Daily Comment (September 26, 2016)

by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EDT] It was a quiet weekend.  The only major news of note was that Jeremy Corbyn was elected as the leader of the Labour Party by nearly 62% of party members.[1]  Most political pundits are predicting the Labour Party is doomed to the political wilderness until it gives up on this charge to the left.  Perhaps; however, like Brexit, the Trump/Sanders phenomenon, the AfD in Germany and the National Front in France, this news is a clear signal of the rise of populism.  Those left behind by globalization, deregulation and the rapid introduction of new technology have had enough.  Up until the financial crisis, rising debt and distraction from social issues kept populists on both the right and left pacified.  Deleveraging and weak growth have ended the populists’ tolerance.  As a result, populists across the West are trying to grow their influence, which could mean a reversal of the supply-side policies of the past 35 years.

It is with this background that the U.S. holds its first presidential debate this evening.  There has been much ink spilled on the ramifications of this debate.  Debates are always interesting because they are unscripted; unusual things can happen.  However, the impact is probably overstated as core supporters are rarely swayed by debates.  When a debate occurs between two establishment figures, likeability is probably the best trait to project.  Al Gore’s irritating sighing in response to George W. Bush’s answers did him serious harm.  This election is unusual because it is between a populist and an establishment candidate.  Essentially, Clinton offers continuity while Trump promises change.  Thus, much like the Reagan/Carter debates, this election may simply come down to how you fared over the past eight years.  If the years went well for you, Clinton is your candidate.  If they didn’t, either Trump or one of the other party candidates might be your preference.

So far, we don’t think the financial markets have discounted a Trump presidency.  If Trump even remotely projects a modicum of presidential aura, it will be a success.  If he doesn’t make a hash out of his performance tonight, we may see some weakness develop in equities.  On the other hand, Clinton needs to goad Trump into looking a bit crazy, or “non-presidential.”

Finally, OPEC is meeting over the next three days.  There is growing hope that the cartel will come to some sort of output agreement.  Although we doubt it will happen at this meeting, the outlines of a deal are starting to take shape.  Saudi Arabia will probably cut production to Q1 levels, around 10.2 mbpd, if Iran agrees to keep output at current levels, somewhere between 3.6 to 3.8 mbpd.  The other Gulf States will probably contribute an additional 0.4 mbpd.  This agreement likely isn’t enough to stimulate a recovery much above $50, but it will implement a floor around $40 per barrel.  As prices stabilize, we would expect U.S. production to stabilize and recover.  In addition, the Russians will not only keep production elevated, but they will try to grab market share.  So, the good news is that OPEC is probably creating a sustainable price floor but little else.  However, that may be enough to lift energy sentiment.

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[1] For background on Corbyn, see WGR, Meet Jeremy Corbyn, 9/21/2015.