navigation patrols in the South China Sea,[7] which may be in response to the idea that Taiwan could be in peril.

Labour splinters: Although the numbers aren’t large, we note that a group of seven MPs broke off from the Labour Party over Corbyn’s policy on Brexit.[8]  The group isn’t big enough at this point to change Corbyn’s policy path, but it could grow, and it highlights the growing divergence in British politics between those who want to stay in the EU and those who wish to leave.  And, that divergence cuts across party lines.

Return of the populists: This morning, Vermont Senator Bernie Sanders announced he is running for president again in 2020.  This announcement came as a surprise to no one as it was widely speculated that he was going to run again after falling short against Secretary Hillary Clinton in 2016.  To say this time is different would be a bit of an understatement.  Last election cycle, Bernie Sanders’s brand of left-wing populism led many to label him as a fringe candidate.  Today, however, left-wing populism has become mainstream in the Democratic Party.  As of now, there are several candidates who have already announced or are presumed to be considering a run for the Democratic nominee.  The list includes Elizabeth Warren, Sherrod Brown, Kamala Harris, Joe Biden, Julian Castro, Amy Klobuchar, Corey Booker and Kirsten Gillibrand.  There is no clear favorite at this time, but Bernie Sanders is widely considered to be a front-runner.  It is possible there will be no centrist nominee for president in 2020; we doubt financial markets will take that outcome well.

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[1] https://www.ft.com/content/14f833ee-3173-11e9-8744-e7016697f225

[2] https://www.bloomberg.com/news/articles/2019-02-19/kuroda-says-stronger-yen-could-force-boj-s-hand-on-stimulus

[3] https://www.bloomberg.com/news/articles/2019-02-18/praet-says-ecb-could-change-rate-guidance-if-outlook-worsens

[4] https://www.reuters.com/article/us-china-pboc-perpetuals/china-pledges-more-support-for-banks-perpetual-bonds-to-boost-lending-idUSKCN1Q80BG

[5] See WGRs, The Malevolent Hegemon: Part I (11/26/2018), Part II (12/3/2018) and Part III (12/10/2018).

[6] https://www.washingtonpost.com/opinions/2019/02/18/chinas-xi-jinping-is-growing-impatient-with-taiwan-adding-tensions-with-united-states/?utm_term=.3fd403ceec33

[7] https://www.scmp.com/news/china/diplomacy/article/2186461/us-steps-freedom-navigation-patrols-south-china-sea-counter

[8] https://www.ft.com/content/924b9286-335e-11e9-bb0c-42459962a812?emailId=5c6b85d15495b7000468513c&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22