Friday, 5th of July 2019
“Patience is power; with time and patience the mulberry leaf becomes a silk gown”
– Chinese Proverb
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Equity markets have had another rip-roaring week as investors pile into stocks in anticipation of further easing by both the Fed and ECB. So certain are investors that Fed Chair Jerome Powell will announce the first interest rate cut since 2008 at the FOMC meeting at the end of July, that futures prices ascribe a 100% probability to this decision. The only point of argument appears to be over the magnitude of the impending cut, with 25bps seen as the most likely decision but with 50bps still thought possible (even with the strong US jobs data beat released this morning). Current interest rate expectations represent a complete reversal of the consensus at the start of the year, which was dominated by those who feared a blinkered Fed would spark a recession – or at least a damaging bear market – by ploughing ahead with further interest rate hikes against a backdrop of softening global data. We did not share this view, given that central banks have consistently failed to normalise interest rates since the crisis and tend to be bullied by markets into scrapping well-intentioned plans regardless of what their optimistic forward guidance suggests that they expect to happen. Nevertheless, the 180-degree about-turn by market participants who now predict deep rate cuts with total certainty looks a bit absurd when no cuts were pencilled in at the last Fed meeting. It also suggests that anything other than a substantial interest rate cut accompanied by dovish forward guidance could spook the market.
Meanwhile, in the Eurozone this week, the surprise nomination of Christine Lagarde for the top job at the ECB has precipitated a sharp fall in bond yields, both across the block and beyond. Investors regard the Chair of the IMF and ex-Finance Minister of France as a dovish choice with political street-smarts who is unlikely to break with incumbent ECB President Mario Draghi’s cautious monetary policy approach. If anything, she is seen as even more dovish than Draghi who, throughout his Presidency, has been criticised by the hawkish German economic establishment for his predilection for quantitative easing and other stimulus measures. Nevertheless, in the most recent episode of political horse-trading in Brussels the German candidate for ECB President – current Bundesbank President Jens Weidmann – predictably failed to gain the support of Southern and Eastern European states who rather like the backdoor financing of profligate government spending by the central bank. Thus, Christine Lagarde it is, and bond markets are rejoicing. Many see her as talented and qualified, while lauding her political nous at a time when the Eurozone is weakening and centrifugal forces such as the threat of a ‘no deal’ Brexit and divisions over policy and values threaten its political integrity. But should an ex-politician with no formal training in academic economics be given the presidency of a technocratic institution under attack from all sides in an era of deep partisan division and institutional crisis? Food for thought.
Nominations to several other top EU positions were finalised by the European Council this week after a brief but intense period of political wrangling in the wake of the Parliamentary elections in May. Along with the ECB Presidency, up for grabs were the Presidencies of the European Council and the EU Commission (from which Donald Tusk and Jean-Claude Juncker will retire in November and December, respectively) as well as the role of EU foreign policy chief. The Council is made up of the leaders of individual member states who appoint all positions other than the Commission President, where they nominate a preferred candidate who is then sent to the European Parliament for approval (usually little more than a tick-box exercise, although this time may be different). The new Council President, which is an important but largely ceremonial role, is the liberal former Prime Minister of Belgium, Charles Michel. The son of a prominent Belgian MEP, Michel is a vocal opponent of Brexit aligned with hawkish leaders like President Emmanuel Macron in opposition to another Article 50 extension. The outspoken Spanish socialist Josep Borrell, who has been accommodating to Iran and a critic of Israel, Trump and Catalan Independence, is the new EU foreign policy chief despite having been fined for insider trading only last year. Most sought after among the Brussels’ crowns, however, is that of Commission President given the authority it carries. In a break with tradition, where the European Parliament has a role to play in choosing the candidate, the European Council has nominated the German Defence Minister Ursula von der Leyen, after discussions held behind closed doors. A political non-entity outside Germany with abysmal approval ratings back home, she is a strange choice for the position; indeed, her nomination has sparked a rare backlash from MEPs who feel side-lined by the process. Nevertheless, she ticks a number of boxes: she is a European federalist and a Merkel ally whose father was also a high-ranking civil servant in Brussels. She is also most probably the only candidate on whom the Council could agree. She may yet fail to get the necessary votes in parliament to become Commission President, but do not expect revolutionary change if she does.
In other news, the massive ongoing protests in Hong Kong took a polarizing turn on Monday with the occupation and ransacking of the Legislative Council by pro-democracy activists. Having broken into the building and stormed the parliamentary chamber, the activists proceeded to demand the resignation of the Chief Executive of Hong Kong, Carrie Lam, and even unfurled a colonial-era Hong Kong flag. The political dispute has been raging for months, as the Hong Kong executive has sought to ram through parliament a controversial extradition bill that would permit suspects to be sent to the mainland for trial. The rule of law is for all practical purposes non-existent in mainland China, where individual rights are considered a threatening Western import and an opaque system of courts operates at the behest of the Communist Party. Many in Hong Kong, which has thrived in large part thanks to its open economy and robust and impartial legal system, are determined not to see those advantages crushed by the paranoid mainland authorities. So far, they have forced Carrie Lam, a career bureaucrat with close ties to Beijing and President Xi Jinping – hardly a friend of democracy or its popular expression – to delay the bill, but she remains in power and the Chinese extradition law has not been defeated. The Communist Party has remarkable patience when it senses history moving its way. Do the protestors?
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