by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT]
Good morning and happy Monday! It was a busy weekend in front of a busy week. Here are the details:
Baghdadi dead: The leader of Islamic State (IS), Abu Bakr al-Baghdadi, died over the weekend, killing himself with a suicide vest while his compound was raided by U.S. Special Forces. Killing the leaders of such movements, such as the operation against Osama bin Laden, are important psychological events. In the case of al Qaeda, the group continues to operate but the profile of the new leadership is significantly lower, which probably makes sense because having a high profile makes one a high-value target. Although we expect IS to continue, its form will likely be far different than what we saw a few years ago. It more likely will look like al Qaeda; IS will be something akin to a franchise name for similar movements around the world. We strongly doubt it will, in the short run, control enough undisputed territory to be considered a caliphate. At the same time, as the U.S. withdraws from the Middle East and other parts of the world, the ability of IS and fellow travelers to operate will be fostered. So far, the market impact of this event was minimal; if anything, it might be modestly bearish for crude oil.
Brexit extension: Last week, we noted the “catch-22” that was emerging on the Brexit extension. The EU wanted more clarity before granting an extension, while the U.K. wanted an extension to build more clarity. It appears the standoff is being resolved. The EU appears ready to grant a flexible extension to the end of January 2020, with the potential to move sooner if the U.K. resolves its issues. Parliament will vote at approximately 7:00 pm London time on PM Johnson’s plan for an election on December 12. That plan also includes a new vote on Johnson’s U.K.-EU Brexit deal. If this fails, the path may shift to an alternative. The Scottish National Party (SNP) and the Liberal-Democrats have offered a bill that would trigger an election on December 9. That would be too soon for the Tories to push their Brexit bill through Parliament; thus, the election would occur before the Brexit bill is passed. PM Johnson has expressed interest in the bill, which could pass with a simple majority. The risk for Johnson is that he might not be able to offset the Brexit Party without executing Brexit before the election. A hung Parliament is a possible outcome. On the other hand, an election will be necessary at some point so getting on with it makes sense.
One of the fallouts of Brexit is the loss of Britain’s contribution to the EU budget. Germany is balking at a projected rise in its expected future contribution. The potential fallout (see below) could be renewed momentum to German populists and nationalists. In other words, even after Brexit is “put to bed,” the remnant EU is likely to struggle with the political fallout for years and will face internal tensions that are likely to be negative for the euro and European equities.
Peronists win: Although it was no surprise that Alberto Fernandez won yesterday’s election in Argentina, the final results were a bit tighter than expected. For investors, the key unknown is how much power his running mate, former president and first lady Cristina Fernandez de Kirchner, will have in the new administration. The more power she wields, the greater the likelihood of default and turmoil.
German regional elections: The state of Thuringia, which resides in the former East Germany, held elections over the weekend. The AfD made a strong showing, seeing its vote share rise to 23.5% from 10.6% in the last election in 2014. The hard-left Die Linke (the Left) party won the most votes, at 31%. The CDU took 21.6%, down 12 points from 2014. The key point of the results is that the center isn’t holding; the hard-left and hard-right now command a majority in this small state and it isn’t likely that any of the parties can form a government. These sorts of outcomes weaken the ability to govern.
CPC plenary session: The CPC will meet this week to hammer out policy for the upcoming year. Chairman Xi waited until the last possible moment to hold this session, which may reflect internal dissention. Xi has come under pressure for deteriorating relations with the U.S. and weakening economic growth. As a result, we will be watching for any signs that Xi may be forced to accommodate these pressures. Look for a rush to get a trade deal with the U.S. or fiscal stimulus. Meanwhile, China is trying to woo foreign firms on the back of new legislation that liberalizes foreign investment. Additionally, the trade talk reports remain favorable.
Fires in California: Widespread fires have led to blackouts in an attempt to reduce the chances of further conflagrations. It is unclear if these blackouts will hurt overall economic growth, but the longer they persist the better the chances are that the blackouts will have a negative effect.
Odds and ends: The National Association of Business Economists are projecting less than 2% growth next year. Recent polls show that attitudes toward socialism and capitalism are age-dependent. Under conditions of hyperinflation, it is not unusual to see an economy shift to barter, and there is growing evidence that this is occurring in Venezuela. With the end of the recent UAW strike, the union is now planning to use its current deal as a pattern for other automakers. Finally, the USDA reports that the stocks of frozen pork bellies, the uncured meat that, once cured, becomes bacon, are at their highest levels since 1971.