Daily Comment (January 28, 2019)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Welcome back; we are sure the Pro Bowl captured your attention over the weekend.  There is a lot going on this week, including unemployment data, Chinese/U.S. trade meetings and Brexit votes in Parliament.  The U.S. government has reopened, at least temporarily, and it’s going to get real cold in the Midwest to the Northeast this week.[1]  Here is what we are watching this morning:

Venezuela:  There are still two presidents in Venezuela with no clear end in sight.  Some European nations indicated they would no longer recognize Maduro if he does not call for new elections in 10 days.[2]  Maduro rejected the EU ultimatum.[3]  We do note that Maduro is avoiding a showdown with the U.S. by not ousting American diplomats.[4]  Oil markets have been rallying on tensions in the face of bearish inventory data but, this morning, we are seeing a slump as the crisis continues.

An interesting insight into the differences between the foreign policy of left-wing versus right-wing populists has emerged from Italy.  That nation is the only one currently being governed by a “Nader coalition,”[5] a government made up of populists from both wings.  The left-wing populists, led by the Five-Star Movement, oppose foreign intervention in Caracas.  The right-wing populists, led by the League, support the EU and the stance of the major European governments noted above.[6]  Politically, this experiment in Italy is very important because, in most states, neither the right- nor left-wing populists hold a majority but if they were united they would usually command a large majority.  Since they are usually unable to unite, both populist groups are susceptible to being co-opted by establishment groups.  Nader’s argument is that to truly gain power, populists must work together.  So far, in Italy, the government has functioned but tensions have been mounting.

In a related observation, we note Howard Schultz’s consideration of a third-party run; essentially, Schultz could become a magnet for establishment votes from both the Democrats and the GOP (combined are probably 20% to 30% of the electorate).  The Democrats are unhappy with his potential run, fearing it will split the left-wing populists and left-wing establishment.  However, that would only happen if the Democrats nominate an establishment figure.  If Warren were to get the nomination, her voters would not likely support Schultz.  In other words, a Schultz presidential run could upset both parties by taking the establishment vote away.  Previous third-party candidates tended to split one party but Schultz could split both.  It’s hard to see Schultz winning but it is also hard to see either party gaining a majority if he has a successful run.  That might move the presidential vote out of the Electoral College and into the House of Representatives.

Brexit: We are now in the amendment phase of Brexit negotiations.  There are currently nine different proposals offered, most of which are designed to exclude a hard Brexit and a few call for another referendum.  Many include extending the deadline.[7]  May is supporting a couple of efforts by MPs to limit the time frame of the Irish backstop,[8] hoping to bring the hardline Brexit supporters to her original position.  Ireland has indicated it will not support any plan to limit the time of the backstop[9] and has further indicated that Ireland may be required to return physical barriers to the frontier, including troops.[10]  Financial markets continue to hold that a hard Brexit will be avoided which is why the GBP has been rising recently.  However, there is still a chance that Britain and the EU stumble into a hard Brexit despite efforts to avoid that outcome.

One other interesting development on Brexit.  There is some speculation that the crown may get involved in the Brexit talks.  Queen Elizabeth usually avoids the political fray; in her role as constitutional monarch, her powers are sweeping on paper but rarely used.  However, she made reference to the negotiations in a recent speech, calling on parties to “seek common ground.”  She has the power of “prorogue,” which allows her to adjourn a rebellious Parliament.  She also has the power to withhold “royal assent” from legislation which could end Brexit altogether.  Neither of these actions has been deployed by a British monarch in centuries and it goes to show the seriousness of Britain’s current constitutional crisis.[11]

EU and Iran: The EU has created a Special Purpose Vehicle to avoid U.S. sanctions on Iran.[12]  If the EU follows through on this plan and allows Iran to increase oil exports, it would be bearish for oil prices.  However, the EU is running the risk of souring relations with Washington and we will see if it has the resolve to see this through.

China/U.S. trade talks: Talks restart in the U.S. this week.  The key issue is whether President Trump will accept a short-term deal that boosts U.S. exports to China and leaves the technology issue unresolved.  We suspect he will take such an arrangement because the technology issue probably can’t be resolved[13] soon and very likely cannot be resolved at all.  It appears that we may not have a global standard for 5G, the next generation of technology that will, if it meets expectations, create the backbone for the “internet of things” and driverless cars.[14]  Our expectation is that both Xi and Trump need a short-term deal to bolster confidence.  But, the long-run positions are hardening into a superpower confrontation.

Chinese industrial profits fall:Chinese profits fell for the second straight month, falling 1.9%.[15]  Weak demand was cited for the decline.

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[1] https://www.axios.com/life-threatening-cold-polar-vortex-midwest-weather-dad70dfb-fb02-4cbb-8818-f6e84d364813.html

[2] https://www.thelocal.fr/20190127/eu-nations-put-venezuelas-maduro-on-notice

[3] https://www.politico.eu/article/venezuela-nicolas-maduro-rejects-eu-call-for-new-election-juan-gaido/

[4] https://www.nytimes.com/2019/01/26/world/americas/nicolas-maduro-juan-guaido-venezuela-diplomats.html?emc=edit_mbe_20190128&nl=morning-briefing-europe&nlid=567726720190128&te=1

[5] Nader, R. (2014). Unstoppable:  The Emerging Left-Right Alliance to Dismantle the Corporate State. New York, NY: Nation Books.

[6] https://www.politico.eu/article/5star-league-italian-government-split-over-venezuela-crisis-alessandro-di-battista/?utm_source=POLITICO.EU&utm_campaign=06bdd12864-EMAIL_CAMPAIGN_2019_01_28_05_09&utm_medium=email&utm_term=0_10959edeb5-06bdd12864-190334489  It isn’t the only issue dividing the two.  https://www.politico.eu/article/salvini-di-maio-the-green-clash-tearing-apart-italys-coalition-government/?utm_source=POLITICO.EU&utm_campaign=06bdd12864-EMAIL_CAMPAIGN_2019_01_28_05_09&utm_medium=email&utm_term=0_10959edeb5-06bdd12864-190334489

[7] https://www.nytimes.com/reuters/2019/01/23/world/europe/23reuters-britain-eu-planb-factbox.html?module=inline

[8] https://www.ft.com/content/da21a8aa-22da-11e9-8ce6-5db4543da632 and https://www.politico.eu/article/mays-brexit-assault-will-target-backstops-threat-to-peace-dup-theresa-may-good-friday-agreement/?utm_source=POLITICO.EU&utm_campaign=06bdd12864-EMAIL_CAMPAIGN_2019_01_28_05_09&utm_medium=email&utm_term=0_10959edeb5-06bdd12864-190334489

[9] https://www.ft.com/content/3cecf28e-222a-11e9-8ce6-5db4543da632

[10] https://www.ft.com/content/6e9c5762-20c1-11e9-b126-46fc3ad87c65

[11] https://www.nytimes.com/2019/01/25/world/europe/queen-elizabeth-brexit-britain.html

[12] http://time.com/5514136/european-union-iran-sanctions/

[13] https://www.nytimes.com/2019/01/21/us/politics/china-trade-pessimism.html?module=inline

[14] https://www.nytimes.com/2019/01/26/us/politics/huawei-china-us-5g-technology.html

[15] https://finance.yahoo.com/news/chinas-december-industrial-profits-shrink-again-weak-demand-041845449–business.html