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Trump's Iran Tactics 'Create Uncertainty and Uncertainty Is Bad for Business'

Trump's Iran Tactics 'Create Uncertainty and Uncertainty Is Bad for Business'
(Andrew Harnik/AP)

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Monday, 16 October 2017 06:48 AM Current | Bio | Archive

Once again, politics could have some bearing on financial markets today and further down the road.

On Friday, President Trump said in prepared remarks at The White House when referring to the nuclear agreement with Iran: “When the agreement was finalized in 2015, Congress passed the Iran Nuclear Agreement Review Act to ensure that Congress’s voice would be heard on the deal. Among other conditions, this law requires the President, or his designee, to certify that the suspension of sanctions under the deal is “appropriate and proportionate” to measure -- and other measures taken by Iran to terminate its illicit nuclear program. Based on the factual record I have put forward, I am announcing today that we cannot and will not make this certification.”

For investors it could be helpful to keep in mind that the President’s address was given ahead of yesterday’s (Sunday) deadline and that his move did not automatically withdraw the U.S. from the agreement.

The President’s message is a mixed one and has a confusing effect on Congress, which isn’t helpful at this moment in time. This situation creates uncertainty and uncertainty is bad for business.

The Iran situation is more likely to be priced in into financial markets than are some of the Korean scenarios because the extreme of war is something markets rarely price in as a risk in advance. Sanctions are something investors can comprehend and price for.

Besides that, there are the ongoing NAFTA (North America Free Trade Association) negotiations about which there have been leaks suggesting that the United States has proposed NAFTA to come to an end every 5 years unless the 3 countries could agree to extend the treaty. The Trump administration would call for a so-called NAFTA sunset clause that would effectively trigger a renegotiation of the pact every five years.

Also, Iraqi forces are moving into Kirkuk in an apparent attempt to establish control of the oil fields in the Kurdish area.

There are reports of armed resistance and crude oil prices have moved a little higher on concerns of oil supply disruption.

The uncertainties caused by President Trump imposing additional conditions on Iran may also be a factor to consider.

Meanwhile in Europe, Austria’s elections saw a victory from the center-right People’s Party who are likely to go into coalition with the anti-establishment Freedom Party. The Freedom Party has been in government from 2000 to 2005, so this is unlikely to provoke a too strong market reaction. The fact that Austria is now likely to have Sebastian Kurz, a Millennial as Chancellor is more likely to attract media attention. The final results will only be know by the end of the week.

China’s producer price inflation (PPI) was up 6.9 percent year-on-year and consumer price inflation was down somewhat.

Investors should keep in mind that Chinese inflation has not much bearing outside of China. Consumer price inflation represents mainly food and China is not a big food exporter. Producer price inflation may seem more relevant internationally as most companies sell to other companies. However, the relationship between producer prices and Chinese export prices is weak and the relationship between Chinese export prices and foreign consumer price inflation is almost non-existent for most products.

Finally, speaking on Sunday at the Group of 30 International Banking Seminar in Washington, D.C., Fed Chair Janet Yellen said in a prepared speech: “Inflation readings over the past several months have been surprisingly soft, however, and the 12-month change in core PCE prices has fallen to 1.3 percent. The recent softness seems to have been exaggerated by what look like one-off reductions in some categories of prices, especially a large decline in quality-adjusted prices for wireless telephone services … My best guess is that these soft readings will not persist, and with the ongoing strengthening of labor markets, I expect inflation to move higher next year. Most of my colleagues on the FOMC agree. In the latest Summary of Economic Projections, my colleagues and I project inflation to move higher next year and to reach 2 percent by 2019.

Conclusion, the Fed rate hike in December remains a sure thing while Fed funds rates should rise further next year in 2018, again, unless something catastrophically would occur, which of course can never be excluded.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
The Fed rate hike in December remains a sure thing while Fed funds rates should rise further next year in 2018, again, unless something catastrophically would occur, which of course can never be excluded.
fed, december, rate, hike, sure, thing, investors
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Monday, 16 October 2017 06:48 AM
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