Daily Comment (January 11, 2017)

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

[Posted: 9:30 AM EST] There was a lot of political and geopolitical news overnight.  The most widely covered were reports that the Russians have compromising information about Donald Trump.  The 32-page report, published last night by Buzzfeed, makes a series of allegations, suggesting that the president-elect engaged in salacious behavior in Moscow, Trump campaign officials made numerous contacts with Russian officials and the Wikileaks were used to divulge information about Hillary Clinton and members of her campaign for “plausible deniability.”

It should be noted that these allegations circulated among the media well before the election.  They didn’t get a lot of traction because news organizations could not establish their veracity, but that doesn’t mean there isn’t an element of truth in them.  Russia’s two short-term goals are to get sanctions lifted and to rebuild influence in its near abroad.  Although it isn’t completely obvious that Trump would help in this area, Clinton was a known quantity and it was abundantly clear she would have bolstered NATO and pressed to keep sanctions in place.  Thus, trying to support Trump and undermine Clinton was a reasonable policy for Russia.

One of the more interesting sidelights of this affair begs the questions of why is this material coming out now and why did the intelligence agencies allow it to come to light?  It is plausible that the intelligence agencies are not happy with the incoming president and wanted to signal to him that they do have the ability to affect his presidency.  Trump holds a press conference at 11:00 EST this morning.  How he handles this issue will be worth monitoring.

Will this issue be enough to seriously undermine his presidency, leading to impeachment or resignation?  Probably not, but it should be noted that it might compromise his leadership to some degree.  It is important to remember that the establishment wings of both parties oppose many of Trump’s campaign promises.  Using this issue to prevent aggressive immigration reform or trade restrictions is not out of the realm of possibility.

At the same time, it should be remembered that foreign nations try to affect U.S. elections as a matter of course.  The fact that the Russians were so obvious about it suggests either a rather profound degree of incompetence or an indication that Putin’s personal loathing of Hillary Clinton got the best of him.  We note Politico is reporting that Ukraine was engaged in measures to support Clinton because it wanted a friendly person in the White House.  This support included reports that the country was investigating Paul Manafort for corruption in activities in Ukraine.  According to this source, Ukrainian officials are rapidly backtracking on these efforts in an attempt to build favor with the Trump White House.

China was in the news as well.  The military sent a strategic bomber near the Spratly Islands.  In addition, the Chinese Navy sent a flotilla of warships, including its lone carrier, the Liaoning, through the Taiwan Strait.  This show of force led the Taiwan military to scramble jets and send its own navy to surveil the Chinese vessels as they moved through the area.  China’s actions triggered Japan and South Korea to scramble warplanes earlier this week.  China’s increased aggression is coming as the U.S. prepares to transfer power and as Chairman Xi (who is speaking at Davos next week, the first Chinese president to speak to this group) is laying the groundwork for his second term, which will begin in November.

On the topic of China, the under-the-fold story in today’s FT reports that Chinese authorities are scrutinizing the bitcoin price surge.  According to the story, Chinese bitcoin exchanges are monitored for large transactions.  We suspect this is true.  However, smaller deals are not closely watched and thus bitcoin may have become the portal of choice for less affluent households to diversify their holdings.  Reuters is reporting that forex regulators are telling banks to keep their regulations surrounding capital exports secret and to let bank analysts know that any negative thoughts on the CNY should be “kept to themselves.”  SAFE, the Chinese regulator that manages forex, has been issuing oral regulations to conceal regulatory changes.  This forces banks to refuse transfer business that they may have performed previously, but the banks have to do so without indicating why.  These measures suggest that Chinese officials are very concerned about capital flight.

Finally, Bloomberg is reporting that Russia has started reducing oil production; as much as 148 kbpd of output may have been shut in.  Russia is notorious for reneging on production cut agreements, so the fact that it appears to have started the process (the Russians have promised cuts of 300 kbpd over the next few months) is remarkable and bullish for crude oil.

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