With respect to geopolitics, analysts at Rabobank explained, (again), that the trade war could be on the brink of a full-blown cold war.
Key Quotes:
“As US Senator and war hero John McCain lies in state in Washington; as the US reactivates its second fleet and the vice admiral in charge states “There are some bad actors on the world’s stage. We call them competitors in our strategic documents. They intend to undermine and rewrite the order that America established at the end of WW2 and threaten the very birthright freedoms that we hold sacred”; and with an awful real-life mass shooting at a video-gaming event in Florida, America is very much in the headlines again today. Does this relate to markets in any way? Yes, it does.
With rising to the challenge of these “competitors” in mind, note two trade-related headlines:
1) The US is claiming that a trade deal with Mexico over a revised NAFTA could be agreed as soon as today, and that Canada would then come back to the table; suggestions are that US President Trump’s demands for a rolling five-year sunset clause have been dropped in favour of a periodic commitment to reassessment of the deal. That news is likely to see a big swing in MXN today if true. What is also means, perhaps, is that the White House is realising that it has to concentrate its energies on competitors and not neighbours.
2) Bloomberg reports today “Trump’s China Hawks Prepare to Swoop as Trade Talks Go Nowhere”, claiming that the trade war “is about to get uglier” as the US is “set to unleash a fall offensive.”
Hardliners are not only demanding China implement huge long-term structural changes to its economy; it is claimed they want to disentangle supply chains entirely, moving US production out of China (to within the new NAFTA?) Axios has the same story, saying that the trade war “is likely to extend well into the second half of next year and perhaps beyond as neither side is prepared to appear politically weak at home, and both are ready to absorb economic pain.” And risk monitors Eurasia Group are now talking about a new Cold War. That should be a depressingly familiar argument to regular readers given we argued it back in November 2017 – and some of you will have suffered my awful rendition of the Soviet national anthem in person as part of the same message more recently.
Against that backdrop central banks are also dealing with stars and stripes:
Fed Chair Powell, at what was a rather boring Jackson Hole gathering in terms of headlines, stated “Navigating by the stars can sound straightforward. Guiding policy by the stars in practice, however, has been quite challenging.” What he did make clear is that he is still locked in for a September hike, and a further December move is currently 61% priced in by the market. He also underlined that he doesn’t see an elevated risk of the US overheating, which means that even if we do see more hikes ahead than the market is expecting, the Fed won’t be in a rush to break from the once-a-quarter pace we have become accustomed to. Nonetheless, from September onwards things become very, veryinteresting in that the Fed and market expectations are clearly parting ways. The former appears to be following a very different set of stars to the latter.
For the PBOC, the issue is of a stripe – in this case a horizontal line of USD/CNY at 7.0 on out screens, which it is not yet willing to countenance. Late Friday, as is that bank’s wont, it counter-cyclically announced that it will be reintroducing a counter-cyclical factor in where it sets the USD/CNY rate at the start of the trading day. In other words, “we saw that the FX market wants to test closer and closer to 7 and so we have decided that we are the market again.” Naturally, that has seen yet another knee-jerk response, with CNH trading below 6.80 this morning when we were above 6.95 so recently. Unfortunately, for the PBOC, the other stripe they have to consider is their FX reserves, which stay magically around USD3.1 trillion month after month as if nailed to that level. This is a totem that says China can keep setting USD/CNY wherever it wants, even if that makes a mockery of the pledges it made to the IMF when it became a reserve currency. However, given that local money supply is still growing around 8.5% y-o-y, and the authorities feel that this is too low if anything, one can see that the ratio of FX to local money is going to continue to decline rapidly. At some point ahead even USD3.1 trillion won’t mean very much in relative terms. – and that threat also increases exponentially with every further FOMC rate hike, of course.
Wondering how they will get along with China after rejecting Huawei’s 5G bid on national security grounds, Australians started work this Monday with a feeling of confusion and deja-vu over who is running the shop. For now it is Scott Morrison, but he would be well-advised not to get too comfortable in the role given a looming election and a plunge in his party’s popularity to 44% vs. Labor’s 56% following the latest round of Prime Ministerial ‘Cluedo’ – or rather looking at the polls, of ‘No Clue, doh!’ “Was it Petter Dutton with the lead pipe in the party room?” “Was it was ‘Friends for Stability’ with a knife in Julia Bishop’s back?” However, AUD is back at 0.7337 this morning and seems to be treating this as just another wild weekend of the kind usually experienced on the Gold Coast not Canberra.
Ironically Japan, which used to have its own revolving door of prime ministers, is now the regional anchor in terms of democratic stability. We have just seen PM Abe announce that he will run as LDP president on 20 September, and if he wins, then aims to stay on until late 2021 as Japan’s longest-serving leader. Perhaps at some point he might get round to introducing the long-awaited “third arrow” of Abenomics, but much like Scott Morrison, I wouldn’t be getting my hopes up. However, it is looking more and more likely that the global backdrop might help him push through his cherished changes to Japan’s pacifist constitution, which links back nicely to the Stars and Stripes, where I came in. (Theoretical question: if Japan were to become a much larger regional player in geopolitical terms, would JPY keep its safe-haven status?).”
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