Rabobank: “How Is This Not Front-Page News?”

Submitted by Michael Every of Rabobank,

All the news that’s fit to print. It’s a classic phrase, but it’s clearly not One Size Fits All in our fractured political/media landscape. Want to hear how awful party X or country Y is? There is a media outlet for you. Want to hear the complete opposite? There is another channel for that. Want to get an objective opinion? Well good luck with that – but there are some slim pickings out there in blog-land. The best approach is arguably Hegelian – follow everything. Read The Telegraph and The Guardian; read The Washington Times AND The Global Times; watch MSNBC AND Fox News; then compare and contrast – and this runs true for financial press and market news too.

For example, yesterday’s Daily underlined expectations that US-China relations would go off a cliff. Subsequently we saw two bombshell Reuters stories. The first is that according to anonymous officials, the Trump White House is going to “turbocharge” the extraction of supply-chains from China, taking an ‘all of government’ approach; this including financial incentives such as tax cuts or subsidies for those firms; the US is considering higher tariffs and targeted sanctions of Chinese individuals, and even close relations with Taiwan as well; and it wishes to bring other countries with it in a so-called new “Economic Prosperity Network”, which sounds like a combination of the TPP and the Cold War. At any point during the 2018-19 trade war, this would have been front page news. Instead, it got hardly a mention. It did rightly see markets dip somewhat yesterday, but arguably not to the extent the story deserved. It also ignored Peter Navarro following up that “Buy American would soon be the law of the land” for some US government departments. Perhaps the market, in its infinite wisdom, believes this is all electioneering and/or that Trump won’t follow through? There is form there – but such certainty in the face of such uncertainty!

Later in the day Reuters was at it again. This time with news that an internal Chinese report seen by Xi Jinping has concluded that in the post-pandemic era Beijing will face the toughest international anti-China pushback since 1989, and that in a worst-case scenario it needs to be prepared for armed confrontation between itself and the US. Reuters states that the report is regarded by some in China as their version of the 1946 “Novikov Telegram”, which was the former USSR’s response to George Kennan’s infamous telegram from Moscow that concluded the Soviets did not see the possibility of peaceful coexistence with the West, and that a US policy of containment was needed. One might think THAT would be front-page news. It wasn’t. It was hardly news at all. Yet there is no election coming up in Beijing.

It is probably not a coincidence that both of these stories emerged yesterday. The US clearly wants China to know that economic sabres are being sharpened in the hope that they don’t have to be used, just rattled; and China wants the US to know that they know the sabres are being sharpened – and that the outcome would be awful for both sides if they are used. Duelling with words is certainly preferable, after all.

This does not mean that something important is not happening here: it is. Neither does it mean markets should be ignoring it: they shouldn’t. Geopolitical tensions are escalating rapidly far beyond the extent to which markets are pricing for – apart from US Treasury yields, where the 2-year is hovering around a record low of just 18bp. An extra 10% US tariff on Chinese goods at this stage, as a random example, would actually be a very benign outcome given the rhetoric being flourished. Of course, one can make the point that USD/CNH is hardly moving. Yet as was stressed yesterday, this is not really a market. When it starts moving sharply we know that at least one sabre is already being used.

Meanwhile, on a different front, there are lots more headlines today about virus lockdowns being rolled back. It seems that real life will begin again in many developed economies within the next few weeks to some extent. That obviously generates one set of headlines – mainly “V-shaped” in tone. The problem is that once we get out of our houses we will see what the real economic damage is: no more hypothesizing what a post-pandemic recovery will look like. As alluded to yesterday, it’s likely to be very ugly due to lingering restrictions and prudent changes in behaviour (the kind of risk prudence markets aren’t showing re: US-China relations). For example:

• As 3 in 4 Brits remain sceptical of leaving lockdown, the UK Chancellor is warning that half the population is now being supported by the government. Imagine what the bill is going to be. Imagine how we don’t need a Magic Money Tree to get out it.
• New Zealand, which is seeing zero new infections, has seen PM Arden stress its borders will be staying closed for a long while yet. No tourism, sorry.
• Australia, also doing well versus the virus, also has closed borders….and the RBA left rates on hold and pledged to keep them there until the economy is back at full employment, which could be years – or ever, depending on immigration policy. The RBA also pledged to do more QE if needed. (Which stopped AUD from ramping at this meeting for once.)
• Showing the mental confusion when post-Covid geopolitics meets traditional “because markets” neoliberal thinking, Aussie Treasurer Frydenberg has stated that the country must avoid the evils of protectionism…while ensuring it is self-sufficient. Mate, self-sufficiency *requires* protectionism else everyone would already be buying Aussie because it’s cheaper. And perhaps it requires an Economic Prosperity Network too?

But back to what’s fit to print. Also not exactly screaming to the top of the front pages, Germany’s constitutional court will today rule on what Reuters (again!) is calling “an existential challenge to the ECB’s bond purchases”. Will judges give the green light for ECB operations to continue as normal, or place real limitations on them? Might that be an important story, perhaps, given the key role the ECB is playing, the risk downside, and the uncertainty of the outcome for markets? Apparently not. It’s more pressing for Bloomberg to tell us that US stock futures are heading higher along with oil. Perhaps to stop us all from having a fit.