Daily Comment (October 24, 2016)

by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EDT] Good ISM data from Europe (see below) lifted global equity markets.  Mergers are another factor affecting financial markets, with the biggest being Time Warner (89.48, +6.84) and ATT (37.49, -1.15).  This one is getting lots of political attention.  Donald Trump has already indicated that his administration would kill the deal.  Sen. Clinton’s campaign issued a statement calling for caution and scrutiny.  And, Sen. Sanders has come out saying “no way” would he approve the merger.  The persistent theme of populism v. establishment appears to be playing out in this merger.

On the election front, it is becoming a foregone conclusion that Donald Trump will lose in historical fashion.  We remain unconvinced.  Although we still expect Sen. Clinton to win, we suspect the vote will be much closer than current polls suggest.  However, we also warn that focusing solely on the presidential race runs the danger of missing major cultural, social and political shifts.  The country is dividing along populist and establishment lines.  Further evidence of this split comes from reports suggesting that House Majority Leader Ryan (R-WI) is facing a leadership challenge from the Freedom Caucus, the populist GOP House faction.  According to Forbes,[1] it is doubtful that the Freedom Caucus can muster enough votes to actually oust Ryan.  However, Ryan was never all that keen on the job anyway and has presidential ambitions.  Ryan, like his predecessor, will probably be forced to cobble together a voting bloc of establishment Democrats and Republicans to pass any legislation, and such moves will make him unpopular.  If the Freedom Caucus makes conditions difficult enough for Ryan, he may just resign, throwing the House into disorder during the lame duck session.

A couple of interesting trends appear to be developing in China.  First, the weekend NYT reported that the anti-corruption campaign is evolving into a loyalty policing campaign instead.  The CPC Central committee begins meetings today and part of Chairman Xi’s agenda is tighter control and management of the party.  Displays of loyalty are now being demanded.  Another element that appears to be emerging is that Xi is pressing for an end to mandatory retirement rules, which would allow his most trusted advisor, Wang Qishan, who runs the anti-corruption office, to remain in power.  Second, there are hints that Xi is also pressing for a third term as leader of China, breaking the tradition established by Deng.  The post-Mao rulers did not want to create another dynastic leadership structure and thus implemented an informal two-term limit.  Xi has not indicated who will succeed him, something that would be required over the next year if he does not intend to run for a third term.  Loyalty oaths would likely support the process of grabbing a third term.

Finally, Iraq is indicating that it will not participate in OPEC output cuts, citing the fact that it is engaged in a war with IS and needs all the revenue it can muster to defeat this foe.  With Iran refusing to participate as well, and Russian compliance doubtful, Saudi Arabia is facing the unpleasant prospect of returning to the role of swing producer which will effectively force it to lose market share.  If OPEC is unable to negotiate a deal, oil prices are vulnerable to a break into the $40 to $45 per barrel range.

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[1] http://www.forbes.com/sites/stancollender/2016/10/23/paul-ryan-could-be-ousted-in-3-weeks-throw-the-lame-duck-into-chaos/#6b6022c77bba