RaboBank: "It's Hard To Keep Up With All The Escalation"

Submitted by Michael Every of RaboBank

It’s hard to keep up with all the escalation.

Yesterday morning Asian time the worry was that the US was about to turn its fire on Chinese surveillance-camera maker Hikvision, which would obviously have proved damaging to that PLA-linked firm. Yesterday evening the US instead shifted its attention to the UK chip-designer ARM, who has now also stepped away from "all active contracts, support entitlements, and any pending engagements” with Huawei according to the BBC. While ARM is hardly a household name, industry specialists describe the impact of it complying with the ban on Huawei and affiliates, and any Chinese entity the US sees as a similar threat, as an “insurmountable obstacle.” In other words, it is a true business killer - and Bloomberg also reports Washington believes it is closer to persuading the EU to implement a ‘de facto’ ban on Huawei too, if not a formal one, and is leaning on South Korea to join the fight. Meanwhile, other Chinese firms are also rumoured to soon be subject to a US ban: Meggvil, Meiya Pico, and Iflytek – all tech/surveillance firms like Hikvision.

Ladies and gentlemen, the Tech Cold War has begun. Of course, there was no reaction from CNH this morning despite China’s industrial crème-de-la-crème about to be potentially defenestrated. But, as I keep stating, that underlines the whole problem.

The Fed minutes were of relatively little interest by comparison: as our own Philip Marey notes, many participants viewed the recent dip in the Fed’s preferred PCE inflation measure as likely to be transitory, and while the FOMC agrees on remaining on hold for some time, there was wide disagreement on the most likely direction of policy rates after the pause. A few participants think the Committee would likely need to tighten policy, but a few others observed that subdued inflation pointed to remaining slack and could lead to inflation expectations becoming anchored at low levels. In short, they don’t know: but Philip thinks the next change in Fed Funds will be a cut. In fact, he expects the threat of a recession will force the Fed to start a full-blown cutting cycle in 2020. Indeed, does a Cold War run alongside a hot economy? (Please see here for Philip’s full write-up on the minutes.)

In the UK yesterday’s headline ‘99 Lead Balloons’ was prophetic as Andrea Leadsom became the latest, and perhaps final, Tory minister to crash out of PM Theresa May’s Cabinet. It now seems that May has just days, and maybe even hours left in office, with suggestions that the backbench 1922 Committee is so infuriated with her that it has drawn up a technical argument for how it can temporarily suspend its own party rules to allow her to be dumped by the party earlier than December; this is allegedly being kept in a sealed envelope in the hope that she will quit tomorrow morning of her own volition after appalling defeat that the Tories are about to suffer in the EU elections. On which note, if polls are accurate this time(!) this Euro-Vision Wrong Contest is going to see the Brexit Party led by Nigel Farage --which has gained 100,000 members in just weeks-- win around 38% of the UK vote vs. perhaps as low as 7% for the Tories – the smallest vote share in their history, which is longer than many of the democracies voting across Europe. Labour is also going to fare badly, however, with the Lib-Dems reinventing themselves as the Remainers‘ choice, while newbies Change UK are only polling at 3%, below Tommy Robinson’s street-brawling skin-heads of UKIP. How many votes will GBP get afterwards?

A similar pattern is likely to be seen across the EU in parliamentary voting, where it will “douze points” for populists in many locations, and “nil points” for There-Is-No-Alternative Establishment parties. That kind of populism is a theme I dived into in detail earlier in the year in ‘The Age of Rage’ report: it’s been a long time coming. Indeed, as our Head of Rates Strategy Richard McGuire pointed out over a decade ago, the Eurovision song contest was perhaps one of the early flags for this populism when grotesque Finnish rock group Lordi won the competition back in 2006 with “Hard Rock Hallelujah". (Of course, the Americans got there first with G*W*A*R, but that’s another story, as well as being partly responsible for my tinnitus.)

Yet as the UK Telegraph’s Ambrose Evans-Pritchard notes sourly...

”The election of 170 part-time dilettantes from the eurosceptic Left and Right might shake up French or Italian politics. It will change absolutely nothing in the governing structure of the EU…The EU’s permanent machinery will reassert iron control once the noise has subsided. Few euro-rebels ever learn where the light switches are at the Espace Leopold in Brussels. They do not master procedure or lay siege to the powerful committees that ‘codecide’ – i.e., can veto or rewrite – 60% of new legislation descending on national parliaments. Their vocation is criticism.

Day-to-day matters are left to Team Germany and its satellites. This is not to make an anti-German point but simply to state a fact of European life. German MEPs are career legislators. Election is the path to a lifelong job. Protest movements barely scratch the surface of this regime. They take up their seats - and salaries - but their influence over daily governance is scarcely greater than Sinn Fein’s at Westminster. The game is symbolism. European elections are to promote the brand at home and gain fungible funding - if you can slip the money past the Strasbourg police or Questors.

Nigel Farage, France’s Marine Le Pen, and Italy’s Beppe Grillo, and Greece’s Syriza (before it was co-opted) all levered gains in the 2014 elections into uprisings of sorts in their own countries, but they did not deflect the EU juggernaut one inch from its rigid, imperial, integrationist course. Not even Brexit has done that. Au contraire. Perhaps it will be different this time. Matteo Salvini and Hungary’s Viktor Orban are not outsiders any more. They are in government. Yet as a grizzled, scarred veteran of EU trench warfare for almost thirty years, I remain deeply sceptical. My working premise is that nothing of substance will change unless or until Germany loses faith in the euro project or - much the same thing - Italy’s corrosive debt dynamics finally compel the Bundesbank to cut off Target2 support for the Bank of Italy. Winning elections is never quite enough in the European Union.”

It’s up to you if you find that reassuring or not --markets probably will-- but it also suggests we could have folded last Saturday’s camp shindig in Tel Aviv into this EU vote and not made an iota of difference to facts on the ground for the average European family. Nonetheless, populism can reach a point of praxis. In the background the US is breaking-up key Chinese firms and global supply-chains, and Hard Brexit would prompt the same thing for Europe: Lordi, Lord