Category: zerohedge

The White House is preparing to unveil $50 billion worth of tariffs on more than 100 different types of Chinese goods Thursday at 12:30 pm ET – what President Trump has characterized as a response to China’s larcenous Intellectual Property practices (and, quite possibly, a preemptive strike as China prepares to launch its petroyuan contracts next week).

This is how UBS’ Chief US Economic Paul Donovan summarized what is coming:

US President Trump is expected to announce a tax increase for US consumers who have dared to purchase goods that have been partially made in China. There is likely to be a large US flag, suitably photogenic and smiling American workers and a dramatic signature. And selective tariffs, investment restrictions and visa limits.

US Trade Representative Lighthizer said that an “algorithm” was used to maximize the pain to China and minimize the pain to US consumers (this acknowledges that there is pain for US consumers). Trade data (presumably the algorithm input) is complex and often out of date. Saying the word “algorithm” in an authoritative voice does not magically reduce the risks.

The tariffs will be imposed under Section 301 of the 1974 US Trade Act and focus on Chinese high-tech goods. There will also be restrictions on Chinese investments in the US, said US Trade Representative Robert Lighthizer. China’s apparel industry may also be hit. For years, China has forced US companies to turn over valuable source code and other intellectual property as the price of gaining entry to one of the world’s “most lucrative developing markets.” But Trump and his protectionist allies have argued that this is a blatant violation of WTO rules.

Back in August, Trump ordered the Commerce Department to launch an investigation into Chinese trade practices under Section 301 – which was regularly invoked by the Reagan administration to punish Japanese exporters.

Meanwhile, as China prepares for a full-fledged “trade war” with Washington, the leaders of the world’s second-largest economy are seeking to shore up support for their position from other nations and world trade bodies. China has zeroed in on US export caps as one reason for the widening trade deficit between the world’s two largest economies.

Chinese Foreign Ministry spokeswoman Hua Chunying said it was unfair to criticize China’s trade practices if the United States won’t sell to China what it wants to buy, referring to US export controls on some high-tech products, per Reuters.

“How many soybeans should China buy that are equal to one Boeing aircraft? Or, if China buys a certain number of Boeing aircraft shReutersould the U.S. buy an equal number of C919s?” Hua said, mentioning China’s new self-developed passenger jet.

However, China still hopes it can hold constructive talks with the United States in a spirit of mutual respect to seek a win-win solution, she added.

US agricultural exports to China stood at $19.6 billion last year, with soybean shipments accounting for $12.4 billion. Chinese penalties on US soybeans will especially hurt Iowa, a state that backed Trump in the 2016 presidential elections and is home to US Ambassador to China Terry Branstad.

Boeing could also find itself in China’s crosshairs, particularly as the country’s aerospace program is seeking to develop the C919 as a domestic rival to Boeing’s jets.

Boeing, which has the biggest market share in China of any aerospace company, said last year it expects China to buy more than 7,000 Boeing jets worth some $1.1 trillion over the 20 years between now and 2036.

Chinese officials repeated threats that their retaliation would be swift.

“With regards to the Section 301 investigation, China has expressed its position on many occasions that we resolutely oppose this type of unilateral and protectionist action by the U.S.,” the Commerce Ministry said on Thursday.

“China will not sit idly by while legitimate rights and interests are hurt. We must take all necessary measures to firmly defend our rights and interests.”

Jacob Parker, Beijing-based vice president of China operations at the US-China Business Council, said the group wanted to know what action the US administration wants China to take to improve protection for intellectual property, and over forced technology transfer.

Parker said China needs to adopt a tougher deterrent against counterfeiting and IP theft, and do away with joint venture and business licensing requirements that can be used to mandate technology transfers to gain market access.

“It’s really important for them to lay that out so that we have a strategy going forward and it’s not just tariffs for tariffs’ sake.”

China celebrated a WTO decision, released Wednesday, declaring Obama-era anti-subsidy tariffs illegal under WTO rules as validation of its claims:.

“The Chinese side never wants to fight a trade war with anybody, but if we are forced to, we will not hide from it,” Foreign Ministry spokeswoman Hua Chunying warned on Wednesday. Beijing will “definitely take firm and necessary countermeasures to defend its legal rights,” she said, as quoted by China’s Global Times.

Meanwhile, the Commerce Ministry said in a statement that Vice-Minister Wang Shouwen had slammed Trump’s new wave of protectionism at an informal meeting of ministers from 50 World Trade Organization (WTO) member-states in India earlier this week.

“Trade restriction measures will not only hurt the global trade order but also cause serious damage to the multilateral trade system,” Wang said, urging all countries to “support the global multilateral trade system and defend the authority and effectiveness of WTO rules.”

The Commerce ministry welcomed Wednesday’s WTO ruling against Obama-era anti-subsidy tariffs on Chinese goods. The decision “proves that the US side has violated WTO rules, repeatedly abused trade remedy measures, which has seriously damaged the fair and just nature of the international trade environment and weakened the stability of the multilateral trading system,” the statement said.

China’s shift to a consumption-based economy has made it less dependent on exports – so the $50 billion tariffs imposed by the US likely won’t have much of an impact. But Moody’s Investors Service said the impact would be far greater if the US significantly expands tariffs and throws in broad-ranging protectionist measures.

If that comes to pass, China could retaliate against US companies, cancelling orders for Boeing planes and nixing a pending deal for Qualcomm to acquire NXP Semiconductors. It could also foil Tesla’s push to build a factory on the mainland.

But as China hopes an amicable solution might be worked out, the boost to Trump’s popularity since announcing the steel and aluminum tariffs (which are incredibly popular among ordinary working Americans, even as they’ve turned pundits and “experts” apoplectic with rage) has emboldened him to seek a more aggressive tack.

And now we wait for Trump’s official launch of trade war with China just after noon.

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Submitted by Shant Movsesian and Rajan Dhall MSTA FXDailyterminal.com

Today’s BoE meeting looks to be well covered, much in the same way as the FOMC last night, when the market reacted to the lack of clear direction for 4 hikes this year.

For the UK, a May hike from the BoE is still not as clear cut as in the US, but given the data has been broadly supportive of the near term fundamentals, we would expect this to give the MPC the confidence to stand by their conviction.  The previous meeting prepared the market for rates rising sooner and by more than previously priced in, and this looks very unlikely to be revised under the circumstances, and especially with the transition deal now agreed.

There is a very small risk that the BoE move on rates today, but this risk is less than 10% and would almost certainly catch the market off guard.  That said, Feb was in the running last year, so no surprise that there are outlying expectations for the unexpected, but this then moves us on to the vote split.  All members are expected to vote for a hold today, so any dissent will be taken as a sign that May is on.  From thereon it is back to data watching and of course, the Brexit talks.  Current pricing for a May hike, ranging from 65-90% depending on markets – OIS was 64.5% this morning.

EUR/GBP is pressing into the bids from 0.8700, but Cable is a little more hesitant as the USD regains its composure, but we are looking a potential move to 1.4225-50 if May is underscored.  The EUR cross rate could then test 0.8650, which is the next major level we are looking at on the downside.

GBPUSD 4HR Chart with levels

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Mark Conditt, the serial bomber who terrified Austin residents from March 2 and early Wednesday, when he blew himself up as police closed in on his vehicle, recorded what police say amounts to a video confession. However, the mystery why he did what he did continues as the video didn’t elaborate on his motive.

The 25-minute “confession” on a cell phone found after Conditt’s death detailed how he’d made all seven bombs that had been accounted for – five that exploded one that was recovered before it went off and a seventh that amounted to a suicide bombing as officers closed in, Reuters reported.

“He does not at all mention anything about terrorism, nor does he mention anything about hate, but instead it is the outcry of a very challenged young man, talking about challenges in his personal life,” Austin Police Chief Brian Manley told reporters.

“I would classify this as a confession,” Manley said. Conditt had no criminal history.

Based on their search of the suspect’s home and his video statement, police said they believed there were no other bombs, and that the danger to the public had subsided. However, FBI Special Agent Christopher Combs said investigators believe the suspect would have continued his attacks had he not been apprehended.

Police recovered a “target list” of addresses, but the video included no explanation why Conditt selected these targets.

Conditt likely recorded the video between 9 p.m. and 11 p.m. on Tuesday when, according to Manley, Conditt said he believed police “were getting very close to him,” and he was proven right. Authorities filed a criminal complaint and issued an arrest warrant around that time.

“This can never be called a happy ending, but it’s a damn good one for the people of this community, the people of the state of Texas,” Travis County District Attorney Margaret Moore told reporters.

Residents of Austin – a city of more than 1 million people – voiced relief that the hunt for the bomber had ended.

“I am going to be leery and extra careful tomorrow at work, but I feel relieved now,” said Jesus Borjon, 44, an employee of parcel delivery firm UPS, who lives in Pflugerville. The first bomb went off during Austin’s annual South by Southwest festival of music, film and technology.

The Associated Press recounted how police used standard investigative techniques, like examining receipts and surveillance footage, to track Condit.

Rep. Michael McCaul, a Republican from Austin, told the AP that Conditt’s “fatal mistake” was walking into a FedEx store to mail a package because that allowed authorities to obtain surveillance video that showed him and his vehicle, along with his license plate number. From there, investigators could identify the suspect and eventually track him using his cellphone.

Police discovered homemade bombs inside Conditt’s home in Pflugerville, a community where, notably, portions of the popular TV Show “Friday Night Lights” had been filmed. His two roommates were detained for questioning. One was later released.

Investigators said one room in the home contained bomb components and explosive materials but no finished bombs. Police do not know how Conditt learned to make the bombs, but said they were analyzing his Internet history.

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Yesterday, we showed that according to Wall Street, the biggest tail risk facing investors right now is a “trade war”…

… and that should trade tensions escalate, lower stock prices would be the immediate result (and that managers would sell stocks in advance).

Well so far this morning, they are being proven right (or simply selling), because a jittery overnight session for stock futures which saw the S&P close at session lows after yesterday’s Fed rate hike (due to the “snowstorm” according to a dead serious Marko Kolanovic), turned increasingly volatile just before dawn in New York, as investors prepared for today’s China trade war announcement from President Trump that could levy tariffs on more than 100 types of Chinese goods, and is due just after noon ET.

As a result, S&P futures slid for much of the session, dropping below 2,700 and hugging the key support level as we hit save (we wonder what weather phenomenon JPM will blame for today’s swoon).

“Investors are increasingly nervous about the escalation in the narrative towards a trade war between the U.S. and China, it makes markets quite volatile,” Stephane Ekolo, equity strategist at TFS Derivatives, told Bloomberg.

It wasn’t just US futures though, and it wasn’t just the imminent US trade war with China, as several other factors converged, leading to a sea of red in global stock markets, resulting from continued pressure on technology stocks led by Facebook, as well as a sharp deterioration in European PMI data, oh and of course asset valuations which remain at all time high; Nasdaq futures slide to below Monday’s low which was start of tech sector focus, while e-mini S&P futures testing 100-DMA.

The Fed did not help to boost sentiment, tightening financial conditions by raising its key rate another 25 basis points to 1.75 percent on Wednesday and flagged at least two more increases were likely this year. But it stopped short of pointing to the three that some economists had been predicting. China also nudged up its borrowing costs overnight, as Beijing braced for new tariffs from U.S. President Donald Trump on Chinese imports worth as much as $60 billion.

Not all Fed bulls were discouraged, though. “Over the balance of the year we do think they will move to four hikes,” said JP Morgan’s Seamus Mac Gorain, highlighting the impact of recent fiscal stimulus. “Trade tariffs are a risk, of course, but more open economies,” such as Mexico or the euro zone “could be more at risk than the U.S.”

European equities found some support through cash open before fading further, led by underperformance in the tech and bank sectors. Thursday’s European retreat worsened after data showed the continent’s private-sector economy cooled in March as manufacturing growth contracted sharply. The Markit composite purchasing managers’ index dropped to 55.3 from 57.1, below the median estimate of 56.7, and a 14 month low.

• EU Markit Manufacturing Flash PMI (Mar) 56.6 vs. Exp. 58.1 (Prev. 58.6)
• EU Markit Comp Flash PMI (Mar) 55.3 vs. Exp. 56.7 (Prev. 57.1)
• EU Markit Services Flash PMI (Mar) 55.0 vs. Exp. 56.0 (Prev. 56.2)

Meanwhile, economic confidence in Europe’s exporting powerhouse – Germany – continues to shrink as Europe is likely next on Trump’s deficit-shrinking, trade war radar. In today’s IFO Business Confidence reading, both current conditions and expectations continued to shrink.

“The threat of protectionism is dampening the mood in the German economy,” said Clemens Fuest, the chief of the Munich-based Ifo institute, which published the business sentiment data.

The MSCI Asia Pacific index rose for first time in five days although Chinese stocks declined sharply at the close after the PBOC matched the Fed’s rate hike, and raised interest rates on reverse repo operations and funding facilities by five basis points. The Shanghai Composite fell 0.5% while the ChiNext index dropped 0.7%. In Hong Kong, the Hang Seng Index fell 1.1% while the Hang Seng China Enterprises Index closes down 0.8%, wiping out 1.6% rise in morning. Tencent weighed on the Hang Seng Index, falling 5% – most since Feb. 6 – after posting results Wednesday evening; analysts lowered profit forecasts based on the company’s spending plans.

Meanwhile, Zuckerberg’s CNN appearance last night did little to calm the growing fears, and Facebook was down another -2.0% in pre-market.

In other overnight news, US House and Senate leaders agreed to USD 1.3TN spending bill which they hope to pass prior to the government shutdown deadline at midnight this Friday, although there were also reports that US House Freedom Caucus said it is against the omnibus spending measure. In Europe, the EU expects US President Trump to announce tariff waiver today according to sources.

The ECB released its economic bulletin, which showed that Indicators suggest strong growth momentum with possible better expansion in the near term, adding that developments support a gradual upward trend in wage growth. Also overnight, Riksbank’s Floden said sticking to the current interest rate path is the fastest way to get interest rates up adding that the latest inflation outcomes are clearly lower than expectations.

In FX, the British pound was the notable mover, surging to its highest in more than a month after British wage data published on Wednesday bolstered expectations the Bank of England would signal a May rate increase after its monetary policy meeting due in just over an hour.

Meanwhile, the dollar initially weakened further in follow-through from FOMC digestion and unchanged 2018 median dots; however the risk-off environment leads to slow grind higher against G-10, except for USD/JPY, which goes through Asian low. As Bloomberg adds, the dollar erased its decline, holding steady as President Trump readies to announce about $50 billion of tariffs against China over intellectual-property violations.  The pound maintains its bullish momentum, while the euro erases gains as PMI data out of Germany and France missed forecasts. Some highlights of key FX pairs below, from BBG:

• The Bloomberg Dollar Spot Index was little changed, close to a one-month low, and most G-10 crosses traded in narrow ranges
• The euro edged up toward 1.24 against the dollar before erasing gains; the pound rose amid speculation that the BOE will pave the way for an interest-rate increase in May while gilts rallied on profit taking
• USD/JPY slipped amid Japan’s political uncertainty and concern about U.S. protectionism; the yen was also boosted by seasonal demand by Japanese operators ahead of the fiscal year-end book closing and a softer dollar after the Fed’s rate decision was considered less hawkish than what some traders expected
• The Aussie reversed earlier gains and a test of the 100-DMA at 0.7778 after February jobs data missed estimates and with traders are also waiting on expected U.S. announcement levying $50 billion of tariffs against China

Meanwhile, Treasuries extended their gains from Wednesday, with gilts pushing higher ahead of the Bank of England decision, as global bond yields fell broadly. Borrowing costs on 30-year German debt hit their lowest level of the year. Two-year U.S. yields slipped to 2.304% from 9 1/2-year high of 2.366%. The 10-year yield fell below 2.85%, its biggest move in three weeks.

In commodities, crude drifted sideways near $65.30 while iron ore traded in China was 1.5% stronger. WTI (-0.8%) and Brent Crude (-0.6%) took a breather from yesterday’s post-DOE rally with both benchmarks hovering just below their highest level since early February amid rising concerns of US output threatening to disrupt the tightening market; WTI has recently given back the USD 65/bbl handle. Moving onto metals, despite a softer USD and general risk-aversion thus far, gold prices are seen modestly lower after spot gold hit highs of USD 1334.8/oz overnight. Elsewhere in base metals, copper climbed off its lowest level in three months, Dalian iron ore rose 0.9% after recouping recent losses, steel futures were seen lower overnight as demand concerns continue to hamper sentiment.

Economic data on Thursday include initial jobless claims, Markit PMI data. Nike, Micron and Accenture are among companies due to release results

Market Snapshot

• S&P 500 futures down 0.8% to 2,696.25
• STOXX Europe 600 down 0.4% to 373.59
• MSCI Asia Pacific up 0.3% to 177.01
• MSCI Asia Pacific ex Japan down 0.3% to 581.48
• Nikkei up 1% to 21,591.99
• Topix up 0.7% to 1,727.39
• Hang Seng Index down 1.1% to 31,071.05
• Shanghai Composite down 0.5% to 3,263.48
• Sensex down 0.07% to 33,114.27
• Australia S&P/ASX 200 down 0.2% to 5,937.15
• Kospi up 0.4% to 2,496.02
• German 10Y yield fell 2.4 bps to 0.568%
• Euro up 0.2% to $1.2360
• Brent Futures down 0.5% to $69.16/bbl
• Italian 10Y yield rose 3.5 bps to 1.676%
• Spanish 10Y yield fell 3.4 bps to 1.301%
• Gold spot down 0.1% to $1,330.94
• U.S. Dollar Index down 0.3% to 89.54

Top Overnight Headlines

• U.S. will announce China tariffs today; to target more than 100 different types of Chinese goods totalling $50b, according to people familiar
• EU expects that it will be exempted from U.S. import tariffs on steel and aluminum, according to people familiar
• European Mar. P Composite PMIs: France 56.2 vs 57.0 est; Germany 55.4 vs 57.0 est; 55.3 vs 56.8 est.
• Riksbank Deputy Governor Martin Floden says inflation data below Riksbank’s forecast, weaker krona than expected lately are “two developments that speak in different directions in terms of what should happen with monetary policy”
• German Mar. IFO Business Climate: 114.7 vs 114.6 est; Expectations 104.4 est; Current Assessment 125.9 vs 125.6 est.
• U.K. Feb. Retail Sales y/y 1.5% vs 1.4% est;ONS notes underlying three-month picture is one of falling sales, mainly due to strong declines across all sectors in December
• PBOC hikes reverse repo rate by 5bps to 2.55% in reaction to Fed

Asian stocks traded mixed as the region digested the fallout from the FOMC. ASX 200 (-0.2%) and Nikkei 225 (+1.0%) were varied with commodity-related stocks underpinned by gains in crude and the metals complex due to a softer USD, while the KOSPI (+0.4%) also gained amid US tariff exemption hopes after US Trade Representative Lighthizer named South Korea as one of the countries likely to be exempted. Conversely, Hang Seng (-1.1%) and Shanghai Comp. (-0.5%) underperformed with the US set to announce tariffs on China later today and after both the HKMA and PBoC raised rates in response to the Fed. Finally, 10yr JGBs were higher by around 10ticks as they tracked the gains seen in T-notes which found relief from the unchanged 2018 Fed rate hike projections, while the BoJ were also in the market for JPY 710bln of JGBs in the belly to super-long end with its Rinban amounts kept unchanged.

The PBoC stated that the increase in reverse repo rates meets market expectations and is a normal response to the Fed rate hike, while the Hong Kong Monetary Authority also raised rates by 25bps to 2.00% in lockstep with the Fed.

Top Asian News

• China’s Central Bank Raises Borrowing Costs After Fed Hikes
• Philippines Keeps Key Rate at 3% as Seen by Most Economists
• Tencent Among Top Decliners After Margins Warning: Asia Movers
• UBS Sees India’s External Finances at Risk Despite High Reserves
• Tesla to Supply Batteries for Solar Project in Australian State

European equities kicked the session off on the backfoot (Eurostoxx 50 -1.1%) with losses emanating largely from the fallout of yesterday’s FOMC release and proposed US tariff measures today on China which are set to be unveiled at 1630GMT. Equities then staged a mild recovery before once again taking another turn lower in what has been a choppy session of trade thus far since  the open. In terms of sector specifics, all ten sectors trade lower with some modest outperformance in energy names in-fitting with price action in the complex as WTI held onto the USD 65/bbl level (has since lost this level). Individual movers include Reckitt Benckiser (+5.5%) who have confirmed they have dropped out of the running for Pfzier’s consumer health business which has subsequently paved the way open for GSK (-1.0%) to make an approach.

Top European News

• Rio Tinto to Sell Winchester South to Whitehaven for $200m
• Ted Baker Sees Challenging Market Conditions After Bad Weather
• StanChart Is Said to Start Sale Process for Private Equity Unit
• Volatile Volatility Leaves Europe’s Investment Banks Whipsawed
• Deutsche Bank Raised ‘A Lot of Money,’ Needs to Deploy It: CEO

In FX: USD: Initially a choppy reaction from the FOMC’s rate hike decision yesterday, however the greenback ultimately softened after members maintained 2018 rate path view of 3 rate hikes (1 member away from median projection at 4). Additionally, the central bank steepened the path of rate hikes for 2019-2020, however the council did soften language around activity. DXY trading above mid-89 with losses stemmed after finding support at the March lows of 89.40. Trade wars remain at the forefront of investors’ minds amid reports that Trump will announce China tariffs today (1230EDT) with the value said to be around USD 50bln (lower than the previously touted USD 60bln). Retaliation from China is likely, as evidenced by yesterday’s WSJ report. Subsequently, the increased uncertainty could take USD/JPY back down to the 2018 low (105.23) prompting a test of the 105 handle. Antipodeans (AUD,NZD): RBNZ kept interest rates unchanged at 1.75%, as expected. Market pricing for a rate hike is not seen until mid-19. As such, NZD saw a muted reaction upon release, the central bank struck a rather balanced tone after remaining upbeat over global growth, but highlighted downside risks to inflation. NZD currently trading in a tight 40pip with price action likely to be driven by risk. A firm break above 0.7260 could see the spot price back at 0.7350, however, trade war uncertainty may see gains tempered. Elsewhere, AUD has been pressured by the jobs report overnight with the headline employment change falling short of expectations (17.5 vs. Exp. 20k), while the unemployment rate saw an unexpected uptick.

In commodities, WTI (-0.8%) and Brent Crude (-0.6%) are taking a breather from yesterday’s post-DOE rally with both benchmarks hovering just below their highest level since early February amid rising concerns of US output threatening to disrupt the tightening market; WTI has recently given back the USD 65/bbl handle. Moving onto metals, despite a softer USD and general risk-aversion thus far, gold prices are seen modestly lower after spot gold hit highs of USD 1334.8/oz overnight. Elsewhere in base metals, copper climbed off its lowest level in three months, Dalian iron ore rose 0.9% after recouping recent losses, steel futures were seen lower overnight as demand concerns continue to hamper sentiment.

Looking at the day ahead, EU leaders will today meet in Brussels to sign off on Brexit guidelines (continuing through to Friday). Meanwhile it’s a busy day for data, highlighted by the release of those flash March PMIs in Europe and the US. The BoE monetary policy meeting outcome is the other big highlight. Other notable data releases include March confidence indicators in France, the January current account balance reading for the Euro area, Germany’s IFO survey
for March, UK retail sales for February and weekly initial jobless claims, January FHFA house price index, February leading index and March Kansas City Fed PMI in the US. Late in the evening we’ll also get the February CPI report in Japan.  ECB speak will also be a focus with Lautenschlaeger and Nouy due to speak at separate events. German Chancellor  Merkel is also due to deliver a speech in parliament likely outlining her policy goals.

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 225,000, prior 226,000; Continuing Claims, est. 1.87m, prior 1.88m
• 9am: FHFA House Price Index MoM, est. 0.4%, prior 0.3%
• 9:45am: Bloomberg Economic Expectations, prior 54.5; Consumer Comfort, prior 56.2
• 9:45am: Markit US Manufacturing PMI, est. 55.5, prior 55.3
  • Markit US Services PMI, est. 56, prior 55.9
  • Markit US Composite PMI, prior 55.8
• 10am: Leading Index, est. 0.5%, prior 1.0%
• 11am: Kansas City Fed Manf. Activity, est. 17, prior 17

DB’s Jim Reid concludes the overnight wrap

Unsurprisingly, the big focus over the past 24 hours has been the Fed and to be honest, we’ve been left scratching our heads a little as how best to sum up the meeting. By the end of day the market was seemingly left feeling a little 
bit underwhelmed given that Treasury yields closed well off their highs and the Greenback tumbled by the most in nearly two months. However, it feels like that was perhaps just reflective of what were elevated hawkish expectations going into it as the message for us was one that while economic data for now is not necessarily strong enough to justify a faster hiking cycle this year, the Fed does appear to be a lot more upbeat further down the line.

 Indeed, that was reflected initially in the statement with the addition of the line “the economic outlook has strengthened in recent months”. The hotly anticipated dot plot projections revealed that the median for 2018 was left at a total of three rate hikes, however only just as it would have only taken one more voter below the median to have moved higher in order to shift the median to four. Further out, the median for 2019 is now at 2.9% which implies three rate hikes, an increase of one from December, while the 2020 median is now at 3.4% which is up from 3.1% in December.

Meanwhile the stronger outlook was reflected in the more optimistic median projections for growth, unemployment and inflation. Indeed, GDP has been revised up by two-tenths this year to 2.7% and by three-tenths in 2019 to 2.4% while unemployment was revised down one-tenth this year to 3.8% and down three-tenths next year to 3.6%. As for inflation, the median committee member still expects core inflation this year of 1.9% which was perhaps a small surprise given the data so far, however median readings for 2019 and 2020 were both lifted to 2.1% and a tenth more than previously expected. That’s interesting as it also implies that the Fed is willing to accept a slight overshoot which is something that Evans has emphasized with regards to the symmetry of the 2% target.

As for new Fed Chair Jerome Powell, well in golfing terms it felt like he struck it straight down the middle of the fairway. That’s to say that he largely gave away an impression of one of continuity under his new role as Chair, and an emphasis still on the Fed sticking with its gradual approach to tightening. In other words, he didn’t appear like he was willing to deviate off the well beaten path and into the rough. Indeed, his tone was fairly balanced while he sought to down play the importance of the median dot plots as well as adding “there is no sense in the data that we’re on the cusp of an acceleration in inflation”.

Overall, DB’s Peter Hooper noted that the FOMC statement and Powell’s inaugural press conference were close to his expectations, marking a shift in a hawkish direction relative to December, although perhaps slightly less so than he had anticipated given recent Fed rhetoric. More specifically, he thought Powell’s debut performance was strong and highlighted that the Committee is likely going to need to see evidence that wage and price inflation are picking up meaningfully before becoming concerned about significant overheating associated with the tightening labour market. For more details, refer to Peter’s note.

As for markets then, as we noted at the top US Treasuries ended the day lower in yield across the curve with the 2y, 10y and 30y down -4.0bps, -1.3bps and -1.1bps respectively. However, they were down anywhere from -3.6bps to  -5.1bps versus the intraday yield highs as the initial reaction was a spike higher, before that move was quickly reversed. Meanwhile the USD index closed -0.65% while equities also weakened and tumbled from their highs. The S&P 500 ended -0.18% after being up as much as +0.82% while there was similar price action for the Dow (-0.18%) and Nasdaq (-0.26%). In fairness early gains were helped by a rally for Oil (WTI +2.57%) while the ongoing alleged issues with users privacy at Facebook still seems unresolved so equity markets were certainly kept busy.

This morning, markets in Asia are a bit mixed with the Nikkei (+0.71%) and Kospi (+0.53%) up slightly while the Hang Seng (-0.49%), ASX 200 (-0.22%) and Shanghai Comp (-0.84%) are all down as we type. Treasuries have continued to firm with yields another basis point or so lower. News (Reuters) has emerged overnight that the US is a step closer to avoiding another government shutdown with the release of a $1.3tn spending draft bill to fund the government through September with more funds for border security, infrastructure and the military. The lower House may vote on the bill today, then followed by the Senate. Elsewhere, China’s PBOC has raised the rates it charges on reverse repo agreements by 5bps following the Fed’s rate hike, with the PBOC noting that the move is “in line with market expectations and a normal reaction the Fed’s rate hike”.

So, one central bank down and one to go with the Bank of England decision due out at 12pm GMT today. The consensus is for no change in policy while market pricing also assigns a low 16% probability of a hike. The bigger question is whether or not we see a more hawkish BoE centre in light of yesterday’s stronger than expected wages numbers. Indeed, pricing for a May hike is over 80% and our UK economists yesterday changed their view to a rate hike (from a hold) for two months’ time. Yesterday, weekly earnings were reported as rising one-tenth to +2.6% yoy in the three months to January, while the broader measure of earnings jumped to +2.8% yoy, beating consensus by two-tenths. In addition, yesterday we had the announcement that the NHS is lifting the pay cap on staff with a 6.5% salary increase agreed over three years.

Also on the cards today are the flash March PMIs from across the globe. This morning we’ve already had Japan’s manufacturing PMI which came in at 53.2 versus 54.1 last month. For Europe, the consensus expects a 0.3pt decline in the composite to 56.8 driven by a 0.5pt decline for the manufacturing print (to 58.1) and 0.2pt decline for the services reading to 56.0. Both Germany (-0.8pts to 59.8) and France (-0.4pts to 55.5) are expected to see declines in their manufacturing prints too. The US in the afternoon is expected to buck the trend with a 0.2pt increase expected at the manufacturing level.

Back to yesterday, unsurprisingly it was hard to keep the tariff debate fully out of the headlines. The WSJ reported that China is planning countermeasures against Trump’s tariffs with US agriculture exports on the list. Reuters headlines in the afternoon also suggested that the White House will today make its announcement over China intellectual-property violations with suggestions it will be around $50bn of tariffs, however more significant is that there may also be investment restrictions based on Lighthizer’s comments. So that will no doubt be a focus for markets today too.

With regards to the remaining data yesterday, in the US, the Q4 current account deficit was slightly wider than expected at -$128.2bln (vs. -$125bln expected) or 2.6% of GDP. February existing home sales rebounded +3.0% mom to 5.54m (vs. 5.40m expected) while the median sales price rose +5.9% yoy. The inventory of available properties fell -8.1% yoy to 1.59m, the lowest for February since 1999. In the UK, the January unemployment rate edged back down to its 43-year low of 4.3% (vs. 4.4% expected). Also in the UK, February public sector net borrowing (ex-banking groups) was £1.3bln (vs. £1.8bln expected), while the March CBI trends total orders index fell 6pts mom to +4 (vs. +8 expected) – the lowest since October.

Looking at the day ahead, EU leaders will today meet in Brussels to sign off on Brexit guidelines (continuing through to Friday). Meanwhile it’s a busy day for data, highlighted by the release of those flash March PMIs in Europe and the US. The BoE monetary policy meeting outcome is the other big highlight. Other notable data releases include March confidence indicators in France, the January current account balance reading for the Euro area, Germany’s IFO survey
for March, UK retail sales for February and weekly initial jobless claims, January FHFA house price index, February leading index and March Kansas City Fed PMI in the US. Late in the evening we’ll also get the February CPI report in Japan.  ECB speak will also be a focus with Lautenschlaeger and Nouy due to speak at separate events. German Chancellor  Merkel is also due to deliver a speech in parliament likely outlining her policy goals.

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Submitted by Bill Blain of Mint Partners

Blain’s Morning Porridge – March 22nd 2018

“Gybe: To shift suddenly and forcibly from one side to the other..”

Headwinds have become tailwinds, and Jay Powell opens his tenure at the FED by upgrading the outlook for the US Economy.

As a keen sailor, I have more than a passing interest in from where the wind is blowing. There are a number of things to bear in mind about tailwinds; i) they get you where you expect to go faster – meaning we shouldn’t neglect thinking about how this Goldilocks recovery ends.

And, ii) sailing downwind (ie tailwinds) can prove the most dangerous point of sail – things can go from smooth and stable to disaster in frighteningly short moments as a result of a sudden windshift causing a crash-gybe to flick the crew into the water, or the mast to come tumbling down. I’ve attached a photo showing just how bad tailwind sailing can go….

The Fed’s message was simple: stronger growth, lower but stable full employment, modestly rising inflation, and rates set to double to double to 3.4% in 2020. Three, maybe four hikes this year, but three next year…. It should not have come as much of a surprise to the market. Some of the news reports say it was “Aggressive”, but what I heard was a dovish “middle-ground” back-loading of further tightening – further hikes to follow if justified. They are not slamming on the breaks, but gently brushing the pedals. Powell summed it up nicely: “The economy is healthier than it has been since before the crisis…”

Cynics might ask which particular crisis?

The world is an increasingly volatile place – a blusterous conflabulation of sentiment, facts, hopes and expectations that tends to spin very differently to Central Bankers scripts.

Perhaps its a modern update Chinese curse, but we live in “unconventional” times – while the Fed is considering tightening policy, the government is looking to Spend, Spend, Spend. We should be keeping a tight eye on employment – with the economy already looking inside NAIRU – how will tax-cuts and fiscal spending impact already tight labour costs? Meanwhile, what about the global economy? What about Populism? Or geopolitics and the threats of a trade-war with China? What about so many other unforseen things…. As we charge downhill with the spinnaker flying, just how stable is that mast?

Next on my worry list this morning is Facebook.

I was out with someone who knows about this kind of stuff – my 23 year old son Jack who is making a career for himself in advertising (and directing music videos in his spare time!). He explained it’s not just Cambridge Analytica that’s been exploiting Facebook and other social media sites through deep diving apps that amuse us with puppy pics, while measuring and tailoring product and messages to our desires and weaknesses.. Its happening across the board – it’s a dimly understood marketing revolution. We just don’t realise how social media users aren’t customers – we’re the product! It was a light-bulb moment…

Almost as revealing as Mark Zuckerberg’s dollar-late appearance last night on CNN. What struck me is that he has as little idea as the rest of us what a monster Facebook has become. Sure, he took responsibility – but does he actually understand what for?

You can’t uninvent stuff – but last night I deep dived my social media pages, changed all the options, put in new passwords and wonder just what a mess we’ve created.

Back in the real world – or is it?

Some interesting thoughts on alternative assets yesterday. According to some US research, global investors now hold around 25% of their total assets – accounting to some $7 trillion – in the form of Alternatives – ie things that aren’t “financial assets” such as stocks and shares. We’re very aware that assets like property tend to yield significantly more than financial assets – properly reflecting their lesser liquidity, but also how stocks and bonds have tightened and become inflated as a result of QE policies.

I was reading stuff about how much investors should demand for illiquidity – a base guess being a 1% spread over the risk free rate if you are locked into an illiquid alternative asset for one year rising to 6% for 10-yrs plus. Others say managers should be earning at least a 3% illiquidity premium on illiquid alternatives to justify themselves.

The trick is finding the right people to manage alternatives – for instance a global aircraft leasing firm or a firm with a fleet of ships under management, with all the technical and professional management skills to understand why planes fly and ships float, while also making sure they are working hard to earn a return. Or guys who understand the intricacies of private equity. There aren’t that many conventional bond/equity long/short portfolio managers who’ve got a breeze of an idea on which particular renewable energy projects beats the rest – but there are specialists who do. One approach is to find the right experts to invest on fund’s behalf – and we’ve got such managers we recommend.

That said, the research note yesterday made the case that many investors are utterly unprepared for illiquidity risks of alternative / illiquid assets. While the best case is to plan and hold illiquid alternatives through to maturity, its equally important to plan for need – have a plan to sell if you have to.

That said, I think I’ll stick with my 2018 investment strategy: buy assets correlated to global growth, and avoid correlation with inflated liquid assets.

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Authored by Robbie Travers via The Gatestone Institute,

“Free speech can’t just apply to those you agree with,” the editor of Spiked Online, Brendan O’Neill, once said. Politically correct speech does not need protecting. The United States’ First Amendment exists precisely to protect the minority from the majority and to protect unpopular opinions from those who would silence them.

On March 2, French prosecutors decided that Marine Le Pen should be prosecuted  for drawing attention on Twitter to the atrocities committed by Islamic State. They apparently decided that Le Pen’s message, even if factually correct, should not be heard.

Le Pen’s “crime,” the prosecutors allege, is that in a series of tweets, she posted disturbing images of victims of Islamic State, thereby exposing the crimes against humanity that group have been committing in the Levant.

Presumably, these were potential dangers about which she thought the public should be aware. They included the beheading of the British journalist, James Foley, who was repeatedly beaten, starved, and waterboarded before his throat was slit.

Other tweets documented a Jordanian fighter pilot, Moaz al-Kasasbeh, in a cage, being burned alive, and a tank crushing a Syrian army soldier. These crimes, however, are those of Islamic State, not Marine Le Pen.

Her most objectionable crime, apparently, was to have distributed a picture of Foley’s decapitated corpse with the tweet, “Daesh is THIS!”

It would be hard to disagree. Even Islamic State does not deny that these events took place. On, the contrary, it broadcast them globally. Le Pen was merely informing people, in the most striking way she could, that Islamic State is a murderous organisation that continues to slaughter innocents. She is issuing a warning.

Marine Le Pen did not suggest that all Muslims are terrorists. She did not suggest that anyone should use violence against Muslims. She did not even suggest that French people should take action against Islam.

She did not stage or misrepresent the facts. She did not share material that was doctored or false. Someone might suggest that perhaps she was attacking Islam or Muslim attitudes by distributing pictures of its activities. Even so, why should that be grounds for silencing her, prosecuting her, for stripping her of immunity, conceivably imprisoning her for three years and fining her €75,000?

Marine Le Pen. (Photo by Thierry Chesnot/Getty Images)

Why should Le Pen — or anyone — not be able to criticise or inform the public about Islamic extremism — or anything for that matter? One would think it especially important for a politician, who is responsible for the welfare of the public, to advise it of potential threats. What, for instance, if people had not been allowed to warn people about Communism? How convenient for Communists that would have been!

In addition, what are people to do who may not have the resources to fight the bottomless war chests of the French Government? How are they ever to speak out without fear of legal retribution? Or is the real, secret, goal of the state to have no one who disagrees with it speak out?

One might object to publishing a picture of a decapitated body on the grounds of good taste, or that it would be painful for Foley’s family to see. But should that be the reason for someone to face an exorbitant fine, crushing court costs, and a possible jail term? Le Pen was merely highlighting the crimes of a terrorist organisation that has already attacked France, and murdered hundreds on French streets.

Imprisoning politicians is, of course, a tidy way for a state to silence those who disagree with it. The former USSR under the KGB, and Germany’s STASI, doubtless assumed it was simply a professional perk. Russian President Vladimir Putin, in fact, just guaranteed that in upcoming elections, his leading challenger, Alexey Navalney, will be unable to run. President Recep Tayyip Erdogan of Turkey seems to find arresting anyone who disagrees with him a favourite pastime, with more than 113,000 – including possibly 150 journalists. Is this the model Western democracies would like?

Le Pen’s message was clear: Islamic State’s practices and the ideology of extremist Muslims must not come to Europe.

Unfortunately, they already have. Since the attack on the French satirical magazine Charlie Hebdo, in January 2015, the Islamic State and its affiliates have murdered more than 247 individuals. For how long can France afford to keep its head in the sand?

Le Pen, in what increasingly looks like an empty attempt to silence her, appears to be trapped in a politically motivated prosecution. The charge states that Le Pen is allegedly guilty of: “Violent messages that incite terrorism or pornography or seriously harm human dignity.”

Regardless of your stance on the politics of Marine Le Pen, to say that she is aiming to “incite terrorism” has no basis. On the contrary, Le Pen has been virtually the only politician in France consistently raising difficult questions on how to fight terrorism. She has suggested that France must reinstate border checks to “counter terrorism.” She has repeatedly said that politicians who do not stand their ground in seeing Islamism with clear eyes are failing to stand up for their country. She notes, “I’m on the ground to meet the French people to draw their attention to important subjects, including Islamist terrorism to which the least we can say Mr Macron is weak on.”

As to the second element of the charge against her, if the actions of Islamic State are indecent, evil or pornographic, this does not mean that alerting people to them is — any more than 18th century drawings informing people about the mass beheadings during the French Revolution, or Hitler’s atrocities during the Second World War. Not to inform the public about them could justifiably be viewed a dereliction of duty and reckless endangerment.

As to the claim that Le Pen’s tweets “harm human dignity,” they do not; Islamic State does. It is important for Europeans to know about these Islamic-inspired atrocities before they start “coming soon to a theatre near you”, as they have already been doing.

Tellingly, the prosecution of Le Pen has come at a time when the establishment has seen the public increasingly support politicians who question the taboo subject of mass migration and its threat to Europe — opinions that until now have been considered dangerous and “racist”. One can see the electoral successes of Chancellor Sebastian Kurz in Austria; Geert Wilders and his Freedom Party in the Netherlands; the AfD party in Germany and the Five Star Movement in Italy. Incumbent politicians must be terrified.

In this new trend of censorship by prosecution – as in the similar political trials of Geert Wilders, or the increasingly severe government censorship in Germany — mainstream politicians appear desperate to hold onto their jobs.

German Chancellor Angela Merkel, for instance, this week finally had to accept  that “there are no-go zones in Germany”. For years, politicians scorned the idea that such areas exist. Counterterrorism experts, however, such as Steven Emersonand policy analysts such as Soeren Kern, as well as many others, have been warning the public about them since 2015.

In Paris, alone, there are many no-go-zones, complete with an app on how to avoid them, despite the denial of its Mayor. Bordeaux, Toulouse, Marseille, Grenoble, Avignon also face similar social problems.

Marine Le Pen should not be prosecuted for alerting the French citizens to the dangers of an organisation that still threatens to invade their capital and murdertheir children.

France may lock up Le Pen for warning Europe about Islamism, but all that would accomplish is to imprison someone for telling the truth, and to endanger the public even further.

If the opposition wish to defeat Le Pen, they are free to argue against her policies.

Otherwise one can only conclude that their objections are nothing more than playing politics.

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US tech firms will no longer be able to choose the destination with the lowest tax rate for their European headquarters, if a widely expected European Commission proposal is approved. Beginning Wednesday, the European Commission has proposed new tax rules that would require US tech firms to pay taxes in the countries or regions where they generate value – not just where their headquarters are located, according to the Wall Street Journal.

Per Bloomberg, firms including Alphabet Inc., Twitter Inc. and Facebook Inc. could face a 3% tax on gross revenue gleaned from users in a given region.

EU officials have been ratcheting up the pressure on US tech giants over the past few years. Late last year, EU Competition Commissioner Margrethe Vestager slapped Amazon with a 250 million euro fine after ruling that Luxembourg, where Amazon’s European headquarters is based, failed to tax the company on three-quarters of its revenue, in accordance with state-aid rules. A year earlier, Vestager scored another victory, this time against Apple, by accusing Ireland of under-taxing the consumer electronics maker.

US Treasury Secretary Steven Mnuchin has warned European leaders that the US “firmly opposes” legislative proposals that target digital companies, though he didn’t specifically name the EU.

“Imposing new and redundant tax burdens would inhibit growth and ultimately harm workers and consumers,” Mnuchin said.

According to WSJ, officials had debated postponing the proposals so as not to appear like they were meant in retaliation. Officials clarified that the rules are meant to target all tech companies, though the provisions of the proposals suggest US tech firms are likely to be the worst hit.

EU tax chief Pierre Moscovici told reporters in Brussels on Wednesday that the proposed levy wasn’t aimed at the U.S. nor was it meant to target specific nations or companies.

“Digitalization brings countless benefits and opportunities. But it also requires adjustments to our traditional rules and systems,” said European Commission Vice President Valdis Dombrovskis, who leads financial-services policy work at the EU. “The amount of profits currently going untaxed is unacceptable.”

As BBG explains, the new taxes will apply to sales where users play a major role in value creation. It would also cover services provided by multi-sided digital platforms, which let users find and interact with each other and where users supply goods and services directly to each other. The levy would be charged annually and at a single rate across the EU of 3 percent, a level which would yield around 5 billion euros ($6.1 billion) a year. Companies affected by these new rules would meet one of three criteria: Having more than 7 million euros in annual revenues from digital services in a given country; having more than 100,000 users per year in that country; or having more than 3,000 business contracts for digital services created in a year in that country.

In addition, the law would only apply to companies earning more than 750 million euros ($918 million) in global revenue.

On average, the EU estimates that tech companies pay around 9.5% in tax on their profit on the continent, compared with 23.2% for traditional industries, though tech lobbyists dispute that figure.

Taxes will apply even if a firm doesn’t have a physical presence in the region where the taxes are being levied – the only thing that matters is where the “value” from its revenues was created.

If passed, the proposal will function as a stopgap until the Commission can create a broader framework that would empower member countries to levy their own taxes. The proposal will need unanimous consent from all 28 EU member states before it can become law. So one country alone could block it.

Other countries have argued that discussions and decisions on this issue should be tackled at a global level and with the help of the Organization for Economic Cooperation and Development, a group that advises its 35 members on tax policy, per BBG

Smaller countries (many of which are tax havens) complained that the new rules would disadvantage them and favor larger states.

Furthermore, online media, streaming services like Netflix, online gaming, cloud computing or IT services would instead be exempt from the tax, Reuters reported.

‘How to tax digital companies’ is destined to be one of the most fraught elements of figuring out how best to regulate the digital economy… all of which plays into George Soros’ master plan from Davos.

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Authored by Ashoka Mody via VoxEU.org,

Two European elections – in Germany on 24 September 2017 and Italy on 4 March 2018 – warn that the peoples of Europe are drifting apart. Much of the recent deepening of these divisions can be traced to Europe’s single currency, the euro. This column argues that the political divide in Europe may now be hard to roll back absent a shift in focus to national priorities that pay urgent attention to the needs of those being left behind.

The University of Cambridge economist Nicholas Kaldor was first to warn that the euro would divide Europe (reprinted in Kaldor 1978). His critique came in March 1971 as a response to the Werner Commission Report, which presented the original blueprint of what would eventually be the euro area’s architecture (Werner 1970). Kaldor wrote that a single monetary policy (and the accompanying one-size-fits-all fiscal policy framework), when applied to diverse European countries, would cause their economies to diverge from one another. The logic was simple: a monetary policy that is too tight for one country can be too loose for another. The economic divergence, Kaldor said, would cause a political rift. Such warnings continued. The University of Chicago economist and Nobel laureate Milton Friedman (1997) predicted that the euro’s flawed economics would “exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues”.

European leaders dismissed such naysayers. They insisted that the single currency would bring Europeans closer into a political union (Sutherland 1997).

A permissive consensus?

The discourse on the possibility of political union in Europe was conducted mainly within a group of so-called elites. These elites – political leaders and bureaucrats – had little basis to presume that national interests could be reconciled to unify Europe. But they made the further assumption that they had a “permissive consensus” from the public to make far-reaching decisions on European matters (Mair 2013). As I argue in a forthcoming book (Mody 2018), the permissive consensus began to break down about the time the single European currency became a political reality. Following the signing of the Maastricht Treaty in February 1992, the Danish public rejected the single currency in a referendum held in June 1992. And in September 1992, the French public came within a whisker of rejecting the single currency.

The voting pattern in the French referendum eerily foreshadowed recent political protests. Those who voted against the single currency tended to have low incomes and limited education, they lived in areas that were turning into industrial wastelands, they worked in insecure jobs, and, for all these reasons, they were deeply worried about the future (Mody 2018: 101–103). By voting against the Maastricht Treaty, they were not necessarily expressing an anti-European sentiment; rather, they were demanding that French policymakers pay more attention to domestic problems, which European institutions and policies could not solve.

Over the following years, the permissive consensus continued to fray. The popular voice against ‘more Europe’ expressed itself again in referendums on a European Constitutional Treaty in 2005. Referendums allowed focus on European issues, which were crowded out by domestic priorities in national elections. European elites found it easy to dismiss the referendums as aberrations.

A critical new phase began during the financial crises of the past decade. After the onset of the Global Crisis in 2007 and then through the protracted euro area crisis, euro area monetary and fiscal policies hurt the lives of ordinary people who felt left behind – the less educated and those living outside of metropolitan cities. Euro area policies, however, remained insulated from political accountability to those whose prospects they most severely damaged. As a consequence, domestic rebellions gathered force throughout the euro area. These rebellions originated among similar people in the various member states, but they resulted in opposing national public responses in the northern and southern countries, increasing the political divide.

The rise of Alternative für Deutschland in Germany

The most virulent form of political division emerged in the crucible of the euro area financial crisis in 2012. The permissive consensus finally broke down. In Germany, long-time members of Chancellor Angela Merkel’s Christian Democratic Union (CDU) formed a new political movement, Electoral Alternative, in September 2012. This new movement represented those who refused to accept Merkel’s claim that Germany had no alternative but to support financially troubled euro area nations. In February 2013, Electoral Alternative converted itself into a political party, Alternative für Deutschland (AfD), which called for a breakup of the euro area.

Although AfD missed the threshold of 5% of votes cast for the September 2013 election to the Bundestag, it gained political strength starting in August 2015, following Merkel’s open door to Syrian refugees. Seeing that she was losing popular support, Merkel quickly clamped down on refugee and migrant inflows, but AfD continued to gain political strength. In the September 2017 election, AfD received 12.6% of the vote. Many who voted for AfD in 2017 had not cast a vote in 2013, having lost faith that they have a voice in the democratic process. In 2017, these voters looked for solutions outside of the political mainstream. AfD voters had one very specific German feature: many were East Germans. Aside from that, however, the AfD vote manifested a pattern observed elsewhere in Europe and in the US. In East and West Germany, low-income men with only ‘basic’ school education or vocational training voted in large numbers for AfD (Roth and Wolff 2017). Most AfD voters were between the ages of 30 and 59; they worked in blue-collar jobs, often with little job security. They lived in small cities and rural areas.

Thus, economic protest and anti-immigrant sentiment overlapped in AfD voters, an overlap that Guiso et al. (2017: 5) find for several European countries. Even prosperous Germany had left behind many of its citizens. Marcel Fratzscher, president of the research institute DIW Berlin, explains in his forthcoming book that the country’s economic gains in the past few decades have not percolated to the bottom half of the German population (Fratzscher 2018). In this bottom half, real incomes have barely grown; few are able to save for a rainy day. Political alienation and conflict within society have increased.

With the CDU and the Social Democrats having experienced historic setbacks, a governing coalition proved difficult to form and Germany remained without a government for an unprecedented five months. Recently – coincidentally, on the same day as the Italian election, 4 March 2018 – the CDU and the Social Democrats finally agreed to form a ‘grand coalition’. A German government will soon be in place, but polling data show continuing decline in popular support for the CDU and especially for the Social Democrats. AfD will be the largest opposition party in the Bundestag, and, for now, its support in the polls is rising.

The anti-Europe movement in Italy

Italian developments moved in parallel. Italy’s Five Star Movement, headed by the comedian-blogger Giuseppe “Beppe” Grillo, rose from relative obscurity to prominence in the February 2013 election, garnering 25% of the vote. Italy had been in near-perpetual recession since early 2011, with mounting job losses, especially among young Italians. The Five Star Movement’s call for direct democracy resonated with voters frustrated with European monetary and fiscal policies, which profoundly affected their lives but which they felt powerless to influence. The poorer southern areas voted for Five Star candidates. But whether in the north or the south, the share of votes received by Five Star candidates was higher in regions of higher unemployment (Romei 2018).

For Italians, indignities during the crisis years had come on top of economic stagnation since Italy entered the euro area in 1999. Economic productivity – the source of higher standards of living – stopped increasing, Italian producers lost international competitiveness, and well-paying manufacturing jobs began to disappear with nothing commensurate to replace them. The financial crises – first the Global Crisis that started in July 2007 and then the continuing euro area crisis – compounded Italy’s economic and political dysfunction. Euro area authorities’ emphasis on tight monetary policy and unrelenting austerity depressed economic growth and therefore had the perverse consequence of increasing the government’s debt burden. Meanwhile, the enforced fiscal austerity crowded out the government’s ability to cushion the economic pain of vulnerable citizens. And although ECB President Mario Draghi’s announcement in July 2012 that the ECB would do “whatever it takes” to save the euro area helped bring down the nominal interest rate the Italian government paid on its debts, the ‘real’ interest rate (the nominal rate adjusted for inflation) remained high. The Italian economic squeeze continued. In early 2013, the average Italian was poorer than at the time of entry into the euro area.

In the February 2013 election, Grillo campaigned on an anti-European platform, even promising to hold a referendum on whether Italy should remain in the currency union. Mario Monti, the outgoing prime minister, appointed to head an interim ‘technocratic’ government in November 2011, campaigned as a pro-European and received an electoral drubbing. Pier Luigi Bersani, head of the center-left Partito Democratic (PD), also promised a pro-European Italian government, and his party received 29% of the votes, down from 38% in the 2008 election.

Although the PD did manage to lead a coalition government, it ran through two prime ministers – Enrico Letta and Matteo Renzi – before settling on Paolo Gentiloni. The damage was done. The jockeying for power within the PD, much of it instigated by Renzi, eroded the party’s reputation and public standing. In the March 2018 election, the PD received 19% of the votes cast. In contrast, the Five Star Movement increased its vote share to 32%. The anti-Europe parties altogether received about half the votes; if former Prime Minister Silvio Berlusconi’s Forza Italia, with its softer European-skepticism, is added, nearly two-thirds of all Italians distanced themselves from Europe in the latest election.

Thus, in Germany, AfD has attracted economically anxious Germans worried that the German government is doing too much for Europe. In Italy, the Five Star Movement has gained because anxious Italians are angry that the European governance system disadvantages, and even damages, their futures. Despite the continued decline in nominal interest rates under the ECB’s quantitative easing programme since January 2015, the real interest rate for Italians remains higher than 1%; in contrast, the real interest rate for Germans is –1%, which gives German producers and consumers greater ability to spend and grow. The single monetary policy continues to feed the economic divergence between northern and southern member states, which sustains and amplifies the political divisions.

Today many hope that, spurred by French President Emmanuel Macron’s call for euro area reform, Merkel will work on repairing the euro area’s architecture. Such a hope is illusory. Merkel is all too aware that any sign of financial generosity toward Europe will embolden the rebels within the CDU. Other northern nations have made clear that they will oppose calls on their taxpayers (Rutte 2018, Finance Ministers 2018). No euro area nation state is willing to cede its national parliament’s sovereignty on fiscal matters. Policy decisions will remain disengaged from politics. Hence, even if new financial arrangements are engineered, it will be impossible to achieve accountability in euro area governance. Political tensions will continue to build.

Concluding remarks

There are no easy answers to Europe’s economic and political woes. For this reason, as I argue in my forthcoming book, the answers will not be found in ‘more Europe’. For too long, euro area leaders have dismissed or denigrated the domestic public rebellions. This is a terrible mistake. However inchoate, and sometimes nationalistic and xenophobic, these rebellions have been, they convey an important message. In addition to the distress the euro directly inflicts, the single currency distracts European leaders’ attention from where it ought to be directed: domestic priorities. Of special importance is strengthening human capital, a capability in which all southern euro area countries (and even some northern countries) are lagging behind world leaders. Investment in human capital is crucial to achieving greater equity and sense of fairness while helping to regain international competitiveness.

Put simply, European leaders must shift their efforts away from the ultimately impossible goal of making euro area governance more accountable and towards national domestic economic agendas that give hope to those who feel disenfranchised. If they fail to make this shift, domestic politics will continue to fragment, and as that happens, European politics will become ever more corrosive.

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As previewed overnight, the U.S. State Department is warning European corporations that they will likely face penalties if they participate in the construction of Russia’s Nord Stream 2 gas pipeline, on the grounds that “the project undermines energy security in Europe“, when in reality Russia has for decades been a quasi-monopolist on European energy supplies and thus has unprecedented leverage over European politics, at least behind the scenes.

“As many people know, we oppose the Nord Stream 2 project, the US government does,” said State Department spokeswoman, Heather Nauert at a Tuesday press briefing. “We believe that the Nord Stream 2 project would undermine Europe’s overall energy security and stability. It would provide Russia [with] another tool to pressure European countries, especially countries such as Ukraine.”

And speaking of Ukraine, recall that in 2014, shortly after the US State Department facilitated the presidential coup in Ukraine, Joe Biden’s son Hunter joined the board of directors of Burisma, Ukraine’s largest oil and gas company. Surely that was merely a coincidence.

The project which began in 2015 is a joint venture between Russia’s Gazprom and European partners, including German Uniper, Austria’s OMV, France’s Engie, Wintershall and the British-Dutch multinational Royal Dutch Shell. The pipeline is set to run from Russia to Germany under the Baltic Sea – doubling the existing pipeline’s capacity of 55 cubic meters per year. 

Nauert said that Washington may introduce punitive measures against participants in the pipeline project – which could be implemented using a provision in the Countering America’s Adversaries Through Sanctions Act (CAATSA).

“At the State Department, we have spent a lot of time speaking with our partners and allies overseas to explain to them the ramifications of CAATSA and how an individual or a company or a country can run afoul against CAATSA and fall into sanctions,” Nauert said. “We don’t tend to comment on sanctions actions but we’ve been clear that firm steps against the Russian energy export pipeline sector could – if they engage in that kind of business – they could expose themselves to sanctions under CAATSA.” 

Several EU nations, particularly Germany, have repeatedly expressed interest in participating in Nord Stream 2, however the pipeline has been opposed by several minor bloc nations, including Poland, Latvia, Lithuania, Romania and Hungary. Ukrainian authorities are also staunchly against the project, as it bypasses Ukraine and would impact them monetarily. 

Of note, CAATSA – approved last Summer, was recently used by the U.S. Treasury Department to impose penalties against 19 Russian individuals and five Russian entities, including Russia’s Federal Security Service and the Main Intelligence Directorate (GRU) for their alleged interference in the 2016 U.S. presidential race. 

***

As Alex Gorka of the Strategic Culture Foundation wrote, on March 15, a bipartisan group of 39 senators led by John Barrasso (R-WY) sent a letter to the Treasury Department. 

They oppose NS2 and are calling on the administration to bury it. Why? They don’t want Russia to be in a position to influence Europe, which would be “detrimental,” as they put it. Their preferred tool to implement this obstructionist policy is the use of sanctions. Thirty-nine out of 100 is a number no president can ignore. Powerful pressure is being put on the administration. Even before the senators wrote their letter, Kurt Volker, the US envoy to Ukraine, had claimed that NS2 was a purely political, not commercial, project.

No doubt other steps to ratchet up the pressure on Europe will follow.

via RSS http://ift.tt/2pAaetY Tyler Durden

Authored by Margarita Simonyan, editor-in-chief of RT TV channel and MIA “Russia today” via RIA.ru,

Translated by Scott via The Saker blog,

Essentially, the West should be horrified not because 76% of Russians voted for Putin, but because this elections have demonstrated that 95% of Russia’s population supports conservative-patriotic, communist and nationalist ideas. That means that liberal ideas are barely surviving among measly 5% of population.

And that’s your fault, my Western friends. It was you who pushed us into “Russians never surrender” mode.

I’ve been telling you for a long time to find normal advisers on Russia.

Sack all those parasites.

With their short-sighted sanctions, heartless humiliation of our athletes (including athletes with disabilities ), with their “skripals” and ostentatious disregard of the most basic liberal values, like a presumption of innocence, that they manage to hypocritically combined with forcible imposition of ultra-liberal ideas in their own countries, their epileptic mass hysteria, causing in a healthy person a sigh of relief that he lives  in Russia, and not in Hollywood, with their post-electoral mess in the United States, in Germany, and in the Brexit-zone; with their attacks on RT, which they cannot forgive for taking advantage of the freedom of speech and showing to the world how to use it, and it turned out that the freedom of speech never was intended to be used for good, but was invented as an object of beauty, like some sort of crystal mop that shines from afar, but is not suitable to clean your stables, with all your injustice and cruelty, inquisitorial hypocrisy and lies you forced us to stop respecting you. You and your so called “values.”

We don’t want to live like you live, anymore. For fifty years, secretly and openly, we wanted to live like you, but not any longer.

We have no more respect for you, and for those amongst us that you support, and for all those people who support you.

That’s how this 5% came to be.

For that you only have yourself to blame. And also your Western politicians and analysts, newsmakers and scouts.

Our people are capable to forgive a lot. But we don’t forgive arrogance, and no normal nation would.

Your only remaining Empire would be wise to learn history of its allies, all of them are former empires. To learn the ways they lost  their empires. Only because of their arrogance.

White man’s burden, my ass (in English in the original text – trans.)

But the only Empire, you have left, ignores history, it doesn’t teach it and refuses to learn it,  meaning that it all will end the way it always does, in such cases.

In meantime, you’ve pushed us to rally around your enemy. Immediately, after you declared him an enemy, we united around him.

Before, he was just our President, who could be reelected. Now, he has become our Leader. We won’t let you change this.  And it was you, who created this situation.

It was you who imposed an opposition between patriotism and liberalism. Although, they shouldn’t be mutually exclusive notions. This false dilemma, created by you, made us to chose patriotism.

Even though, many of us are really liberals, myself included.

Get cleaned up, now. You don’t have much time left.

via RSS http://ift.tt/2IHVxNS Tyler Durden