Geopolitics continued to monopolize headlines Monday as Joe Biden’s “America’s back” world tour rolled on and journalists on the Israeli politics beat penned lengthy essays documenting the history of Benjamin Netanyahu’s reign, some of which read like he just died.
To let Netanyahu tell it (and tell it he did), he’ll be back in power “soon.” “If we’re destined to be in the opposition, we’ll do it with our heads held high until we topple this dangerous government and return to lead the country our way,” he chafed, defiant. If preventing such an outcome is the only tie that binds for the strange bedfellows coalition that managed to unseat him, the new government may have trouble reaching consensus on much. To the outside observer anyway, it appears as a potentially fractious, patchwork alliance.
Meanwhile, NATO leaders are poised to declare China’s “ambitions and assertive behavior” a “systemic challenge.” That’s according to a joint communique. I’d say that’s an apt description, and one Beijing is likely to bristle at publicly. (Party leaders might chuckle privately — it’s a rather quaint way of describing the rise of a superpower, after all.)
“I don’t think anybody around the table wants to descend into a new Cold War with China,” Boris Johnson remarked. “People see challenges, things we have to manage together, but they also see opportunities and I think what we need to do is to do it together.”
It’s still not obvious what “it” is, though. When it comes to China’s rise (economic and otherwise), there’s quite a bit of talk among Western democracies about collective action. That sufficed as a general description of how America and its allies would present a united front when dealing with Beijing once Trump’s presidency was over, but as the G-7 meeting made clear, there’s no consensus on exactly what the goals are. You can’t do “it” together if you don’t know what “it” is. I talked about that at length on Sunday (linked article below).
When it comes to NATO, I’d add that Turkey is a (perpetual) spanner in the works. Over the weekend, Erdogan announced an expanded swap line with China. As Bloomberg wrote, “the arrangement… will allow the country to boost trade in local currency and avoid using dollars, supporting the central bank’s reserves.”
For markets, all of this is something of sideshow right now. In the US, the inflation obsession is the default story when there’s nothing else to talk about (i.e., when AMC isn’t up at least 30% and/or Bitcoin isn’t at least 20% higher or lower). This week will provide ample opportunities for anyone inclined to give you their take on the Fed, whose June meeting is notable for epitomizing the “important non-event” paradox.
“The general inference from Fed officials is that inflation won’t get too high, nor will it stay there too long,” BNY Mellon’s John Velis said Monday. “Bond markets are just as sanguine as the forecasters [with] 10-year breakevens 20 basis points lower than they were in the middle of May [and] five-year breakevens off 34bps over the same period,” he added, before cautioning that although “demand side effects are indeed to be expected and should fade over time, the supply side effects are more consistent and don’t show much sign of relenting.”
It’s not just bonds that are sanguine. “Investors looking to add riskier assets to their portfolios are emboldened by the ongoing repricing in Aussie-yen risk reversals,” Bloomberg’s Vassilis Karamanis wrote. “The one-month gauge in the risk proxy keeps unwinding the unprecedented rally for yen calls seen in March 2020, and now signals the least bearish sentiment for the Australian dollar in eight years.” Some of that, Karamanis said, is idiosyncratic (i.e., Aussie specific), but from a macro perspective, “it’s down to growing optimism for a global post-pandemic recovery that makes the case for an outperformance of higher beta assets.”
Writing Monday, Rabobank’s Michael Every noted that the Biden-Putin summit lines up with the Fed meeting (Wednesday). “[The] latest round of dot-plottery [will show] if it is 2023 or 2024 before a new front is opened up on markets,” he said, adding that “these little dots are now as inextricably linked to larger geostrategic issues as the wooden representations of aircraft pushed around maps with sticks by staff in WW2 movies.”