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'Messy Politics' Means More to Investors Than 'Meaningless' Economic Data

'Messy Politics' Means More to Investors Than 'Meaningless' Economic Data

By    |   Monday, 02 October 2017 07:37 AM

Today, we have an unfortunate mix of really messy politics and generally meaningless economic data.

To start with politics, at the moment there are three political focal points around the world.

  • The Trump twitter feed has been active again. Specifically, attempts by the Secretary of State Tillerson to negotiate with North Korea in a conventional diplomatic manner have been undermined by a couple of Trump’s tweets.
  • There has also been an escalation of the language directed against American citizens in Puerto Rico. A tweed referring to the most ingrates reads: “We have done a great job with the almost impossible situation in Puerto Rico. Outside of the Fake News or politically motivated ingrates,... 7:22 AM - 1 Oct 2017”
  • And then, a group of names of candidates for the position of Fed Chair has been paraded, which are: Former Fed governor Kevin Warsh, Fed Governor Jerome Powell, Stanford economist John Taylor, former BB&T Corp. CEO John Allison, Columbia University economist Glenn Hubbard. Fed chief Yellen and Trump aide Cohn are also being considered.

What does this mix of U.S. politics mean?

In spite of the potentially cataclysmic consequences, the North Korean tweets probably have the least impact. Markets will shy away from pricing in the risk of a disaster scenario because markets do not price in disaster scenarios, until they happen.

The Puerto Rico comments have potentially more market importance in the median term.

The narrative in U.S. politics is rapidly moving toward one of racial tension.

One of the features of anti-establishment politicians is that they have tended to mobilize voters who do not normally vote.

Inflaming racial tensions may bring out new groups of voters in next year’s mid-term elections, adding uncertainty to the outcome.

Finally, the uncertainty about the Fed Chair and the very broad-range of abilities and policy views of those being paraded creates considerable uncertainty about the interest rate outlook for next year.

An interesting element here is candidate Kevin Warsh who was a Fed governor between 2006 and 2011 and who resigned from the board because of his opposition to the bond-buying program. Warsh is viewed as more of a hawk than Yellen. Warsh has also called for a revamp of how the Fed makes monetary policy, saying it needs “fresh air” from markets and from the “real economy.”

Now, the fact that quantitative policy has been pre-announced, limits uncertainty about that.

In Europe, the political focus is the attempt to hold a vote on Catalonian independence, ensuing images of violence in Catalonia. The outcome of the vote itself is not necessarily relevant for financial markets.

For now at least, the euro slides and Spanish bonds dip this morning after more than 2 million Catalans voted for the region’s independence.

Investors could do well keeping in mind the ongoing strengthening of anti-establishment politics and the potential for centrifugal forces in Europe, and believe me that is relevant for financial markets, especially with the prospect of the Italian elections that are due to be held no later than May 20, 2018.

In the United Kingdom (UK), the political focus is the Conservative Party conference and questions about Foreign Secretary Johnson is “unsackable”  after an off message intervention into the EU-UK UK-EU divorce proceedings.

Foreign investors who are less likely to understand the nuances of UK politics may overreact to the noise.

Besides all that, the data we’ll get today is manufacturing sentiment data with the Tankan survey in Japan, the purchasing managers indicators in Europe and the ISM survey in the U.S.

The correlation of these opinion polls to economic reality has been declining for years, but economists are still required to comment on them.

The Japanese Tankan survey at least has an official status, which does tend to prove sampling. The Tankan showed stronger corporate sentiment, which matters in today’s context more as a political barometer perhaps, ahead of the Japanese general election that will take place on October 22.

Interestingly, a survey by the Kyodo news agency showed on Sunday that the disapproval rating for Japanese Prime Minister Shinzo Abe’s administration at 46.2 percent exceeded that in favor with 40.6 percent.

The European and U.S. data we’ll get today is not going to add to our stock of knowledge about where the world is heading, but I fear that today’s politics is fowling on that count as well.

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

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Markets will shy away from pricing in the risk of a disaster scenario because markets do not price in disaster scenarios, until they happen.
politics, investors, economic, data
Monday, 02 October 2017 07:37 AM
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