Daily Comment (March 11, 2019)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Equity futures are mostly higher this morning, although Dow futures are lower on the Ethiopian airlines crash.[1] Here is what we are watching this morning:

Chinese trade: It appears the trade summit between China and the U.S. will likely be delayed, probably into April.[2] There was some movement on the enforcement mechanism. China is uncomfortable with giving the U.S. unilateral power to decide whether China is violating the terms of the agreement, but would be willing to accept a joint plan.[3] China has also indicated it won’t engage in competitive devaluations,[4] most likely because any threat of a weaker CNY would trigger capital flight. We still expect the Trump administration to make a deal with China as a failure of talks would harm the president’s reelection campaign.[5]

Meanwhile, we note that China’s exports appear to be rebounding this month.[6] There is evidence that China’s economy is starting to benefit from recent stimulus measures.[7]

Brexit: It’s decision week for Brexit. There are three votes this week. The first occurs tomorrow on May’s exit deal. Although her administration has been negotiating with the EU, there has been no discernable progress made.[8] Thus, we are assuming her plan will go down in defeat again. The following day Parliament will vote on whether it wants a “no-deal” Brexit. That will likely also be defeated as few MPs want to be seen as supporting the chaos that a fast, hard break would bring. On Thursday, assuming our assessment of Tuesday’s and Wednesday’s votes are correct, Parliament should vote to ask for an extension.[9] Although it would appear logical that they should vote for an extension, stranger things have happened.

It does look like PM May’s remarkable run could be coming to a close.[10] Although she has suffered historic losses in Parliament, she has hung on to power, in part, because no one else has any better ideas on how to proceed. However, the Tories are concluding that the party needs a new leader to negotiate trade arrangements with the EU. From our vantage point, we don’t see a leader in the Conservatives who will have any easier of a time concluding Brexit.

Meanwhile, the BOE has ordered banks to triple their “easy to sell” asset buffers on fears of a hard Brexit.[11] Businesses are in varied states of preparation.[12] So far, the GBP has held its value on the belief that a hard Brexit will be avoided. We suspect this supposition is true, but there remains a chance that Britain stumbles into a crisis.

Venezuela blackouts: Venezuela suffered massive power outages over the weekend[13] that are continuing into this workweek.[14] The Maduro government has accused outsiders of sabotage, but the most likely reason is the ineptitude of the regime. Protests against the government continue despite the blackout,[15] but it increasingly appears that the opposition cannot swing the military to its side. Thus, the slow-motion collapse continues.[16]

Saudi oil cuts extended into April: Saudi sale intentions for next month are signaling that oil production cuts will continue, which is supportive for oil prices.[17]

Indian elections begin mid-April: The world’s largest democracy will begin elections on April 11. Six subsequent elections will be held over the next five weeks, ending on May 19 with final results due on May 23.[18]

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[1] https://www.washingtonpost.com/world/ethiopian-airlines-flight-bound-for-nairobi-crashes-with-157-on-board/2019/03/10/0be5826c-4310-11e9-90f0-0ccfeec87a61_story.html?noredirect=on&utm_term=.1847abc5605e&wpisrc=nl_todayworld&wpmm=1

[2] https://www.wsj.com/articles/u-s-china-trade-deal-isnt-imminent-ambassador-branstad-says-11552031163 and https://www.ft.com/content/e089b6de-42b4-11e9-b168-96a37d002cd3

[3] https://www.nytimes.com/2019/03/09/business/china-trade-talks-trump.html?action=click&module=Latest&pgtype=Homepage

[4] https://www.wsj.com/articles/u-s-china-near-currency-deal-beijing-vows-not-to-devalue-yuan-to-help-exports-11552204378

[5] https://www.bloomberg.com/news/articles/2019-03-08/trump-says-china-deal-will-mean-very-big-spike-for-markets

[6] https://www.scmp.com/economy/china-economy/article/2189454/china-exports-rebound-strongly-early-march-after-februarys-20

[7] https://www.ft.com/content/c085c2e4-4235-11e9-b168-96a37d002cd3

[8] https://www.ft.com/content/dceee028-43ca-11e9-a965-23d669740bfb

[9] https://www.nytimes.com/2019/03/08/world/europe/brexit-uk-may-endless.html?emc=edit_mbe_20190311&nl=morning-briefing-europe&nlid=567726720190311&te=1

[10] https://www.ft.com/content/618ad20c-4316-11e9-a965-23d669740bfb?emailId=5c85da12a114dd0004a40895&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[11] https://www.ft.com/content/7450737a-4356-11e9-b168-96a37d002cd3?emailId=5c85da12a114dd0004a40895&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22