Daily Comment (March 22, 2019)
by Bill O’Grady and Thomas Wash
[Posted: 9:30 AM EDT] Good morning! Equity markets are mixed today following weak manufacturing data in Europe and the president’s hints that a trade deal with China is close to fruition. Below are the stories we are currently monitoring:
Brexit extension: On Thursday, the Financial Times reported that the EU is preparing to offer the UK an extension on Brexit on the condition that MPs approve a withdrawal agreement next week. According to reports, the EU would agree to an extension of May 22, the day before the European Parliamentary elections, on the condition that May is able to gain parliamentary support. However, if the U.K. Parliament rejects May’s offer then the EU would consider an extension of nine months. If this longer extension occurs, then the UK will be required to participate in the EU elections. Brexiteers are furious at the prospect of the U.K. participating in EU elections following the country’s decision to withdraw from the EU. As a result, we would not be surprised if more Brexiteers end up supporting PM May’s deal.
Venezuela’s “big stake”? The Trump administration hinted at possible retaliation against President Nicolas Maduro following the arrest of Robert Marrero, the Chief of Staff of opposition leader Juan Guaido. This move by Maduro will likely escalate tensions between the U.S .and Venezuela as Maduro grapples with staying in power in light of crippling U.S. sanctions. Tensions have been running high between the two countries following the U.S. decision to recognize Juan Guaido as the legitimate leader of Venezuela. Following this decision, the U.S. has maintained that there will be severe consequences for the Maduro regime if Guaido or anyone in his inner circle is harmed. At this point, the administration has been ambiguous about what its response will be, but has vowed that Maduro’s actions “will not go unanswered.”
Flood season: The National Oceanic and Atmospheric Association stated in its Spring Outlook report that the U.S. is likely to see “historic and widespread flooding” in May. If this occurs, it will be bad news for farmers who have been stockpiling crops in anticipation of a possible trade deal with China and are still recovering from the bomb-cyclone that hit two weeks ago. Federal regulations prevent the selling of crops that have been tainted by flood waters, which will likely result in farmers absorbing losses of some of their excess inventories. As a result, we expect the price of crops to be relatively high over the summer as poor weather conditions will have a negative impact on supply.
North Korea:Following months of progress, it appears that denuclearization talks between the U.S. and North Korea may be on the brink of breaking down. Last week, it was reported that North Korea was considering walking away from negotiations following the summit in Hanoi that saw both sides leave without an agreement. Speculation was further stoked today after North Korea decided to withdraw from a shared liaison office with South Korea following the U.S. decision to sanction two Chinese shipping companies. The sticking point in negotiations appears to be North Korea’s insistence that sanctions be removed before it decides to completely denuclearize, while the U.S. maintains that sanctions will only be removed once there is proof the country has completely denuclearized. Furthermore, there are reports that North Korea has been able to avoid sanctions with the help of China. At this point, it is unclear what the next steps are but we will be closely monitoring the situation.