Although US equities advanced for a third consecutive session Thursday, you didn’t have to look very far to find evidence of trade frictions.
Semi stocks were sharply lower, bucking the broader market trend, and paring an impressive two-day rally in the process. Through Wednesday afternoon, the SOX had erased well more than half of Monday’s egregious losses, but Donald Trump’s decision to blackball Huawei changed the game.
The Huawei news was insult to injury for Micron, which is now down more than 11% for the month. “[This is a] massive escalation”, Cowen’s Chris Krueger wrote Thursday. “[It’s] hard to see how China does not retaliate with non-tariff trade barriers to defend their national champion.”
Arguably, the Huawei broadside is one of the most consequential (and hence dangerous) foreign policy decisions of Trump’s presidency. That might sound hyperbolic (especially considering the whole “rocket man/fire and fury” ordeal) but when you drill down into the specifics and take a moment to wrap your head around exactly what it would mean if the Commerce Department adopted a strict approach, you come away more than a little unnerved.
And speaking of things that are a little unnerving, watch Donald Trump’s nonchalant response to a reporter who shouted a question about Iran the president’s way on Thursday:
Yes, if the question is “Are we going to war with Iran?”, Trump’s answer is “I hope not.” Everybody else “hopes not” too, because a shooting war with Iran would make Iraq look like a walk in the park.
Oil markets are effectively caught between geopolitics (the ongoing struggle to oust Maduro in Venezuela and the threat of a military conflict between the US and Iran) and the prospect of decreased demand stemming from a trade-related global economic slump. Here’s BofA highlighting exactly that tug-of-war, in a note dated Thursday:
The evolving situation in Venezuela and particularly Iran is complicating things further. Chances of a military conflict in the Persian Gulf keep rising as the US pressures Iran. But partly because global oil inventories are balanced, oil options markets are ignoring these risks. True, oil volatility has already started to increase in the past few weeks. However, when looking at the fundamental drivers behind the recent jump in oil volatility, we find much of the surge has been driven by macro, not micro factors. In our models, the VIX alone explains over 70% of the increase in oil volatility in the past month. In our view, this implies oil vol markets are underpricing Iran risks. In part, oil prices have been relatively stable because supply (less Iranian/Venezuelan barrels) and demand (less business cyclical demand) drivers are partly offsetting each other.
Tensions with Iran are of course running higher than ever after Riyadh blamed Tehran for ordering the Houthis to attack a pair of Aramco pumping stations this week. The Saudis hit back on Thursday, bombing Houthi positions in Yemen, where a God-awful humanitarian crisis prompted Congress to pass a bipartisan resolution aimed at forcing the US to end its support for the conflict – Trump vetoed that resolution.
Attacks on a handful of ships off the coast of the UAE raised further concerns about the Strait of Hormuz and, on Wednesday, the US pulled non-emergency staff from the US embassy in Baghdad and a consulate in Erbil, citing unspecified threats. Iraq and the UK both suggested they are not aware of any new threats from Iran or its allied militias, but the Pentagon insists the danger is real. The bottom line: The State Department is fretting about the distinct possibility that Quds commander Qassem Soleimani might instruct Iran’s proxy militias to target US personnel. One of the ironies of the Trump administration’s hardline approach to Iran is that it’s emboldened Soleimani, who famously traded Game of Thrones memes with Trump last year.
Soleimani certainly didn’t need Trump to bolster his credentials – he is, by many accounts, one of the most feared men in the world. But Trump and Mike Pompeo are risking a situation where his domestic celebrity and regional influence grows even stronger. Here, for instance, is what Roula Khalaf wrote for the Financial Times earlier this month (you should read the piece in full):
I should know better than to make a prediction about the Middle East. But here I am, making a prediction. The next president of Iran will be Qasem Soleimani, commander of the overseas arm of the hardline Revolutionary Guard and master of Tehran’s influence across the region. And here’s more: if he’s not president in two years, he will be more powerful still — as the kingmaker deciding on the next supreme leader, the highest position in the Islamic republic.
You can expect Pompeo to detail some of the specifics around the purported threats to US personnel in Iraq once those folks are out of dodge, and don’t be surprised if Soleimani gets a mention. In reality, it’s likely the decision to evacuate non-emergency personnel was a precaution, a pretext for something or, perhaps, both. Last week, John Bolton announced that the US had dispatched a carrier strike group and bombers to the Persian Gulf and US lawmakers are scrambling to get on the record that Trump absolutely cannot engage Iran militarily without congressional approval.
The point in recapping all of this is to draw your attention to the fact that Trump appears to be stumbling further and further towards two worst-case scenarios: An economic cold war with Xi Jinping, and a shooting war with the Quds Force.
It’s safe to say Trump is woefully uninformed when it comes to appreciating how grave the situation would be were either of those two outcomes (let alone both) to be realized.
He seems to be coming around, though. For instance, the Washington Post reported on Wednesday evening that “Trump is frustrated with some of his top advisers, who he thinks could rush the United States into a military confrontation with Iran and shatter his long-standing pledge to withdraw from costly foreign wars.” The Post went on to say that “Trump grew angry last week and over the weekend about what he sees as warlike planning that is getting ahead of his own thinking.”
Similarly, The New York Times on Thursday reported that Trump told his acting defense secretary, Patrick Shanahan, that he doesn’t want to go to war with Iran. In fact, the Times says he (Trump) made it absolutely clear during a Wednesday morning meeting in the Situation Room “that an intensifying American pressure campaign against the clerical-led government in Tehran must not escalate into open conflict.”
On Wednesday night, Trump responded to the WaPo story, calling the paper (but not the article itself) “Fake News”. “There is no infighting whatsoever with respect to my strong policy in the Middle East”, the president tweeted. “Different opinions are expressed and I make a decisive and final decision – it is a very simple process.”
This is one situation where it actually might work out better for the world if Trump goes with his gut. In November, while opining on Fed policy, Trump told WaPo that he “has a gut, and my gut tells me more sometimes than anybody else’s brain can ever tell me.” That’s pretty scary (and also pretty funny), but when it comes to Iran, it’s an unlikely source of comfort. Because Trump’s “gut” is clearly telling him that war would be a mistake, and the “brain” who is spoiling for a fight resides in the skull of John Bolton.
All of the above underscores the risks inherent in the current setup where Trump is surrounded by China trade hawks (in Bob Lighthizer and Peter Navarro) and Iran war hawks (Pompeo and Bolton). The president doesn’t read and he cannot be bothered with detailed briefings. He relies on a combination of advice from fanatics (e.g., Navarro, Bolton and Stephen Miller), public opinion (as gauged by Twitter and Fox News) and, when his “gut” tells him something might be about to go really awry, whatever voices of reason are still inexplicably hanging around (e.g., Steve Mnuchin).
The problem, though, is that everyone with any real credibility left the administration a long time ago. Gary Cohn is gone. John Kelly is gone. HR McMaster is gone. Etc.
Who, then, is Trump supposed to ask if he needs real advice? Lindsey Graham won’t work, because at some point in late 2017, he morphed into a groveling sycophant. The president reportedly leaned on Sean Hannity and Lou Dobbs for guidance during the border showdown. Here’s hoping they don’t get the final word on China and Iran.