Daily Comment (June 13, 2017)

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

[Posted: 9:30 AM EDT] After a two-day correction in tech stocks, equities are stabilizing this morning.  Although the drop in the popular sector seemed to come out of nowhere, it looks to us like a fairly normal market correction, merely some profit taking.  In a world of ultra-low volatility, such pullbacks are less common and thus receive a lot of media coverage.  However, in the broader context, we haven’t seen anything so far in the decline that looks like it will have “legs.”  That isn’t to say the group isn’t richly priced or a “good buy,” but it also doesn’t mean the recent pullback is the start of a larger market correction.

Bloomberg[1] is reporting that there is evidence of broad election interference by Russia in the 2016 presidential campaign.  There have been scattered reports for weeks of Russian actions but this is the first time we have seen a reputable source indicating that there were Russian cyberattacks on election software in at least 39 states.  Our view on this issue, which the article confirms, is that Russia’s goal wasn’t necessarily to sway the election in either direction but to undermine confidence in the electoral process.  There were worries that these cyberattacks might corrupt voter rolls and lead to spoiled ballots or slow the counting process.  What is particularly worrisome is that there is no unified electoral process in the U.S.  Voting procedures are set at the state and local government levels and the degree of technical sophistication varies widely.  On the other hand, having to attack some 7,000 county voting registration rolls would be a massive task and may not yield the desired results.

Partisan divisions have tended to undermine the legitimacy of presidents since the 2000 election.  From hanging chads to controversies surrounding birth certificates, constant rumors of irregular voting and legislative attempts to increase the legal hurdles for voting, the voting process has become another battleground area in American politics.  Now we can add Russian hacking to the list.

From Russia’s perspective, the goal is to support candidates who want to end the hegemonic role that America has played since WWII.  In the last election, Hillary Clinton represented the establishment policies that would have maintained this role.  President Trump’s campaign slogan made it clear he did not support this policy any longer.  Thus, it would make sense that the Putin regime would support measures to help Trump.  It is probably worth noting that Putin would have likely supported Bernie Sanders as well because his foreign policy positions were similar to Trump’s; neither candidate supported the two major trade deals and Sanders voted against the Iraq War.  Thus, if the race would have been Sanders v. Rubio, for example, Russia would have probably tried to undermine the latter’s campaign.

Meanwhile, Putin is facing his own unrest as protests were held across Russia yesterday.  Reports indicate that events were held in 145 cities across the country.  Security forces in Russia moved quickly to quash the unrest.  It has to be unsettling for the regime that it is mostly young Russians involved in the protests.  We don’t think the regime is in any sort of immediate trouble as these events are not going to drive the Russian president from office.  However, faith in the Russian government rests on the person of Putin; polls show that his approval ratings, which run around 80%, are well above the government’s approval ratings in the low 60%.  To ensure the protests don’t gain momentum, the Kremlin is planning to tap one of its sovereign funds and there are rumors that Putin may sack his long time protégé Dmitry Medvedev, the current PM and former president.  The government is also trying to revive its old patriotic youth movements in an attempt to control the uprising.  Clearly, the regime is concerned about these protests.  We note that the U.S. Senate is considering new sanctions on Russia.

Qatar is apparently running the blockade through Oman.  The current blockade, which shows no signs of easing, continues to divide the region, with Iran and Turkey using the opportunity to support divisions within the Gulf Cooperation Council.  In other Middle East news, the Saudi defense purchase deal is facing opposition in Congress.

The FOMC begins its meeting today, concluding tomorrow.  This is a “presser” meeting so we will get a press conference, new economic forecasts and “dots.”  It is a near certainty that the Fed will raise rates tomorrow.  We will be watching for hints of future policy rates.

The Bank of Canada surprised the markets by signaling a rate hike is in the offing.  The CAD rallied on the news.

Finally, the WSJ[2] is reporting the mortgage issuance industry is “re-learning” how to sell subprime mortgages.  Early in my career (clearly, this is Bill writing), I was part of the process of winding down Latin America’s debt crisis, which ended by debt/equity swaps in the late 1980s.  I remember at the time thinking, “It will be another generation before anyone lends to South America again.”  It took about five years.  The reason is that the previous lenders are usually swept away and find other jobs, and a new group enters without any experience of the pain suffered by the previous generation of lenders.  This WSJ article describes well how this process works.

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[1] https://www.bloomberg.com/politics/articles/2017-06-13/russian-breach-of-39-states-threatens-future-u-s-elections?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam&stream=top-stories

[2] https://www.wsj.com/articles/does-anyone-remember-how-to-make-a-subprime-mortgage-1497259803?mod=nwsrl_today_s_markets (paywall)