Daily Comment (November 13, 2019)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

We are seeing some risk-off activity this morning as the markets digest the president’s speech yesterday.  Chair Powell goes to Capitol Hill today.  The IEA opines on energy.  Turkey’s leader comes to Washington.  Impeachment hearings begin today.  Spain has a new coalition (sort of).  Here are all the details and more:

The speech:  For the most part, the speech was a campaign event, with the president highlighting the economy.  However, the area that financial markets were focused on, trade relations, was not all that upbeat.  He did say that the U.S. and China were “close” to a deal but did not offer any insights as to what the deal would look like or when it would be signed.  It does appear that tariffs are the issue holding up an agreement.  It appears the U.S. will only reduce tariffs in exchange for actual changes in Chinese behavior.  There is little evidence that China will make substantial changes; in fact, the ones recently offered, changes in foreign investment laws and a stable CNY, are in China’s interest anyway.  However, the capture of intellectual property will likely continue.  What was ominous about the speech was that if no deal is made, the president promised more tariffs to come.  We still have not heard the fate of European auto sanctions, although a postponement is expected.  A couple of other trade items of note.  The White House is threatening to block the approval of the WTO’s budget which might shut down the organization on New Year’s Day.  Long Yongtu, the Chinese trade official who negotiated his nation’s entry into the WTO, is hoping Trump wins reelection because “he is easy to read.”  This comment may offer an insight into the Chinese leadership’s view of the election.  At the same time, Long is a senior leader and the report may simply reflect his views.  Our take is that China would prefer an establishment Democrat to Trump, but would rather have Trump than a populist Democrat.

Powell:   In yesterday’s speech, the president continued to lambaste the Fed; so far, there isn’t a lot of evidence it has had much of an impact.   Today, Powell faces his biannual testimony to Congress.  We expect him to be questioned about the recent rate cuts but also face an inquiry about the balance sheet.  Powell has been at the job long enough now that he probably won’t trigger any market moves.

The IEA:  Two items of note from the organization’s annual report.  First, the group sees peak oil demand in the next decade and second, shale oil will grow in importance, overshadowing OPEC.  The group did warn that energy efficiency gains were slowing, which supports the idea of higher gasoline taxes.

Turkey:  President Erdogan comes to Washington today for contentious meetings with the U.S.  Relations have become strained over arms purchases from Russia and Turkey’s actions against the Kurds.  Congressional opposition to Turkey is mounting, with Congress accusing Turkey of genocide against Armenians and pressing Trump to cancel the meeting.   President Trump is expected to offer Turkey a compromise on trade and sanctions.  Turkey has warned that if the U.S. and EU don’t ease sanctions, IS fighters could be released.

Impeachment:  As readers have likely noticed, we are not spending much time on impeachment because we doubt the president will be removed from office.  However, this doesn’t mean the action doesn’t matter.  The time spent on this issue will reduce bandwidth for other actions; the government could still run out of money later this month.

Spain has a new government:  The Socialists and the populist left party Podemos have formed a tentative coalition arrangement.  Although welcome news (another round of elections would likely be pointless) these two parties do not form a majority, so the coalition will still need support from minor parties that hold seats.

British election news:  Pressure is rising on Nigel Farage to completely withdraw his party from the upcoming election.  Labour has been facing cyber-attacks.  In what might be the most interesting development, videos of Johnson endorsing Corbyn and the latter supporting the former have emerged.  These are examples of “deepfakes” where hackers take video footage and meld it into a fake video that appears to say something rash.  There is rising concern that such videos, which look shockingly real, may become part of elections across the West.  This is the first time we have seen them in a “live” election.

Hong Kong:  Hong Kong violence continues to escalate.  The unrest may affect upcoming local elections, set for November 24th.

Trouble in Israel:  Israel killed the leader of Islamic Jihad in Gaza yesterday.  Baha Abu al-Ata died in a guided missile attack.  He had been leading a series of missile launches into Israel.  Hamas, who runs Gaza, will probably shed few tears over the assassination.  Islamic Jihad is backed by Iran and is likely causing trouble for Israel to distract it from issues on its northern border.  At the same time, Hamas has little interest in a hot war with Israel at this time.  Meanwhile, relations between Jordan and Israel have definitely cooled, which is a concern for Israeli leaders.

Tech expanding its reach: Big tech’s search for consumer data has spread into healthcare. The Financial Times reports that health websites in the UK have been sharing people’s medical data with advertisers. Big tech firms Google (GOOGL, 1,297,21), Facebook (FB, 194.47), and Amazon (AMZN 1,778.00), as well as smaller ad-targeting agencies were accused purchasing this data. The ability to leverage consumer data is critical to big tech’s growth model, but we fear that its ability to do so may be reaching its apex. Governments across the world are growing distrustful of big tech, especially regarding its usage of data. As a result, there is growing talk about ways to regulate the acquisition and selling of data across the world. So far, it appears that Europe has been at the forefront of this movement, but the U.S. appears to be not far behind. In the U.S. big tech scrutiny has become bipartisan, presidential candidate Andrew Yang has argued that big tech should pay consumers for data access, while Republican Senator Josh Hawley of Missouri has been working on legislation to regulate tech’s ability to monetize data. If this trend continues, it will likely be bad for equities going forward.

The recession is over?  Recession fears in financial markets have clearly recededInvestor surveys and fund manager cash positions suggest a surge in confidence.  Although we doubt this degree of optimism is justified, it is right on time for a Q4 rally.

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