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by Brunello Rosa
19 July 2021
Last week, the countries belonging to the oil-producing cartel OPEC+ (the “+” refers to Russia and Kazakhstan, which are not in OPEC proper) decided to increase oil production by 400,000 barrels a day, in response to the surge in oil prices that has occurred in the past 15 months. In April 2020, oil prices turned negative for the first time in history, as storage costs soared in the middle of the first wave of the pandemic, when half of the world population was in lockdown. Since then, the price of Brent surged to $75pb, along the pick-up in economic activity in large parts of the global economy. OPEC+ also decided to increase the baseline production of oil in many countries, signalling that the cartel believes the recovery will continue and that higher production will be a persistent phenomenon, rather than a transitory one.
The increase in oil prices has led to a marked increase in headline inflation prints around the globe, sparking fears of incipient hyper-inflation, fears which are likely to be overblown. Most central banks have reacted calmly to the sudden rise in inflation prints, reassuring markets that policy rates will remain low for longer, and that short periods of moderately above-target inflation will be tolerated. This explains the fall in long-term yields observed in the US and elsewhere, which has puzzled investors.
While central banks have reassured markets that they will be tolerant against above-target inflation, they have also changed their policy frameworks to start addressing the impact of climate change on financially sensitive matters. The Bank of Japan has recently launched a “green-lending” scheme, set to last at least 10 years, in which banks receive central bank financing at zero per cent if those funds are lent to projects aimed at reducing the impact of climate change. The ECB has included the fight against climate change among the goals of its recently released strategy review. These moves follow the Bank of England’s seminal work on central banks and climate change, championed by former governor Mark Carney.
The inclusion of climate change among the goals of central banks, though it may seem esoteric, is justified by the risks potentially deriving from extreme climate events. Tragic examples have occurred in recent days, with the floods experienced in Germany and Belgium, which have claimed hundreds of victims and caused immense economic damage. The south of Italy has also recently been hit by storms resulting in flooding, though fortunately without causing any deaths thus far. These violent floods in the middle of the summer are extremely unusual, and scientists are saying they can only be explained by climate change (as the wildfires that ravaged Canada recently).
by Brunello Rosa
22 July 2021
by Brunello Rosa and Fawaz Sulaiman Al Mughrabi
16 July 2021
by Alessandro Magnoli Bocchi, Fawaz Sulaiman Al Mughrabi
30 June 2021
by Brunello Rosa and Karmen Meneses
14 July 2021
by Brunello Rosa and Karmen Meneses
6 July 2021
by Brunello Rosa and Karmen Meneses
24 June 2021
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by John Hulsman
13 July 2021
Introduction: China’s Crystal Clear Message
Say what you will about the CCP; its message may not be overly subtle but there is a blessed clarity about what it is trying to say. After spending literally years planning for the 100th anniversary of the party’s founding, Chinese President Xi Jinping did not disappoint in making his ‘state of the Chinese union’ speech one of the most striking of his career.
As is often the case regarding China analysis, the symbolism of the speech was part and parcel of the message. Standing at the Gate of Heavenly Peace in Tiananmen Square in Beijing, at precisely the spot where Mao proclaimed the People's Republic of China (PRC) in 1949, Xi was surrounded by hundreds of high-level party dignitaries, all wearing smart, dark business suits...while he alone was dressed in a grey Mao suit. Consciously harkening back to the founder of the PRC, it was abundantly clear that, having brazenly abolished Deng Xiaoping’s cautionary two-term limit for Chinese presidents, Xi intends to follow Mao’s example instead, both in terms of a far more authoritarian style of rule, as well as in a far more bellicose stance towards the rest of the world.
Acknowledging the reality that China is already a great power, Xi wants more, calling for the country “to be the world’s most powerful economy by 2049.” Superpower status is not enough for Xi; in his speech he was doing nothing less than resolutely calling for China to be the dominant force in the world in another generation.
Xi was also crystal clear on how Beijing is to get there, continuing to bolster its ‘Mandate of Heaven,’ —the two key pillars since Deng’s era undergirding the CCP’s present political legitimacy—capitalism and nationalism. Xi underlined China’s astounding economic rise, wherein following the ineptitude and chaos of the Cultural Revolution, Deng Xiaoping (from December 1978 on) set in motion the free-market forces that have vaulted China once again to the first rank of nations. He straightforwardly stated, “socialism with Chinese characteristics...raised the living standards of the (Chinese) people.”
Xi was equally clear about the CCP’s championing of Chinese nationalism. Regarding reunification with Taiwan, which Beijing still regards nonsensically as merely a renegade Chinese province, Xi was brutally blunt. Taking over Taiwan (a process the CCP has already managed in Tibet, Hong Kong, and Macau) amounts to ‘realizing China’s complete reunification is a historic mission and an unshakeable commitment of the Communist Party of China,’ and the CCP is more than willing to take ‘resolute action to utterly defeat any attempt toward Taiwanese independence... No one should underestimate the resolve (of China) to defend its territorial integrity.’ Xi’s hope is reunification can happen peacefully; with this speech he once again made it clear that it is the CCP’s view that it will happen, and soon, one way or another.
It was also made clear what will happen to anyone getting in the way of Xi’s program for China to dominate the world. As the President put it, the era of China being bullied (as in the humiliations of the nineteenth century) are ‘gone forever.’
Regarding what he sees as hypocritical western meddling and criticism over China’s repressive policies in both Hong Kong and its western Xinjiang Province, Xi is dismissive, “We will not accept sanctimonious preaching from those who feel that they have the right to lecture us.” Xi is saying nothing less here than that the old western-inspired global rules-based order has come to an end. There is a new sheriff in town; from now on China will largely determine global norms.
But how to accomplish Xi’s fabulously ambitious goal of making China the world’s dominant superpower within a generation? Much as was true for Imperial Japan in the early 1940s, China has three decidedly different strategic alternatives. For a militaristic Tokyo, endangered by a looming US oil embargo, the choices were: To double down on fighting in China to seize the whole of the country; Strike the resource-rich (and thinly defended) Dutch East Indies (today’s Indonesia); Obliterate the dangerous American fleet in Pearl Harbor, destroying American influence in the Pacific as a whole. The Japanese disastrously opted for Option 3, leading directly to their own ruin.
After the party, Xi’s CCP finds itself under pressure, with three distinct strategic options and under a time deadline as well, though its predicament is caused by nothing so much as the unmovable forces of geography. For all their obvious geo-economic, strategic, and political advantages, geography is hemming in Beijing’s efforts to dominate the East Asia at present, much less the Indo-Pacific.
China is stymied by being bottled up by ‘the first island chain’ that rings it. Running from Taiwan, through Japan and the Philippines, before ending at the Strait of Malacca in the south (around Indonesia, Singapore and Malaysia) China finds its commercial prospects under perpetual peril to blockade from the US and Japan to the north at the Strait of Taiwan, and to the US, Malaysia, Indonesia, Singapore and India to the south.
Breaking out of its naval and commercial geostrategic imprisonment at the hands of an organically growing US-led anti-Chinese coalition comprising the key states of the first island chain is the key strategic battleground of the incipient Sino-American Cold War. It is simply impossible for Beijing to become master of East Asia, let along the Indo-Pacific and then emerge as the world’s dominant superpower, without it doing so.
As was true for Imperial Japan, after the party, Xi’s China has three broad strategic options: The Belt and Road Initiative (BRI) overland route; The Southern Route (Strait of Malacca); The Northern Route (Strait of Taiwan). Xi’s strategic choice is as momentous as it has been understudied. Here are how the three strategic gambits look from his eyes.
(This is an excerpt of Dr. Hulsman's latest article, which you can read here)
Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. He can be reached for corporate speaking and private briefings at https://www.chartwellspeakers.com. His original writing work can all be found at johnhulsman.substack.com.
Week: 19 - 25 July 2021
DM Manufacturing PMIs To Soften Whilst Japan’s Inflation Rate Is Expected To Stay Subdued
In DMs, manufacturing PMIs are expected to soften, as: i) US indicators point to a gentle slowdown (c: 61.9; p: 62.1); and ii) EZ activity slows (c: 62.5; p: 63.4). DM services PMIs are likely to improve (US: c: 64.8; p:64.6; EZ: c: 59.6; p:58.3).
In Japan, June’s inflation rate is expected to stay subdued at 0.0% y-o-y (p: -0.1%), and core inflation is seen to stay unchanged at 0.1% y-o-y).
US-China Relations Continue To Deteriorate; UK To Ease Covid-Restrictions; CBs On Hold, As Rising Inflation Is Deemed Transitory
The Biden administration warned US businesses about the increasing risks of operating in Hong Kong as China’s tightening grip on the city causes business conditions to deteriorate. The Biden administration issued an advisory cautioning businesses and individuals that they are subject to a restrictive national-security law that Beijing imposed on Hong Kong a year ago.
In the US, Fed Chairman Powell said the economy is “far” from where it needs to be for the CB to change policy. “Conditions in the labor market continued to improve, but there is still a long way to go,” he said, adding that inflation has “increased notably” due mostly to temporary factors.
In the EZ, the ECB is working on creating a digital version of the Euro (EUR). The digital euro would allow consumers to pay electronically, without the need for banknotes and coins. However, it would “complement” the existing monetary system rather than replacing physical cash and erasing the business of commercial lenders.
In China, the economy grew at 7.9% y-o-y in Q2 2021 (c: 8.1%; p: 18.3%), driven by a slowdown in: i) factory activity; ii) higher raw material costs; and iii) new COVID-19 outbreaks in some regions all weighed on the recovery momentum. During H1, the economy grew by 12.7%, due to a low base effect from last year's coronavirus-triggered slump. For 2021, China has set an economic growth target of “above 6%” after expanding the least in over four decades of 2.3% in 2020.
Starting July 19, the UK will remove of all pandemic restrictions, and many politicians from the ruling Conservative Party have dubbed July 19 as "Freedom Day". The economy is expected to temporarily benefit, as all businesses can operate normally amid concerns over the delta variant.
Real Economy: Economic Activity At Risk Of Slowdown As Downside Risks Linger; CBs To Hold
In the US, June’s IP dropped by 9.8% y-o-y (c: 12.2%; p: 16.1%) due to base-effect and a slowing economic recovery. Retail sales rose more-than-expected by 0.6% m-o-m (c: -0.4%; p: -1.7%), and expanded by 18.0% y-o-y (c:14.0%; p: 27.6%).
Still in the US, in June: i) headline inflation accelerated to 5.4% y-o-y (c:4.9%; p: 5%), hitting a fresh high since August of 2008; and ii)core-inflation increased 4.5% y-o-y (c: 4.0%; p: 3.8%). Inflation has been on the rise this year amid low base effects from 2020 and a pick-up in economic recovery, easing business restrictions and surging demand - amid widespread vaccination and fiscal support.
In the EZ, May’s IP rose to 20.5% y-o-y (c: 22.2%; p: 39.4%).
Still in the EZ, headline inflation declined to 1.9% y-o-y (p: 2.0%), and core inflation to 0.9% y-o-y (p: 1.0%).
In Japan, Canada, New Zealand, and Turkey CBs kept their policy rates on hold at -0.1%, 0.25%,0.25%, and 19.0%, respectively.
Financial Markets: Global Stocks Fall; Bonds Up; The USD Strengthens; Oil Falls As Gold Prices Rise
Market drivers: investors continue to worry about rising inflationary pressures and surging coronavirus cases, while other investors digest: i) upbeat retail trade data; ii) better-than-expected earnings reports from financial giants; and iii) dovish comments from the US Fed.
Global equities fell w-o-w (MSCI ACWI, -0.6%, to 719). The S&P 500 Index fell (+1.0% w-o-w, to 4,327), as a decline in cyclical stocks out weighted gains in growth stocks. The selloff was due to: i) concerns about higher inflation; and ii) a slump in consumer sentiment. In the EZ, shares fell on concerns that the increase in CVODI-19 cases could derail an economic recovery, and market participants also worried that CBs might tighten monetary policy sooner than expected to quell inflation (Eurostoxx 50, -0.8% to 4,036).
Fixed Income: w-o-w global bonds rose (BAML Global, +0.3% to 296.7) and UST yields fell (-6 bps, to 1.30%).
FX: w-o-w, the USD rose against the EUR (DXY, +0.6%, to 92.687; EUR/USD -0.6%, to 1.181).
Commodities: Oil prices fell (Brent, -2.6% to 73.6 USD/b), amid fuel demand concerns and oversupply fears. Gold prices rose (+0.2% to 1,811 USD/Oz) following worries over global growth and the spread of the COVID-19 delta variant.
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