Daily Comment (May 17, 2019)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy Friday!  Markets are down due to rising trade tensions between the U.S. and China.  Here are the stories we are following:

Trade talks on hold: It appears the president’s attempt to bring China back to the negotiating table by targeting one of its key entities may have backfired.  China has expressed an unwillingness to resume trade talks following the ban of one of its companies.  After months of progress in trade negotiations the two sides are at an impasse.  Presidents Xi and Trump are expected to meet at the G-20 summit in Japan next month.  It is unclear whether the two will be able to work out their differences there, but we are optimistic that talks will resume following the meeting.

Trump backtracks on Iran: President Trump has informed the Pentagon that he does not want to go to war with Iran.  The president is believed to be wary of engaging in an open-ended war without any provocations due to fears that it could hurt his reelection chances.  In addition, he is getting frustrated with the information from his advisors about Iran’s military agenda[1] as he feels they are trying to rush the U.S. into war.  In fact, some of Iran’s aggressive behavior may have been due to the perception that the U.S. was planning an attack.[2]  As the president attempts to reign in the hawkish wing of his administration, we expect him to receive outside pressure from Iranian rivals such as Saudi Arabia and Israel.  Although we are confident that the president doesn’t want war, we are not sure if he feels comfortable with being perceived as weak on Iran.  As a result, we believe there is still a small chance of an open conflict between the two countries.

May resigns: PM Theresa May has informed her party that she will step down from her position as party leader.  May has come under immense pressure from members of her party to step down after the Brexit deal she negotiated failed to make it through Parliament on three separate occasions.  Boris Johnson appears to be the front-runner for the job.  The current instability surrounding her departure and her possible replacement has added to the uncertainty over Brexit.  As a result, the possibility of a no-deal Brexit is rising.

Additional trade news: The White House announced it is going to remove Turkey from its Generalized System of Preferences program.  This program allows certain exports to be sent to the U.S. duty-free from certain developing countries.  Turkey’s removal is due to it being considered a developed nation.  Furthermore, the White House has also slashed tariffs on Turkish steel from 50% to 25%, which is more in line with other countries.  The Turkish lira fell against the dollar following the report, but returned as the market recognized that the decision has not altered the relationship between the countries.

Australian elections: On Saturday, Australians will vote for their next prime minister.  The two leading candidates are incumbent Prime Minister Scott Morrison and Labor leader Bill Shorten.  Currently, the polls show the race is going to be tight as most voters don’t really see a difference between the two candidates.  Although it is unlikely that the winner of the election will have a huge impact on markets, we will be watching how well third-party candidates perform.  Australia has had six different presidents in 10 years, all coming from either the Liberal Party or Labor Party.  Being one of the few countries that make voting compulsory, a huge support for third-party candidates could pave the way for more extreme candidates.

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[1] https://www.washingtonpost.com/world/national-security/trump-frustrated-by-advisers-is-not-convinced-the-time-is-right-to-attack-iran/2019/05/15/bbf5835e-1fbf-4035-a744-12799213e824_story.html?utm_term=.7fb02937a92f

[2] https://www.thedailybeast.com/trump-admin-moves-fueled-irans-aggression-us-intel-says