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Impasse, 3 Ways: Full Week Ahead Preview

Stalemates, everywhere.

One day, Donald Trump will presumably come to terms with the fact that the border wall which exists in his (“very large”) brain is never going to be built.

That day is not today, though.

Impasse, DC style

Trump spent Sunday regaling 58.1 million Twitter followers with his thoughts on deadlocked border security negotiations which hit an impasse over the weekend. Long story short, he isn’t happy.

“I don’t think the Dems on the Border Committee are being allowed by their leaders to make a deal. They are offering very little money for the desperately needed Border Wall & now, out of the blue, want a cap on convicted violent felons to be held in detention!”, he exclaimed, following reports that negotiations hit a snag when Democrats insisted on capping the number of illegal immigrants who can be detained by ICE.

As the Washington Post (which initially reported the news) writes, “the breakdown in talks made it unlikely that lawmakers will be able to finalize an agreement on Monday, as they’d hope to do so it could pass the House and Senate before Friday night’s deadline.”

It’s not clear whether talks can be salvaged and it’s equally unclear whether it would matter, given that the proposal under consideration reportedly contained a maximum of $2 billion for a border barrier, well short of the $5.7 billion Trump continues to demand.

Trump went on to claim that Democrats are angling to force another shutdown because – and I kid you not – they’re jealous of how well his State of the Union address went.

Of course the idea that this is the end of the discussion is silly. We’re in for a long week of wrangling and conflicting headlines as everyone races the clock to avert a second shutdown and avoid a scenario that would see Trump tempted to declare a national emergency. As we detailed extensively on Sunday morning, it now seems inevitable that the border battle will end up entangled with the debt ceiling debate, posing a serious threat to market stability over the summer.

Read more

Debt Ceiling D-Day

The Beltway drama will be a test of the market’s mettle coming off an uninspiring stretch that saw US equities post their second worst week of the year despite a global pivot from monetary policymakers who are now faced with having to embark on yet another coordinated effort to reflate the global economy amid mounting headwinds to growth and seemingly intractable political turmoil.

SPXWeekly

For its part, the dollar is back on the front foot despite the Fed’s “historic” dovish pivot. We talked at length about this on Friday, noting that rate differentials simply aren’t going to be enough to make dollar bears “great again” in an environment where the US data continues to look better than the rest of the world. Here’s what Barclays had to say about this on Sunday:

The dollar has rebounded sharply from its post-FOMC trough and has traded stronger relative to what short-term, rates-based models would imply. We think this likely can be attributed to three factors: i) US yields remaining high relative to other DMs making a core short USD position hard to carry; ii) The RoW, China and the EA in particular, slowing at a time when US data remain stable, forcing other central banks, in turn, to adopt a more dovish stance and iii) market participants, ourselves included, likely underestimating positioning in high yielding currencies with the Fed-induced rally seen as an opportunity for investors to de-risk, not add.

Traders will have a raft of data to digest this week when it comes to assessing whether the US economy is indeed holding up in the face of a worsening global outlook. We’ll get CPI, PPI, retail sales, industrial production and consumer confidence, which will all be assessed in light of the blockbuster January jobs report and ISM manufacturing “phew!” moment from two Fridays ago.

It’ll be interesting to see how this plays out against a backdrop of worsening US political turmoil and the deteriorating US fiscal situation which continues to get short shrift amid the myriad short-term drivers pushing and pulling on the greenback.

Impasse, London Style

Speaking of political gridlock, in the UK, MPs will vote on still more Brexit amendments this week. We are never – ever – going to see the end of this epic farce. Last week, the BoE’s Carney emphasized (again) that the “fog” surrounding Brexit poses a severe threat to the economy, which he reminded everyone is “not ready for a no deal, no transition” scenario. A no-deal Brexit, he added, “could mean a substantial economic contraction.”

Read more on the economic implications of a no-deal Brexit

The Sum Of All Fears: What Happens If All The Tail Risks Are Realized?

“We would expect the timing issue, whether to ask for an extension to Article 50 and for how long, to become increasingly prominent and could find a majority in Parliament, likely benefiting GBP”, Barclays wrote Sunday, adding that “further gridlock would likely see markets raise the perceived likelihood of no-deal Brexit, which, in our view, remains fairly low.”

There’s some data on deck in the UK, but given the BoE last week and the scheduled votes this week, one imagines it (the data) will take a backseat. Here’s a “likelihood map”/exercise in futility from Barclays:

BrexitWTF

(Barclays)

Just so you have an idea of how truly absurd this has become, read the following excerpts from a Reuters piece that attempts to ‘splain this to a frustrated world:

WHAT WILL THEY DEBATE?

May will make a statement to Parliament on Wednesday updating lawmakers on her progress so far in seeking changes to her deal.

The debate on Thursday will be on a motion – a proposal put forward for debate – about Brexit more generally. The previous similar debate on Jan 29 was on a motion which simply asked lawmakers to agree that they had considered May’s latest statement on the Brexit negotiations.

As with the Jan 29 debate, lawmakers will be able to propose changes, known as amendments. It is likely that many amendments similar to those debated on Jan 29 will be proposed, including attempts to shift control of the process away from government and give Parliament a chance to define Brexit.

As with Jan 29, if these are successful they could have a profound effect, giving lawmakers who want to block, delay or renegotiate Brexit a possible legal route to do so.

Bloomberg reported on Sunday that May will request Parliament grant her additional time to renegotiate her deal, “promising lawmakers a further chance to take control of the process before the clock runs out.”

That’s according to people close to the matter and as the piece goes on to note, May “is aiming to allay lawmaker concern that, unless they vote to take control of the process and order her to seek an extension of EU negotiations, they will have lost their chance to avoid a no-deal Brexit.” In other words, this sounds exactly like what happened last month.

European interlude

Meanwhile, markets will continue to fret over the economic outlook in the eurozone. Italy is already in a recession and the EC’s across-the-board forecast cuts which hit last Thursday underscored how tenuous the situation has become across the pond.

Read more

The Slowdown Cometh: Global Growth Outlook Suffers Another Body Blow In Deep EC Cuts

Germany is in focus as everyone holds their breath to see if Europe’s most important economy will fall into a technical recession after a string of disappointing data. GDP hits on Thursday, so get ready.

In Italy, there are mounting concerns that the fragile coalition between Five Star and League will ultimately prove to be just as untenable as it’s always seemed. Salvini has made a show of insisting that the coalition will hold, but it’s just a matter of time before he’s tempted to parlay his popularity into a power grab.

Impasse, Beijing Style

Also on the docket are more trade talks between the US and China, this time in Beijing where a US “working team” will be wheels down on Monday to pave the way for high-level talks between Liu He, Lighthizer and Mnuchin later in the week.

If that sounds like the very same thing that’s been going on for two months, that’s because it is. We’re just replaying this over and over again, and each time, the structural sticking points (e.g., IP theft, forced tech transfer, a leveling of the proverbial playing field, etc.) remain.

The proximate cause of last week’s sour market mood (well, in addition to proliferating global growth concerns) were reports (later confirmed) that Trump will not meet Xi ahead of March deadline beyond which tariffs on $200 billion in Chinese goods will more than double. A glass half-full read would be that Trump will extend the deadline, but then again, the threat of an executive order banning Chinese telecom equipment from US wireless networks suggests that the White House is not in a conciliatory mood.

Traders will be watching the yuan this week as China comes back from the holiday for signs that last week’s developments are weighing on sentiment at a time when Beijing is keen to support the economy with a hodgepodge of stimulus efforts. At least one analyst is looking for a benchmark cut sooner rather than later, although that’s an out-of-consensus call.

Full calendar via BofAML

CalendarFeb9

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