Daily Comment (May 15, 2019)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Good morning!  Markets are mixed this morning as Chinese equities lifted on speculation that Beijing will provide stimulus following weak economic data, while concerns that U.S. tariffs could dampen economic growth have weighed on U.S. futures.  Here are the stories we are following today:

War with Iran?  Increased posturing by Iran has led the White House to call for an evacuation of all but essential staff at the embassy and consulate in Iraq.  Tensions continue to simmer between the U.S. and Iran following the president’s decision to ban countries from purchasing oil from Iran, effective May 1.  Currently, the two countries appear to be in somewhat of a standoff.  It is believed that Iran has mobilized forces in Iran and Syria, while the White House is reportedly discussing sending military forces to the region.  The president has downplayed discussions about possible military plans, but rumors persist.[1]  It was reported this morning that the U.S. has already reached out to some of its allies for possible support, but they have declined.[2]  That being said, we believe President Trump, similar to his predecessor Barack Obama, favors holding off on military action against Iran until he has the support of allies.  However, this could change if the president is perceived as being weak.  If conflict does break out it will likely be supportive of oil prices.

Possible Huawei ban?  Today, President Trump is expected to issue an executive order that would effectively ban all companies from using Huawei (CNY 3.78, +0.08) technology.  The executive order will likely escalate trade tensions as China might view the move as a blatant attempt to undermine its tech ambitions.  Huawei is crucial to Beijing’s “Made in China 2025” plan, which is designed to move China up the supply chain in order to avoid Japanese-style deflation.  The U.S. has never liked the plan as it fears the initiative could make China a more formidable military opponent.  Thus, the U.S. has used trade negotiations to impede its progress.  Additionally, the U.S. has accused Huawei technology of having spy capabilities and as a result has encouraged allies to steer clear of using it.  The dispute surrounding Huawei is the latest example that the trade dispute could extend longer than the market has anticipated as neither side appears ready back down.

Fed taking on China: President Trump has called on the Fed to ease monetary policy in order to offset the side effects that tariffs may have on the economy.  This represents another attempt by the president to force the Fed to stimulate the economy as he prepares to run for reelection.  The Fed has consistently stated that it sees no reason to lower rates as the economy appears to be growing and unemployment remains at a 49-year low.  We believe the president could use his campaign rallies to stir up his base against the Fed.

European joint military project: In another sign of a growing rift between the U.S. and its allies, the Pentagon sent an angry letter to the EU warning against any European military partnership that does not include the U.S.  This comes in response to a plan by the EU to develop and manufacture its own weapons as well as restrict the amount of weapons it purchases from non-EU companies.  The Pentagon has vowed to retaliate if the EU were to follow through on the proposal.  In all fairness, it appears the EU may be responding to the president’s suggestion that cars from the EU could represent a national security threat to the U.S.  The president is due to make a decision on Friday as to whether or not car imports represent a national security threat and therefore could be subjected to tariffs under section 232 of the Trade Expansion Act.

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[1] https://www.reuters.com/article/us-usa-iran-military/trump-denies-us-plan-to-send-120000-troops-to-counter-iran-threat-idUSKCN1SK1YM

[2] https://www.nytimes.com/2019/05/14/world/middleeast/trump-iran-threats.html?action=click&module=Top%20Stories&pgtype=Homepage