Blain’s Morning Porridge – June 24th 2019

Blain’s Morning Porridge – June 24th 2019

“People would laugh. My statement will not change history. History is History.

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We’ve an exciting week’s play in prospect here in the Global Financial Markets. Highlight will be Friday’s G20 meeting and the expected/hoped for Trump Xi trade rapprochement.  What if it doesn’t happen? There are a thousand and one reasons it might well still be cancelled, and just as many market participants suspect a meeting won’t result in anything tangible, meaning the trade war deepens, global recession fears escalate, another $300bln of tariffs are slapped on, and goodnight record stock prices.  Oh dear… never mind.

If there is one place to watch this week – focus on events in Hong Kong. This week’s planned series of HK demonstrations, and the ongoing challenge it presents to Beijing to respond, has the possibility of seriously destabilising the already fractured global picture.

But, first the markets – we’re about to enter the summer doldrums. July and August are always thin, illiquid months with low volumes. We might get a negative market direction develop, but major market crashes tend to bide their time for the autumn..

With Wall Street at record highs, and over $12.5 bln of bonds now trading at negative yields – the financial asset markets look…. well, just plain wrong! Everyone knows it! There can’t be a serious financial investor on the planet that doesn’t get it – that stock and bond prices are only so high because they expect ultra-low interest rates to be boosted by another bout of central bank easing.

The wake-up-smell-the-coffee moment might be some time coming. Investors expect the distortion to continue, so why shouldn’t they continue to coat-tail the central banks? A failed G20 this week nails down “lower-for-longer” central bank support. So what if China and the US have a full scale trade war, rates will remain low so corporates can continue to leverage themselves up to fund stock-buy backs, and drive the market higher..

(Somewhere at the back of my mind, the little voice is screaming… what about the long-term, what about the long-term..

Maybe this time it’s going to be different. We’ve got two massive potential geopolitical dust-ups in prospect:

In the Gulf, Trump is trying to goad the Iranians into throwing the first punch – all the mumble-swerve about new sanctions, and calling back a strike (that was still loading on the carrier’s deck) 10 mins from “bombs gone” almost reads like a Monty Python sketch. Trump’s bellicosity must fascinate phycologists – is he trying to maintain his record as a President who hasn’t committed troops, or is it the posturing of a bully or a coward? Who cares, an Iran stand-off could become a sizable, but not unsolvable, market headache.

Then there is Hong Kong. The demonstrations are quite extraordinary. This week’s planned series of demonstrations ahead of G20 will put enormous pressure on Xi and the party to act. If China goes in strong-armed, then the West will have to respond. Whatever Beijing says or does will trigger an Occidental reaction – a badly worded Trump tweet could undo the prospects for the meeting on Friday.

The Beijing authorities know the miscalculated attempt to enforce extradition on Hong Kong has backfired badly. It has become a PR nightmare, but also puts pressure on Xi domestically – he may be President for life, but there are plenty who would replace him….

There are profound regional implications. Although many of China’s SE Asian Governments will be looking at the protests in horror – mass protests scare them (which is why Singapore is so quiet), and others seek to appease China (like the Philippines) – the demonstrations could highlight nationalist zeal in the face of China’s attempts to grab the South China Seas. The potential for conflict is rising.

Hong Kong, whatever Beijing thinks, will not be a quick fix. 30 years after Tiananmen Square, The Party believes the Confucian “the state is always right” accommodation it has reached with the population – support the party and it gives you prosperity and national pride – is unassailable. But HongKongers aren’t like that. A little freedom is dangerous thing – an infectious bug to be stamped out. It is a pernicious little thing. Difficult to eradicate when the HongKongers are spread across the globe. Pretty horrifying to read some of the some of the stories of Social Media abuse:

Meanwhile, we also have the difficult issue of the EU leadership to resolve later this week. The 28 European leaders failed to agree on how to carve up the senior leadership roles last week, so they try again later this week before the new European Parliament meets to rubber stamp whatever they agree. Democracy in action is a wonderful thing..

Out of time… back to the day job…

Bill Blain