“The fault, dear Brutus, lies not in our stars” says a character in Shakespeare “but in ourselves”. Events in early 2019 have raised hopes that several geopolitical crises might indeed not prove preordained, but be instead imperfectly resolvable.
1. The U.S. partial government shutdown could break records, but both sides may find themselves under pressure to end it.
The U.S. federal government’s partial shutdown could soon become the longest in U.S. history, with talks between the White House and the Congress yielding no progress so far. But a series of key deadlines will start to put increased pressure on both the President or the Democrats to a compromise, as we discuss on page 2. Approximately 800K federal workers will soon miss their first paycheck, then next month taxpayers will be uncertain if the IRS will be able to begin processing tax refunds as the standard protocol prohibits this. The economic fallout from a shutdown is also likely to increase, with stalled government contracts, further delays to economic data, and the combined income loss of furloughed salaries and delayed tax refunds potentially hitting consumption and thus growth.
2. Likewise, both U.S. and Chinese leaderships will have good reasons to show trade talks progress – despite underlying differences.
Moving from domestic to external U.S. policy, President Trump has been keen to make positive noises on U.S./China trade talks this week – as has the official Chinese commentary. We think that a detailed resolution of all the issues under discussion is all but impossible within the given 90-day deadline but, again, both sides will have good reasons to maintain forward progress. With Chinese growth likely decelerate this year, not helped by a cooling property market and weak private sector sentiment, China needs ways to support the export sector and boost corporate sentiment. On the U.S. side, growth is also expected to ease and the implications of a prolonged stand-off for the U.S. equity market may also be unwelcome. On page 5 we explain the areas in which some sort of Chinese compromise is possible: promises to buy more U.S. goods, opening up the Chinese financial sector, CNY stability and extending intellectual property rights protection.
3. Brexit discussions have entered a volatile period in the UK parliament, with the intended solution increasingly under fire.
Recent UK parliamentary debate appears to have made it less likely that the Brexit process will go down the path preordained by Prime Minister May: a vote scheduled for next Tuesday may well reject her deal and where we go from here remains unclear. On page 4, we look at why the market reaction to a likely prolongation of Brexit uncertainty has been muted so far. If Mrs. May is defeated, volatility will however increase in the three day window that she then has to present a "Plan B" to parliament. We will publish a CIO Insights Memo on the vote and its implications next week.
To download a PDF of the full report, please click here.