Daily Comment (March 26, 2019)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Equities are higher in a quiet news environment.  Here is what we are watching this morning:

Brexit: MPs voted 329/302 to take control of the House of Commons timetable, essentially removing the prime minister from running the process.[1]  Although this is no huge shock, it isn’t obvious whether the MPs will have any better ideas.  Parliament will begin holding a series of “indicative votes”[2] tomorrow to test out various ideas, which include combinations of May’s plan plus joining the customs union to a hard exit or another referendum.  PM May remains defiant, suggesting she may not implement whatever Parliament decides.  She can certainly threaten, but if she defies the will of Parliament she will almost certainly trigger a vote of no-confidence and an ouster.  New elections cannot be ruled out.  As it sits now, it looks to us like the most probable outcome is a long extension of the deadline.  That’s about the only thing that likely has a majority of support.  Such an outcome is modestly supportive for the GBP.

Bond bull market: Fears of recession and the lack of inflation have pushed the 10-year T-note yield below 2.50%.  We are starting to see other effects from this rally in bond prices.  First, the amount of global bonds with a negative yield hit $10 trillion, up from $6 trillion late last year.[3]  The German 10-year Bund fell back into negative territory.  Second, the BOJ is now talking about further monetary stimulus.[4]   It is hard to see how taking rates below zero would stimulate growth; about the only factor that might boost the economy is a weaker yen, but that would get Japan in trouble with the Trump administration.  Third, Fed policymakers are resurrecting the “operation twist” idea, where the Fed buys more short paper to steepen the yield curve.[5]  Monetary policy is a spent force at this point, with the only remaining stimulative tool being fiscal spending.

Bolton v. Pompeo:Although both are considered Iran hawks, there is a split between them on implementing Iranian oil sanctions.[6]  Pompeo wants to extend oil waivers to at least some of the eight nations that were initially granted waivers.  In fact, China and India, which are currently receiving waivers, would probably continue to buy Iranian oil regardless of U.S. actions.  On the other hand, not extending waivers would almost certainly weaken the terms for Iran on the oil it sells to India and China.  Pompeo wants to extend waivers, while Bolton wants to end them.  The other consideration is the price of oil; the Trump administration has made it clear it wants low oil prices and ending waivers would likely lift prices, at least initially.  Saudi Arabia, in defiance of the U.S., continues to support $70 Brent prices.[7]  Thus, if the waivers are ended, we would not expect OPEC to immediately step in to cover any shortages.  However, history also shows that cartel discipline tends to weaken as prices rise.

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[1] https://www.ft.com/content/cdfb086e-4f03-11e9-9c76-bf4a0ce37d49?emailId=5c99a9761d433300045767bb&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[2] https://www.ft.com/content/03c149f2-4f01-11e9-9c76-bf4a0ce37d49?emailId=5c99a9761d433300045767bb&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[3] https://www.ft.com/content/b131da2e-4f02-11e9-b401-8d9ef1626294?shareType=nongift

[4] https://www.reuters.com/article/us-japan-economy-boj/global-strain-stirs-boj-debate-of-more-easing-in-march-idUSKCN1R701O

[5] https://www.reuters.com/article/us-usa-fed-rosengren/fed-should-consider-holding-more-short-term-bonds-rosengren-idUSKCN1R7021

[6] https://www.bourseandbazaar.com/news-1/2019/3/26/trump-team-split-over-iran-oil-waivers-as-next-deadline-nears

[7] https://www.reuters.com/article/us-saudi-oil-prices-analysis/more-shale-who-cares-saudi-arabia-pushes-for-at-least-70-oil-idUSKCN1R31IP