Daily Comment (March 14, 2017)

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

[Posted: 9:30 AM EDT] The two big news items since yesterday morning are from the U.K. and the CBO.  In the U.K., PM May won her battle for a clean Brexit bill, meaning that Article 50 can be declared soon. We look for the declaration to come by month’s end.  From the time of the declaration, negotiations have a two-year deadline, although there is a chance that the EU and Britain could decide to extend talks for another two years.  The GBP did slump on the news, which is more of a knee-jerk reaction given that this outcome was well expected.

Nicola Sturgeon, the leader of the Scottish National Party, is demanding a new referendum on Scottish independence, which was mostly expected.  There is some speculation that PM May is delaying the announcement of Article 50 until the end of March in response to Sturgeon’s call for another referendum.  Speculation had been high that May would announce as soon as today.  If Scotland tries to separate from the U.K. during the country’s negotiations to exit the EU, it will weaken the U.K.’s bargaining position.  May wants to establish a favorable trade deal with the EU but, if Scotland exits, the EU will have less incentive to deal with the remaining elements of the U.K. and will probably force the country to accept WTO rules.

Also from the U.K. this morning, Charlotte Hogg resigned from the BOE after it was disclosed that she failed to tell regulators that her brother worked for Barclays (BCS, $11.12).  She was appointed by the current governor, Mark Carney; because she came from industry instead of academia, she mostly deferred to Carney in voting.  This means that Carney will lose a reliable ally in conducting policy.  Given that recent decisions by the BOE have been non-controversial, in that voting hasn’t been close, we expect her exit to leave policy unaffected.  However, it does undermine the reputation of Governor Carney.

The CBO scored the new health care bill and it showed an increase in the number of uninsured but a reduction in spending.  These characteristics will probably allow the bill to pass in the House but we see a much more difficult time in the Senate.  We are seeing the usual railing against the CBO for its analysis.  Our take is that the body isn’t always right but it is generally fair.  One of our concerns is that the president is spending political capital on this issue which will make tax reform more difficult; the longer the health care issue consumes Congress, the less time there is for other legislation.

Reuters is reporting that Japan is sending its largest warship, the Izumo helicopter carrier, to a port tour across Southeast Asia starting in May.  The ship was commissioned two years ago.  Stops include Indonesia, the Philippines and Sri Lanka.  It will eventually join the U.S. and India for naval exercises in the Indian Ocean in July.  The vessel will be moving through waters claimed by the PRC; although this could be controversial, we don’t expect China to act aggressively against the Izumo.  Still, this is a show of force and does signal that Japan could have significant offensive capabilities if it decided to take such a role.

Finally, we are expecting a nor’easter for the Northeast and parts of the Mid-Atlantic states.  Chancellor Merkel has canceled her trip due to the weather event.  The FOMC is still meeting but some of the members may participate by teleconference.  Major snow events in New York have disrupted financial markets in the past.  We don’t expect too many problems but investors should be aware that New York may be less active today.

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