Daily Comment (June 29, 2018)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy Friday and good riddance to Q2! It’s looking like a risk-on day. Lots of news today. Let’s dig in:

EU summit: A deal was struck on immigration and refugees in a nearly all-night session.[1] The agreement says that seaborne migrants will be placed into processing centers in the EU itself. These centers will sort out who are legitimate asylum seekers from those who are just migrating. Nations will voluntarily establish these centers with support from the broader EU (read: Germany). There are promises that enough money will be allocated to encourage border nations (read: Italy) to set up these centers. Although the deal is being hailed (the EUR jumped on the news), in reality, no nation has yet agreed to actually establish such “controlled centers” and it also isn’t clear which nations will take the immigrants once they are accepted. Merkel was able to get language put in place that requires the initial nation to keep tabs on the new immigrants to ensure they don’t move across borders. It isn’t at all obvious how this can be executed under Schengen rules, which allow EU member citizens to freely move about the continent. Merkel needed this element to quell the internal political threat from Bavaria.

Although Italy, Poland, Hungary and the Czech Republic are governed by populists, the agendas differ. Italy wants refugees dispersed around the EU to relieve the burden on Italy, a frontline state. Under EU rules, Italy is responsible for the migrants if they land on Italian soil. Poland, Hungary and the Czech Republic resisted any plans that would force them to take refugees. Essentially, no deal was reached other than to establish the processing centers. The bottom line: it wasn’t the worst outcome but, in reality, little was accomplished. The EU remains in trouble on this issue.

U.S. ditching the WTO? Axios[2] is reporting that President Trump is indicating a desire to leave the WTO. So far, no one in his administration, as best we can tell, is supportive of this action. In reality, the U.S. is crippling the WTO by refusing to approve appellate judges that handle trade dispute appeals. In September, an appellate judge is expected to retire and once he does so the body won’t have a quorum, therefore disputes cannot be appealed.[3] So, by continuing to veto judges, the administration is effectively rendering the WTO into irrelevance. However, the optics of the U.S. actually leaving the WTO would send an unmistakable sign that the postwar order, built on U.S. hegemony, is over. One of the president’s strengths is “political theater.” He knows how important visual symbolism is; the summit with North Korea is a good example. Leaving the WTO would be part of that as well. If the U.S exits the WTO, look for the dollar to rise and pressure on foreign equities to escalate as well.

Mexican elections: Mexico will hold elections on Sunday. Barring an epic political surprise, Lopez Obrador, otherwise known as AMLO, will be the next president of the country. Mexican voters are angry. Corruption is rife, security is lacking due to narco-terrorism and the economy is struggling due to concerns around NAFTA and the weak peso. AMLO is making broad promises to clean up corruption and improve the economy. In addition, Mexicans want a leader who will stand up to the verbal assaults coming from Washington. We view him as a populist in the model of Lula in Brazil, not Chavez in Venezuela. Although his election is well anticipated and should have already been discounted by the financial markets, his actual election could put further pressure on Mexican financial assets.

Central bank notes: A couple of items. Chair Powell will testify before Congress on July 17.[4] Boston FRB President Rosengren, who for most of his career has been a dove, is signaling support for two more rate hikes this year.[5] Today’s core PCE number, hitting 2%, supports higher rates. The ECB is considering some form of “operation twist” to keep long rates low,[6] which would be supportive for lower rates here.

Iran: Japan and India[7] are indicating they will reduce oil imports from Iran, which is boosting oil prices (mostly Brent) this morning. The administration finds itself at cross-purposes. It wants lower oil prices (thus the tweet storms against OPEC), but it is also sanctioning Iran, which is bullish for oil.

Banning cryptocurrencies:The U.S. government has apparently realized that cryptocurrencies could be a way for excessive and perhaps illegal campaign contributions.[8] Mostly untraceable, cryptocurrencies could come into a campaign and be spent without a traceable record. The Secret Service has apparently warned Congress to this threat.