Morning Commentary: Political Dysfunction – Tribal Warfare Takes its Toll

Foreign Exchange - Morning Commentary

Political Dysfunction – Tribal Warfare Takes its Toll

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Over the past few years, attacks on globalization and the rise of economic nationalism, populism and political tribal warfare have been taking their toll on the global economy. The U.K. and the U.S. are the most recent poster children for domestic politics adding to economic uncertainty going forward. Unfortunately, there is no end in sight as yesterday’s Brexit vote and continued political and economic uncertainty combined with the U.S. government shutdown will begin to bite into each country’s respective domestic economy.
Yesterday’s Brexit vote in the U.K. Parliament and the exceptional loss for PM May was the biggest defeat for any British legislative attempt in the last 120 years according to the London Times. In most eras, a loss of that magnitude would imply new leadership and probably a general election. A No-Confidence vote for the PM is scheduled for later today of which she is expected to win because at this time, there is no majority or even close to one that is seen as a viable option to replace her. All this political turmoil only adds to economic uncertainty and future business investment.
Here in the U.S., the government shutdown continues on with no end in sight. While only impacting the U.S. economy at the margins so far, almost all economists agree that the longer the shutdown continues, the more negative multiplier effect it will have on the economy. Today, there are no Retail Sales, Business Inventories or TIC data to report as there are no government workers to crunch the numbers. Not knowing the economic data makes it hard to know what is happening to the economy.
Fortunately, the markets are looking beyond the near term dysfunction and somehow see silver linings in all this turmoil. Global equities and interest rates are reflecting more optimism than pessimism. The British pound rebounded strongly after yesterday’s Parliamentary vote, and today, U.K. interest rates are much higher; somehow the market ultimately sees continued negotiations and a softer Brexit down the road despite all the near term political improbabilities. All of this can change in a moment’s notice.
  • The Central Bank of China (PBOC) injected 560 billion yuan into the banking system which is the largest one-day addition on record. The Chinese yuan is slightly stronger today following its recent appreciation over the past ten days.
  • The Central Bank of Turkey kept interest rates unchanged at 24.00% as expected. CPI declined to only 20.3% YoY in December which was down from the peak of 25.24% in October.
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