Daily Comment (November 29, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EST] Although yesterday was a news-heavy day, financial markets are relatively calm following North Korea’s missile launch and an upward revision to GDP.  Below are the stories we are following:

Nuclear North Korea: Yesterday, North Korea had its most successful missile launch and says it is capable of hitting anywhere on the U.S. mainland.  Following the launch, North Korean Leader Kim Jong-un announced that his nuclear program is now complete.  It is unclear how the United States plans to respond to the launch, but officials within the Trump administration have stated that the U.S. will continue its current policy of isolating North Korea and reaffirming its threat of possible military action.  It has been suggested that China could be pressured into cutting off oil supply from North Korea.  Although China’s “technical difficulties” with its oil pipeline in 2003 forced North Korea to the negotiating table then, China’s recent attempt at limiting oil supply to North Korea has failed to yield a similar result.[1]  Nevertheless, while the recent missile launch has increased the likelihood of a potential preemptive strike by the U.S., markets have been relatively mum.  We will continue to monitor the situation.

Possible trade war: It appears the warm relationship that had developed between President Trump and President Xi has finally cooled.  Yesterday, the Trump administration initiated an investigation into imports of aluminum sheets from China, marking the first time since 1985 that the Commerce Department has initiated an investigation without a formal request.  If the Commerce Department determines China has aided in unfair trade practices that have hurt the U.S. steel industry, it will instruct the U.S. Customs and Border Protection to collect duties from U.S. companies that purchase the steel.

Senate tax bill makes it out of committee: Yesterday, the Senate tax bill barely made it out of the committee after the two Republican holdouts were finally cajoled into voting for the bill. Concessions appear to have been made to Sen. Bob Corker (R-TN) to ensure the bill is more revenue-neutral, while Sen. Ron Johnson (R-WI) may have succumbed to pressure.  The bill is expected to come to the Senate floor on Thursday, which would put it on track to meet the president’s Christmas deadline.  That being said, there is still speculation that there is not enough support among Senate Republicans, although there have been rumblings that at least two Senate Democrats, Joe Manchin (D-WV) and Heide Heitkamp (D-ND), may support the bill.  At this time, we believe it is a coin toss as to whether or not the bill is able to make it through the Senate this week.

Government shutdown?  Nancy Pelosi and Chuck Schumer skipped a bipartisan meeting with President Trump to discuss the government budget following comments the president made on Twitter.  President Trump accused the two of being weak on illegal immigration and crime, in addition to wanting to raise taxes.  The spat between the two sides has increased the likelihood of a government shutdown; the government is currently funded through December 8.  Presently, there is not enough support among Republicans to secure funding, therefore the Democrats are using their leverage to gain assurances that the children in the DACA program will remain protected as well as secure financing for the Children’s Health Insurance Program.  It is unclear whether a budget deal is imminent and therefore it is likely that another stopgap spending bill will be passed to keep the government funded past next week.

EU/Brexit bill: It appears the EU and U.K. are close to coming to terms on a Brexit “divorce bill.” It is believed the U.K. will pay a little under €50 bn to settle claims with the EU, whereas the estimated liabilities were €100 bn.  After the agreement is finalized, the two sides will begin discussions on a free trade pact, a “hard” Irish border and the rights of EU citizens in the U.K.

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[1] https://www.economist.com/news/letters/21726670-populism-north-korea-childlessness-renewables-shipping-eurocrats-bullets-iceland-st