Rabobank: Biden’s Pardon Risks Further Erosion Of Confidence In The US Government

By Benjamin Picton, Senior Macro Strategist at Rabobank

Pardon?

US stocks rose in shortened trading on Friday, with both the Dow and the S&P500 closing at fresh record highs. Consequently, November marked the best month of the year for the S&P500 as the index finished 5.73% higher, beating February’s 5.17% rise into the silver medal position.

European stocks also rose with the CAC40 up 0.78% and the German DAX up 1.03%. Confidence in Europe was buoyed slightly by a commitment from Marine Le Pen that she wouldn’t bring down Michel Barnier’s government before the weekend over deep disagreements on Barnier’s budget. Despite the stay of execution, the two sides appear to have irreconcilable views over social spending, and its hard to see a situation where Le Pen’s National Rally allows Barnier’s more neoliberal administration to survive into the new year.

Yields on 10-year OATs fell by ~5bps on Friday and French bonds underperformed German Bunds as November CPI data showed a quicker pace of disinflation in France. Nevertheless, the political instability has taken a toll on French borrowing costs as illustrated by outperformance of Greek 10-year bonds on the day and the parity between Greek and French yields (!). Bloomberg reports that some French corporates are now experiencing lower borrowing costs than the national government.

Meanwhile, over in Germany the far-right AfD published a draft policy platform outlining plans to campaign on policies to leave the EU, the Paris Climate Accord and the Euro if the party is successful in forming government at the early election expected in February. The draft policy platform also includes proposals to roll back economic sanctions on Russia and recommission the Nord Stream natural gas pipelines, but still needs to be voted on by AfD members in mid-January. The draft platform marks a break from the manifesto published ahead of EU parliament elections in June, which did not include a firm commitment to take Germany out of the EU.

USDJPY sank below the key 150 level on Friday as Tokyo CPI came in hotter than expected on both the headline and ex-fresh food measure. Even the ex-fresh food and energy measure was up 1-tick on the October reading, prompting a slight lift in futures implied probability of a rate hike at the BOJ’s policy meeting on December 19th. The OIS strip currently has a hike of 16.5bps priced in for the December meeting.

On the geopolitics front the swift dismantling of Hezbollah by Israel, and Russia’s preoccupation with its war on Ukraine appears to have come at great cost for Syria’s Bashar al-Assad. Rebel forces recaptured the country’s second largest city of Aleppo as regime troops were left somewhat stranded by Russian, Iranian and Hezbollah allies and were consequently overwhelmed by the Turkish-backed rebels.

In a situation similar to Yemen, civil war has been raging in Syria for 13 years without attracting a great deal of mainstream interest in Western media. In the case of Yemen, that all changed once the civil war impacted upon freight transits through the Suez Canal, while in Syria the ongoing competition for spheres of influence by Great Powers (Russia, USA, China, Saudi Arabia, Turkey, Iran, Israel etc) provides a useful microcosm of the new global paradigm, but only if one cares to look.

Speaking of new paradigms, Australia’s governing Labor Party struck a deal with the left-wing Greens last week to push through proposed reforms of the RBA. The reforms will create a dual board structure at the central bank, splitting responsibility for monetary policy decisions off from the operational and governance oversight of the bank. Australia’s centre-right opposition parties dealt themselves out of negotiations with the government over the reforms due to fears that the government would use the restructure to “sack (fire) and stack” the monetary policy board with political appointments who might be inclined to cut interest rates ahead of the Federal election due by May next year.

The Greens have been vocal critics of the RBA’s tightening of monetary policy and had previously said that they would only support the government’s RBA reforms if the Treasurer invoked never-before-used powers that allow him to override monetary policy decisions. Treasurer Jim Chalmers had planned to abolish that power and another provision that grants the RBA power to direct bank lending activities. Both of those powers might be useful in a world of increased geopolitical competition where free trade is taking a back seat to state aims and industrial policy is becoming de rigeur again.

Finally, the Wall Street Journal is reporting that President Joe Biden has pardoned his son, Hunter Biden, for federal gun and tax charges despite earlier vows not to intervene. President Biden said that it was clear that Hunter had been “treated differently” by the Justice Department. While this news itself is not immediately market sensitive, Biden’s suggestion that Justice Department prosecutions have not been blind to political considerations in the case of Hunter Biden perhaps risks legitimising President Trump’s claims of unfair prosecution directed against him, and further erosion of confidence in the USA’s institutions of government.

That could certainly have long-term implications for borrowing costs, transmission of monetary policy and a host of other variables.