by Bill O’Grady and Thomas Wash
[Posted: 9:30 AM EDT] Good morning! U.S. equity futures are higher this morning as Huawei (002502, CNY 3.71) gets a reprieve. Political turmoil rises in Europe. Here is what we are watching:
Huawei: The Commerce Department announced a reprieve for the Chinese tech company, giving it three months before restrictions are applied. It isn’t clear if tech companies will work with the company with such a short time frame, but it is possible that some sort of agreement will be reached…or not. The key issue is the goal of the policy. If it is to undermine China’s ability to rise up the value chain, then cutting off Huawei from U.S. technology makes sense. But, if the action was simply to punish the company for bad behavior, it was probably overly punitive. In any case, financial markets have reacted positively to the news as it appears to be a decrease in tensions. In related news, a former trade negotiator indicated that the U.S. and China may be close to a deal.
Elections: Yesterday, we noted that a political scandal was brewing in Austria. Until yesterday, the ruling coalition included a center-right party and a right-wing populist group. The latter, the Freedom Party, has been embroiled in a scandal since a video surfaced showing the interior minister, a member of the right-wing populist group, offering to give contracts to a Russian national in return for the Russian buying a newspaper. The video was a sting operation, but it isn’t clear who conducted the sting. The Freedom Party has left the coalition over the event and PM Kurz has called for elections, which will likely occur in September.
The political insight from this event highlights the difficulties establishment parties have working with populists. The latter tend to lack the political “training” compared to the establishment. Establishment party members have a path in government and learn political skills, e.g., working with the media, the “art” of leaking and methods of raising money without bringing disgrace. This issue isn’t just on the right; the left-wing establishment also faces difficulties dealing with left-wing populists.
Meanwhile, the new president of Ukraine, Volodymyr Zelensky, surprised the political system by calling snap parliamentary elections within minutes after taking office. Zelensky needs support in the legislature, so calling elections soon after his landslide victory shows a bit of savvy that is unexpected in a political neophyte. It remains to be seen if his affiliated candidates can win in the legislature.
In Indonesia, the incumbent, Jokowi was declared the winner. Indonesian equities rallied on the news.
In a surprising development, former president Cristina Fernandez de Kirchner announced she would not be running for president in Argentina’s October elections. It was widely expected she would try to return to the presidency. Instead, she will be the running mate for another Peronist, Alberto Fernandez. Financial markets didn’t quite know what to think; the peso fell over 1% on the news. It is highly likely that Kirchner will be the power behind the throne if the Peronists win. It’s possible that financial markets fear that if Kirchner can hide behind Fernandez she may be even more radical than she would be as president. Financial markets are clearly worried about a return of the Peronists; Argentina suffered severe recession and defaulted on debt under the Kirchners.
Debt limits: Speaker Pelosi, Senate Majority Leader McConnell, Senate Minority Leader Schumer and House Minority Leader McCarthy will meet today with administration officials to discuss the upcoming debt limit issue. The limit is expected to be hit in September. If an agreement to lift the debt ceiling isn’t made, automatic spending cuts in the neighborhood of $130 bn will be required. We don’t expect these talks to generate a deal today but the fact that talks are occurring is positive.
Brexit: PM May is likely to drag her deal to Parliament for a fourth vote; it is highly unlikely it will pass. If the government falls, the prospect of a Corbyn government will be a significantly negative factor for U.K. assets. Here’s another interesting twist—those hoping to avoid a hard Brexit have been pinning their hopes on a customs union, which would allow for free goods trade with the EU. However, there is a problem with this maneuver. When the EU makes free trade deals with other nations, goods flow into the EU at a reduced or no tariff rate and then can flow to the customs union nations without tariffs as well. However, because the agreement the EU made doesn’t cover the customs union nations, those nations find themselves facing tariffs that the EU states don’t. This is further evidence that there is no halfway with Brexit; the U.K. should either stay or leave.
 https://www.nytimes.com/2019/05/20/business/huawei-trump-china-trade.html and https://www.theguardian.com/commentisfree/2019/may/20/the-guardian-view-on-google-versus-huawei-no-winners?wpmm=1&wpisrc=nl_todayworld