Daily Comment (July 19, 2018)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Global equity markets are lower this morning.  The EuroStoxx 50 is down 0.3% from the last close.  In Asia, the MSCI Asia Apex 50 was down 0.2% from the prior close.  Chinese markets were down, with the Shanghai composite down 0.5% and the Shenzhen index down 0.8%.  U.S. equity index futures are signaling a lower open.  With 55 companies having reported, the S&P 500 Q2 earnings are above expectations at $39.31 compared to the $39.20 forecast for the quarter.  The forecast reflects a 19.9% increase from Q2 2017 earnings.  Thus far this quarter, 92.7% of the companies reported earnings above forecast, while 3.6% reported earnings below forecast.

We are in the back half of the week!  Everything is down this morning except the dollar.  Here is what we are watching:

Brexit thoughts:  Yesterday’s vote in the House of Commons actually suggests a rather interesting informal coalition may be evolving.  As we noted yesterday, PM May avoided a no-confidence vote by gathering enough Remain supporters among the Tories and by finding a few Labor MPs to support her as well; the Labor defectors also support either a soft Brexit or staying in the EU.  The Labor MPs could have easily forced a no-confidence vote and new elections where the Labor Party would have a good chance of winning control of Parliament.  However, that is not necessarily a favored outcome if one is a “Blairite” Labor MP, which is essentially an establishment center-left politician.  In other words, pushing for elections that lead to Jeremy Corbyn becoming prime minister is probably not an attractive outcome.  Thus, we may be seeing an informal grouping of Blairite Labor MPs joining Tory Remainers to keep Theresa May in office.  If our theory is correct, May will remain as PM and there will be a soft Brexit.  That would be a bullish outcome for the GBP.

Trade talk:  The G-20 Finance Ministers meet this weekend.  Discussions are expected to focus on trade.  The Commerce Department is holding a day-long hearing today on auto tariffs.  There are 45 witnesses scheduled; only one, Jennifer Kelly of the UAW, is expected to be supportive of auto tariffs.  Companies are uniformly opposed to tariffs as automobile production has become increasingly globalized.  Later this month, EU President Jean-Claude Juncker is expected to visit Washington, and there are hopes he will bring some tariff concessions on European tariffs.[1]  Even trade hawks in the Trump administration see the auto tariffs as misguided and would like to see some modest concessions offered that would allow the president to declare victory[2].  The administration is apparently investigating the uranium market to see if U.S. miners are being unfairly affected; if so, we could see tariffs implemented on that commodity[3].  Meanwhile, NEC’s Larry Kudlow blamed Chairman Xi for the lack of movement on Chinese/U.S. trade negotiations.[4]  The Chinese suggest otherwise.[5]  The bottom line is that there are no talks occurring between the two nations.  As we note in the next segment, China appears to be using the currency as a weapon.

[1] Actually, the history of light-truck tariffs, where the U.S. imposes a 25% tariff on imported light trucks, is fascinating.  Here is a like to the background:  https://en.wikipedia.org/wiki/Chicken_tax

[2] https://www.politico.com/newsletters/morning-money

[3] https://www.ft.com/content/f23cc632-8ac2-11e8-b18d-0181731a0340?segmentId=a7371401-027d-d8bf-8a7f-2a746e767d56

[4] https://www.bloomberg.com/news/articles/2018-07-18/trump-economic-aide-blames-china-s-xi-for-stalling-trade-deal

[5] https://www.reuters.com/article/us-usa-trade-china/china-says-u-s-blaming-xi-for-blocking-trade-deal-is-bogus-idUSKBN1K90UF

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