The Minsk-y Pinch

By Michael Every of Rabobank

We start this August Monday morning with Chinese markets in positive mood (Shanghai +2.2%) and Japan feeling somewhat dour (Nikkei -0.9%); after all, the former saw the PBOC inject more liquidity, while the latter saw Q2 GDP record the largest decline since 1955 at –27.8% annualised. Actually, in today’s world I am surprised the Japanese news didn’t prompt a major rally. US 10-year Treasury yields are around 0.70% at time of writing vs. the near 0.50% level that was prevailing until recently. Yes, some recent data have been slightly better than expected, but not retail sales on Friday, and to keep the rest there will still need that next stimulus package we don’t have yet. Furthermore, market surveys everyone is net short the USD: if there is one thing guaranteeing that we get a rip-roaring swing the other way, it’s that. On which front, there is certainly lots of risk-off momentum for markets to follow – if they can pay attention.

There are further virus problems in holiday-time Europe, as Brits scurry back from France to avoid 14-day quarantine, with Greece and Turkey perhaps to follow, and Italy now closing nightclubs down; in New Zealand, which has had to push back their general election a month to 17 October; South Korea, this time in Seoul; and Malaysia has detected a new virus strain that is 10x more infectious similar to that which has popped up elsewhere. Again we see markets are wrong to be saying Covid is “like, literally, so 2019.” Positively, however, we might be on the cusp of a new instant virus test – which would be handy given the existing systems clearly aren’t working. Just like the UK A-level system, Boris Johnson’s latest snafu, and which seems to be the only thing the UK media can talk about apart from ruined summer holidays in France.

In the US, President Trump said he may take further action against Chinese tech firms, including Alibaba, following the bans on WeChat and TikTok. Not that any of them will be listed in the US by 2022 anyway. The online semi-annual US-China trade deal review was also postponed due to “scheduling conflicts”. Was somebody ‘washing their hair’, an excuse every bit as realistic as when reeled out to avoid a date? Those banking on the longevity of this deal to stop decoupling are certainly going to end up taking a bath. More so as the US just agreed to sell dozens of the latest generation of F-16 fighters to Taiwan for the first time since 1992, which will go down well in China;

In China, the South China Morning Post reports on a Saturday speech by Xi Jinping which states “the foundation of China’s political economy can only be a Marxist political economy, and not be based on other economic theories”. Is that clear enough to people who think economics and politics are separate? And for those arguing the US and China must remain simpatico (“because markets”), the “dominant position of public ownership cannot be shaken, and the leading role of the state-owned economy cannot be shaken.” All well and good for China: but that leaves every other country to either accept that uneven playing field, in which case China’s vast scale will sweep their own industries aside, or to set free-market standards behind a protective wall – which is called decoupling. Or, to mirror China’s policies back at it – which is still called decoupling. (But don’t expect the Bloombergs of this world to grasp the cold, hard, fact of hard Cold War, because they don’t have a political-economy goal-seeking, state-subsidised Chinese equivalent threatening *their* market niche.)

On which front, there are huge public demonstrations in Belorussia, which show signs of potentially threatening the regime, with reports of even some ambassadors switching to the opposition. Russia is now talking about sending in troops if needed, which opens a potential can of worms similar to Ukraine on the EU’s border again. That’s a headache for more than the EU and Putin, of course: China’s Xi Jinping was the first to call and congratulate Belorussian President Lukashenko on his recent, utterly-predictable re-election. (Or “re-election”, as the protestors say.) There are also major student protests in Thailand (where GDP was -9.7% q/q in Q2) that openly call for fundamental changes in Thai society, evidence of a huge, and perhaps unbridgeable, generational divide. Thailand doesn’t get much global media coverage apart from tourist-related stories at the best of times, but it was pivotal state in the last Cold War, and could be again in this new one. Tellingly, it is not currently in the camp prepared to shut China out of its planned 5G network.

Unlike Israel, which had been enthusiastically embracing China as an economic partner until recently, and which marks a geostrategic realignment alongside that of the new normalisation of relations in the Middle East. There, one also needs to focus on what the financial press are again not: on Friday, the UN Security Council voted 2-2 (with 11 abstentions, including the UK, France, and Germany – of course) and so failed to extend the Iranian arms embargo, which will now lapse in October, allowing Russia and China to sell weapons to it again. On Saturday, President Trump made clear he plans to impose ‘snap-back’ sanctions on Iran this week, a move even John “Bomb ‘em” Bolton has publicly opposed. In short, Iran is again going to be ‘risk off’: and if Russia and China press ahead with arms sales, the US will do the same with (more) sanctions on them.

Meanwhile, in Turkey, which is also connected to this larger dynamic, there is official fury over old remarks (from 16 December) made by US presidential candidate Joe Biden calling for the removal of President Erdogan. Not that this is stopping the public from wanting to hold USD (or gold, apparently), and TRY is at 7.3756 this morning.

To finish where we started, it’s not impossible that this kind of backdrop sees further upwards momentum in equities – it’s the easy thing to do if you don’t (or do) read the papers; but it’s unlikely to justify any such sustained move in bond yields; and the USD is still an accident waiting to happen to some.