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Elites “Going Rogue” Suggests The Global Neoliberal Architecture Is Collapsing
Elites “Going Rogue” Suggests The Global Neoliberal Architecture Is Collapsing
Listen carefully. That is the sound of going rogue – and bond yields further through the floor.
Yesterday UK PM Boris Johnson announced he is going to prorogue–or close–Parliament, meaning that when MPs come back to sit next week they will only do so briefly, and will then not return until 14 October, when there will be a new Queen’s Speech to launch BoJo’s slate of legislation as the new PM. So far, so technical. Yet what this effectively means is that there will be a very narrow window next week, and then a slightly larger one in the final two weeks of October, for Parliament to act to prevent Hard Brexit on Halloween.
This is explosive and unprecedented stuff, politically. The British constitution is largely unwritten and so allows wiggle room, and the government insists they have checked the legality of all they are proposing; nonetheless, as the press and opposition note, it smells awful. This is clearly a case of Erskine May (the ‘parliamentary bible’ that looks and sounds like it belongs in a Harry Potter tale) turning into Erskine Maybe or Erskine Might.
Indeed, BoJo is being accused of a “coup”, a “constitutional outrage”, an “abomination”, and of being a “tinpot dictator”, though this being the UK, perhaps that should be “teapot”; but there is not just tea but a genuinely revolutionary atmosphere brewing. Bob Kerslake, former head of the civil service, is quoted in the Guardian as stating:
“We are reaching the point where the civil service must consider putting its stewardship of the country ahead of service to the government of the day.”
…click on the above link to read the rest of the article…
Rabobank: “The US Will Simply Not Allow A New Reserve Currency Without A Fight”
Rabobank: “The US Will Simply Not Allow A New Reserve Currency Without A Fight”
“Peace for our time”
Despite the fact that the German IFO survey was ‘I-ful’, with the official word being that the outlook is “increasingly dire”, and that US core durable goods were -0.4% vs. flat expected, both of which confirm that the real economy is perhaps in real trouble, markets seemed to sigh with relief yesterday. The reason? We have the promise of “peace for our time”. After all, according to the press, US President Trump held out an olive branch to China on trade; and to Iran; and was there perhaps the suggestion of another brunch being offered from Boris Johnson to the EU?
Let’s focus on the US issue first. Nothing we saw or heard yesterday–nothing at all–changes any of the dynamic that we have seen for a long time now. Trump praised Chairman Xi to the skies, and repeated that China wants to make a deal very badly, so much so that they had already called to kick-start talks. Meanwhile, China stated it knew nothing about any such call, and the editor of the Global Times tweeted “Based on what I know, Chinese and US top negotiators didn’t hold phone talks in recent days. The two sides have been keeping contact at technical level, it doesn’t have significance that President Trump suggested. China didn’t change its position. China won’t cave to US pressure.” So very little chance of trade peace for our time. Nonetheless, as usual, the equity market fell for this while the smarter bond market largely didn’t – and neither did CNH.
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Strait Outta Hormuz
Strait Outta Hormuz
The Strait of Hormuz these days seems to be what the streets of Compton used to be in the 90s. Yesterday, Iran’s Revolutionary Guard said it has seized a “foreign vessel” for smuggling fuel. And this morning, news came in that the US has shot down an Iranian drone in the Strait of Hormuz, after it allegedly threatened a US warship. About a fifth of global daily oil consumption (c. 21 million barrels) passes through the Strait each day. Moreover, tensions between the US and Iran are more likely to increase than not (don’t forget Iran also shot down a US drone last month). So don’t expect a smooth ride for oil prices this summer.
From the Strait of Hormuz, to back to Europe. According to Bloomberg sources, ECB staff is looking into potentially reforming its inflation target from “below, but close to 2%” to perhaps a policy band around 2%. Such a band would explicitly make the inflation target symmetric (something President Draghi favours), which means that the ECB can better signal willingness to overshoot the target for a short while. As such, it can reinforce inflation expectations if it is seen as a signal of more (or a prolonged period of) loose monetary policy. However, our ECB watcher Bas van Geffen cautions that the risk of such a symmetric band is that the market could also interpret the lower bound as ‘good enough’, especially if inflation keeps undershooting the ECB’s aim. Suppose the band is 0.5%. This implies the ECB might target an inflation rate of 2.5%, but it also implies that an inflation rate of 1.5% is within the ECB’s target band. Hooray, the ECB has achieved its inflation target by simply changing the definition of the target. What does that mean for its credibility? To avoid that situation, a symmetric band should probably be accompanied by more stimulus to rekindle inflation expectations.
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Rabobank: “There Are Lots Of Comparisons One Can Make To The 1930s At The Moment, None Flattering”
Rabobank: “There Are Lots Of Comparisons One Can Make To The 1930s At The Moment, None Flattering”
Yesterday’s 1 July handover day celebrations in Hong Kong did not go as smoothly at all. After rain had forced the flag-raising ceremony indoors for the first time, early clashes between police and protestors were a harbinger of what was to follow. While hundreds of thousands peacefully marched, thousands of very young protesters literally tore their way through to occupy and graffiti the Legislative Council (LegCo): they blacked out the Hong Kong symbol above Chief Executive Carrie Lam’s chair; briefly lay the British colonial flag on her desk; insisted Lam resign and the Extradition Bill be scrapped, not paused; and left a banner demanding full democracy.
This raises the stakes in all manner of ways. Lam is refusing to move on any front; the silent majority might be sympathetic to the goal but are far from happy with the recent disorder; Beijing is no doubt furious; pro-China protests and groups are already emerging on the streets too, suggesting clashes may occur at some point; and journalists who spoke with the teenagers in LegCo report many profess to be desperate enough to die for their cause. In short, the situation is far from good – for Hong Kong, for markets,…and perhaps for the HKD if one looks further out(?) Don’t forget that the US will be watching closely what happens in terms of HK’s autonomy and its legal recognition of the territory.
At the same time, Iran announced, and the IEAE confirmed, it had exceeded the 300kg uranium-enriching limit set in the 2015 nuclear deal. While Tehran can still step back from this, they are demanding Europe act on circumventing US sanctions on it forthwith to do so. That action will almost certainly trigger a sharp US reaction.
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Rabobank: “We Are On The Verge Of Lunatic Monetary Policy And Lunatic Fiscal Policy Combined”
Rabobank: “We Are On The Verge Of Lunatic Monetary Policy And Lunatic Fiscal Policy Combined”
Ups and Downings
One Bloomberg headline says it all for markets: “All Time Highs in Everything American As Risk Rally Crescendoes” Yes, the S&P and Dow are at all-time highs and the talk is of when, not if, US bond yields hit all-time lows even before the Fed has made its first cut in this cycle. Indeed, USD Libor plunged the most in a decade yesterday and the US 10-year is flirting with below 2%, while there is chatter of both sub-1% and sub-zero. Frankly, would you rule either scenario out?
That will put even more pressure on the ECB and the BOJ and the PBOC to keep slashing rates too. Yet two of the three already have rates below zero, so what can they do? Either face a deflationary slump, or kick out the jams on fiscal policy. Of course, that takes us to lunatic monetary policy and lunatic fiscal policy combined, and a not very covert attempt at currency depreciation. Yet this was always the likely endgame in my eyes, not the recovery and rate normalisation we have been mis-sold for years. It certainly isn’t the sudden “But how did we get here?!” revelation this all seems to be for some (…he writes, thinking of that market talking-head who was speaking of 4% US 10-year yields not so very long ago.)
Meanwhile, in China it isn’t the cost of money that’s the issue, it’s the quantity – which is effectively limitless (just look at all the build-now-ask-questions-never projects permanently underway). However, money won’t flow where they want it to because China is suffering from both Soviet-itis, with its profitless look-at-me! gigantism, and New-normal-osis, where new credit can’t get to the parts of the economy which would benefit most from it.
…click on the above link to read the rest of the article…
Dire Straits Of Hormuz
Dire Straits Of Hormuz
Well, we didn’t have to wait long for ’John Wick: Chapter Portobello’ to begin, did we? Brent crude spiked 4.5% before giving up around half of those gains as a further two oil tankers–one Norwegian, one Japanese–were attacked in the Straits of Hormuz, forcing the evacuation of both vessels; that as Japanese PM Abe sat down with the Iranian government to try to dial down tensions with the US – and as the leadership refused to accept any message from President Trump. The US have now accused Iran of attacking the two ships, which follows on from two other recent tanker attacks, drones hitting Saudi oil pumps, and a missile hitting a Saudi airport this week. The easy market response was long oil, obviously, as well as a ‘Risk Off’ further leg down in bond yields. But who did this and why? And what does that say will happen next? Logically, it was either Iran, or the US, or a third party:
Iran is suffocating under US sanctions, a known instigator of such actions via proxies, and threatening the EU with walking away from the nuclear deal if they won’t help it out. An attack like this would be incredibly reckless…unless they are desperate enough to up the ante to see if a war-averse White House will press ahead with another ruinous Middle East conflict ahead of the 2020 elections and in the face of a Cold War with China. If that is the case then expect more provocations and more Risk Off even as Iran calls this all “beyond suspicious”, “economic terrorism”, and “sabotage diplomacy”.
…click on the above link to read the rest of the article…
Rabobank: “The Biggest Explosions Are Still To Come”
Rabobank: “The Biggest Explosions Are Still To Come”
Civil War, Infinity War, or Endgame?
US consumers are feeling more confident according to yesterday’s data, and they also think things can only get better.
Meanwhile, Europe is patting itself on the back over the far right not dominating in the EU elections, even if they did in the UK and Italy, with consequences yet to be seen. Nonetheless, things are going so well on an underlying basis–as the struggle over who will get all the top EU jobs begins–that the Iron German Chancellor Merkel has decided to knife her own named successor in the back and effectively un-retire for the foreseeable future. What confidence in the future that displays. (And in her political judgement in the original pick.) Meanwhile, over in Asia things are looking ugly. The leading indicator that is Korean exports continues to tumble, and now Bloomberg’s leading indicator suggests the Chinese economy will see a further marked deceleration in May data. Like bird-flu, and now ASF, or pig-flu, what starts in Asia doesn’t stay in Asia for long.
Markets seem to get that message – bonds are screaming that a recession is just around the corner – something our Fed watcher Philip Marey has been calling for the US for some time now. The US Treasury curve is now at its most inverted 3-month to 10-year since 2007, not a happy comparison, while the actual 10-year itself is at 2.25% at the time of writing. Recall we started May at over 2.55%, and in January were close to closing over 2.80%. Over in Germany the 10-year Bund is trading at -16bp, which should mean the ECB’s Draghi leaves red-faced – though of course he will walk out declaring “Mission accomplished.”
…click on the above link to read the rest of the article…
99 Lead Balloons… Are About To Come Crashing Down
99 Lead Balloons… Are About To Come Crashing Down
‘Lead balloon.’ That graphic description of public failure apparently dates from the US in 1924, and ironically was itself such a poorly-received idiom that it didn’t appear in the American press again until 1947. A few decades later, and the phrase was so well known that a derivative of it inspired one of the greatest rock bands of all time. Today, 99 lead balloons fill our sky.
To illustrate the point I don’t even have to look at headlines about the US-China trade war – though I could pick any number of them showing how serious this is getting, and how global the impact is likely to be. My favourite today contains a quote from a US semiconductor maker who states “We’re too far into free trade that the world cannot have countries not trading.” Sorry mate, 1913 called and wants its ‘Great Illusion’ back; indeed, reports are that China’s surveillance camera-maker Hikvision is next in the US firing line. Standing with me not on the side of the (Norman) Angells is Eli Lake writing for Bloomberg, who argues “The tech cold war has begun. To which I can only say: It’s about time. If this ban is just a bit of brinkmanship designed to pry a better trade deal out of Beijing, however, then it’s a blunder. The national security implications raised by Huawei’s technology transcend any trade dispute.” And while US tech is in the headlines, so is US farming, where federal subsidies are set to rise sharply to offset trade-war pain.
I could choose from a series of stories in Turkey, where the authorities are both trying to prop up the currency and cutting rates at the same time(?), as well as about to clash with the US and NATO allies again over their preferred choice of anti-aircraft defence system in a major way.
…click on the above link to read the rest of the article…
Rabo: The World Is Banking On China (But Japan Points To Our Future)
Rabo: The World Is Banking On China (But Japan Points To Our Future)
Market comments
There is a saying in the market that if you want to see the future of monetary policy, you just have to look at Japan. Well, as expected, BoJ Governor Kuroda and his team decided to keep policy unchanged, despite a fresh downward adjustment of its economic assessment. Two out of the nine board members dissented, with one of them being very outspoken in favour of more easing, thus underlining the dovish slant. But, like in Europe, headwinds are mostly blowing from the external environment, leading to weaker exports and industrial output – according to the Bank. In essence, the Japanese economy is feeling the hurt from slower global growth as a result of Brexit, protectionism and the slowdown in China.
And apparently Japanese monetary policy makers still have some hope the economy can recover from this downdraft pretty quickly or that any ongoing weakness would be offset by a better domestic economy. But when many central banks are thinking like that, you can be sure it won’t add up! Or are we all banking on the Chinese now? Well, at least Mr. Draghi and Mr. Kuroda seem to be on the same page, with Kuroda saying this morning that “China’s stimulus is pretty big and will have an impact”.
Even more worrisome is that refraining from action whilst keeping up a brave face perhaps only highlights that the central bank has ran out of options. Despite being arguably the most aggressive central bank in terms of monetary easing since 2008, underlying inflation’s basically gone nowhere (inflation ex-food and energy being at a paltry 0.4% y/y). And while there is an increasing chorus –recently joined by finance minister Taro Aso– to lower or make more flexible the BoJ’s 2% inflation target, Mr. Kuroda confirmed this morning that this is not (yet) the way to go.
…click on the above link to read the rest of the article…
Rabobank: “We Can’t Even Imagine What The Chinese Response Will Be To The Green New Deal”
Rabobank: “We Can’t Even Imagine What The Chinese Response Will Be To The Green New Deal”
The bent out of shape of things to come
If regular readers have not picked up on our view on US-China relations, it is that although just enough good will can be scraped together to kick the can down the road for 90 days, ultimately there is no US-China trade deal that can be done: those tariffs are going up from 10% to 25%. Fundamentally, this isn’t about trade from either side. It’s about geopolitical power. The US knows it. China knows it. Some market analysts know it, though far fewer will dare to say it publicly. But the markets as a whole certainly don’t want to know it – yet. That might be changing though.
We have just seen White House Economic Advisor –and likely one of those guys who does still think this is all about trade– Larry Kudlow say that there is “still a pretty sizable distance” between the US and China as we tick towards the midnight 1 March deadline. Cue market wobbles. The Wall Street Journal today has a story that US firms are phoning President Trump directly to lobby for a deal to get done. Presumably that is not a sign that things are going well. You don’t lobby when the ship of state is moving in the direction you like. And in the same article it is detailed that China seems to be confident that tariffs will come down by 2 March regardless of them not making any concessions. Pride cometh before the fall, as they say. Also perhaps a sign of concern, rather than imminent victory, a pro-trade lobbying group is saying that 934,000 jobs will be lost if the US does proceed with 25% tariffs.
…click on the above link to read the rest of the article…
Lessons From Davos: Everything Can Come Crashing Down… And A Total Rejection Of Any Policy Alternatives
Lessons From Davos: Everything Can Come Crashing Down… And A Total Rejection Of Any Policy Alternatives
As Davos wraps up today, what have we got so far so far from the cockpit of globalisation? Warnings of rising nationalism. Fears of recession. Worries that everything could come tumbling down again. And a total rejection of any policy alternatives regardless. It’s as if the Captain of the Titanic admits to the passengers early into the journey that the ship is sinkable, and indeed they will all drown horribly when it goes down, but then reassures everybody he’s sticking to the same route towards the iceberg anyway. Before flying home in his private jet.
Exhibit A: SO ROSS. Billionaire US Commerce Secretary Ross coming across on TV as a “let them eat cake” kind of guy, when wondering why US government workers without pay don’t just go to a loan-shark to get them through the never-ending shut-down. It was a double-whammy from Ross: he also said the US and China are “miles and miles” away from an agreement on trade, meaning March madness looms, before being prodded to stay on message that it’s all good, even if the real issues over Chinese reforms are where this particular ship is likely to sink.
Exhibit B: SOROS. Emmanuel Goldstein George Soros boldly stating China’s Xi Jinping is: “the most dangerous opponent of those who believe in the concept of open society…Authoritarian regimes are proliferating all over the world and if they succeed, they will become totalitarian….I’ve been concentrating on China, but open societies have many more enemies, Putin’s Russia foremost among them….The first step is to recognize the danger…But now comes the difficult part…The reality is that we are in a Cold War that threatens to turn into a hot one.
…click on the above link to read the rest of the article…
