by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EST]
Happy Monday! Much of the U.S. is digging out of wintry weekend weather. Equities continue their grind higher. Tensions in Iran soar after the government admitted it accidently downed a Ukrainian airliner. The DPP wins big in Taiwan. The U.S./China trade deal is expected to be signed on Wednesday. Here are the details:
Iran: After denying culpability, Tehran had to surrender to overwhelming evidence and admitted it shot down a Ukrainian airliner. Whatever unifying sentiment that developed over the assassination of Soleimani evaporated in an instant as widespread protests against the government emerged. Iran arrested a British diplomat for taking videos of the protests and critics of the government inside Iran are questioning the power of the IRGC. Protestors are increasingly demanding a change in government; what isn’t clear is whether they simply want a new president or an end to the clerical regime. We suspect it’s more of the latter. Our base case is that the Mullahs will maintain power in Iran; however, we are old enough to remember how quickly oppressive regimes in eastern Europe fell in the late 1980s, a testament to how brittle governments without legitimacy can be. For now, there is little market impact from these protests.
Taiwan: Incumbent President Tsai Ing-wen won a landslide victory in Saturday’s elections. She gathered 8.2 million votes, the highest since Taiwan began popular elections of its president in 1996. Tsai’s campaign was based on fears that Beijing wants to do to Taiwan what it has done to Hong Kong; clearly, it was effective. We will be watching to see how President Xi reacts to this snub. We would expect some economic pressure to be applied but the rebuke was significant and, short of war, the options to weaken Taiwan are rather narrow. The DPP maintained its majority in the legislature.
China trade: The U.S. and China are set to sign the Phase One trade agreement on Wednesday. Overall, there isn’t that much there. China has made promises to buy U.S. agricultural products but the numbers being discussed appear to be unworkable. China has agreed not to weaken the CNY. Although the PBOC did allow the currency to weaken last year, currency weakness runs the risk of triggering capital flight. Thus, this isn’t a major “give” by Beijing. At the same time, tariff levels on China remain elevated. We suspect the trade front will be quiet in 2020 through the election. Interestingly enough, the U.S. and China are planning to restart an Obama-era forum for regular meetings between the two countries.
Japan: With the government about to dispatch a navy unit to help patrol the Persian Gulf, a new Kyodo News poll shows 58.4% of Japanese voters are opposed to the move. Only 34.4% supported it. Not only do these numbers show how unpopular the dispatch is, but it also suggests Prime Minister Abe still hasn’t been able to swing the public toward his view that Japan should revise its pacifist constitution to allow greater military development.
Venezuela: New reporting explains an additional issue that played into the government’s ham-handed effort last week to regain control over the National Assembly by shutting out opposition leader Guaidó. To boost Venezuela’s plunging oil production and help revive the economy, President Maduro wants to turn oil operations over to foreign investors from countries such as Russia and China. To do so, however, he would need to overturn his predecessor’s law prohibiting such deals, and that requires the cooperation of the legislature. To date, it still isn’t clear whether Guaidó or Maduro’s loyalists will have final control over the National Assembly.
Austria: In an interview with the Financial Times, right-wing Chancellor Kurz said he remains committed to strict immigration controls despite needing to form a coalition with the left-wing Greens. He said the government’s top priorities would be immigration control and climate change, followed by tax cuts and efforts to spur the country’s competitiveness.
United Kingdom: Preliminary figures show November GDP declined by a seasonally adjusted 0.3%, coming in short of expectations for flat performance. Meanwhile, a Bank of England policymaker said he was considering an interest rate cut at the policy meeting later this month. The news items have pushed the pound below $1.30/dollar for the first time in 2020.
The Stormont returns: The Stormont is the capitol building of the Northern Ireland legislature. The body has been suspended for three years as Sinn Fein, which supports unification, left the government over a public spending scandal. Since then, Northern Ireland affairs have been run out of Westminster. The suspension likely hurt Northern Ireland’s interest in the Brexit process because it reduced its regional power. An agreement over the weekend will bring regional power back to Northern Ireland; a key element of the agreement was an injection of cash from London. Meanwhile, it appears that Irish voters will be heading to the polls next month as Taoiseach Varadkar had planned for new elections after Brexit. Varadkar’s government is a minority and was only able to govern due to an agreement among the parties to rule while Brexit negotiations were underway.
Odds and ends: There was a volcanic eruption in the Philippines over the weekend. We watch these for two reasons—first, they can lead to earthquakes and, second, the ash spew can affect global temperatures if it is broad enough. This one could lead to a cooler summer. The Macron government has offered concessions on pension reform; so far, the unions are mostly unimpressed. The scandal-ridden government on Malta has a new leader. Robert Abela, who comes from the incumbent Labor Party, will become the new PM. The ceasefire in Libya appears to be holding for now. Finally, the Trump administration is reaching out to Pyongyang to restart talks.