Making sense of this world

By Brunello Rosa

15 July 2019  

Last week, when we commented on the selection of the new heads of the top five EU institutions, we highlighted how the end of the musical chairs game that the selection process resembled delivered only a very a fragile political equilibrium. We also took a non-consensus view of the situation, arguing that time is on the side of the national-populist parties in Europe, which, during the five-year tenure of this new parliament, will have the option of making a proposal to the European People’s Party (EPP) to form a coalition together. Already during the past week, events of this kind have been unfolding more rapidly than even we would have expected.

As numerous press reports suggest, the new EU Commission (EC) President Ursula Von Der Leyen is having a hard time securing the votes she will need on July 16thif she wants to win a vote of confidence from the EU Parliament. With the far-left GUE and the Greens having formally announced their vote of no confidence towards President Von Der Leyen, she now needs to rely on a three-party coalition of EPP (179 seats), Socialists & Democrats (153 seats) and Liberals (105 seats). Theoretically speaking, this ruling coalition could count on 437 votes, much more than the 374 necessary to reach a majority in the 750-seat European Parliament. 

However, a number of MEPs, especially those from the German Social Democrats, are still upset by the method by which Von Der Layen was chosen (in particular, the trashing by French President Macron and German Chancellor Merkel of the Spitzenkadidat system that was introduced in 2014). Others are unimpressed by the lack of ambition of her political program, which so far seems to be just a sensible continuation of the status quo. Additionally, some members of the EPP, such as Viktor Orban’s Fidesz, want a softer stance taken by the future EC regarding the application of Article 7 (namely, the sanction imposed on misbehaving countries) in exchange for their vote. So, what seemed to be a vote that Von Der Leyen could take for granted could instead become extremely problematic. 

Facing this situation, it was suggested to her to postpone the vote to September, so that she could gain more time to convince the rebellious MEPs to give her their support. But she understood that nothing would change in the next two months, and that her position could become even weaker if she were to let this situation fester for a longer period of time. 

But here is where the situation becomes intriguing, if perhaps also dangerous. A number of populist-nationalist parties have offered their support to Von Der Leyen, in exchange for a more favourable attitude taken by the EC President on the dossiers close to the various party leaders. PiS, the Polish party of the nationalistic leader Jarosław Kaczyński, has offered its support in exchange for a softer stance on the application of Article 7, like Hungary’s Fidesz. Lega and Five Star have offered their votes in return for a “heavy” portfolio for Italy in the new EC, such as Competition, or Industry. 

Von Der Leyen might manage to convince the rebellious MEPs from her own coalition to fall into line and allow the Commission to have a working and cohesive majority from the start of her term. But she might not have enough time for that. In that case, she may be forced to accept parties to allow for the birth of a Commission presided over by herself. Such a Commission would become vulnerable to the requests of the national-populists sooner than even we had anticipated. Von Der Leyen’s manoeuvring space to reform Europe in the direction of the “United States of Europe” (the way she reportedly would like to see the EU  become) would be further reduced. As a result, the process of EU dis-integration would likely accelerate further in coming years. 

If Von Der Leyen fails to reach a majority this week, this would open up a serious institutional crisis in the EU, forcing EU leaders to find another solution. Such a solution is difficult to identify, as Von Der Leyen was chosen as part of a “package” that is difficult to unbundle, a package which also included the selection of David Sassoli who has been already elected President of the EP, Charles Michel as President of the EU Council, and the arrival (which markets have already greeted positively) of Christine Lagarde at the helm of the ECB.  

2 July 2019

Ramaphosa: The Once And Future King

In one sense, South Africans have been waiting for newly elected president, Cyril Ramaphosa, for a very long time. During the heroic days heralding the end of apartheid, the young, dynamic, spokesman for South Africa’s mining unions made himself a fixture at the side of the country’s secular saint, Nelson Mandela. Indeed, in the 1990s, Ramaphosa was chosen to head the African National Congress (ANC) National Reception Committee which coordinated the details of the great man’s stirring release from prison and ultimate ascension to power. Even then, many South Africans viewed the charismatic young leader as Mandela’s rightful heir. 

But the ANC, like many national liberation organisations of the time, was a woolly bureaucratic entity; despite his obvious gifts, Ramaphosa had to wait his turn in line to lead the country, watching Mandela’s successors (the élitist Thabo Mbeki and Jacob Zuma, whose government proved ineffective and plagued by corruption scandals) squander much of South Africa’s glistening promise. The South Africa that Ramaphosa finally inherits is characterised by high unemployment and shockingly low growth rates, rolling national power outages illustrating the chronically poor state of South Africa’s infrastructure, and very high rates of violent crime. Can this once and future king rescue this resource-blessed land, restoring its great economic promise?

Ramaphosa Saves The ANC From Itself 

Returning to politics after an absence as a very successful businessman in the telecoms, fast food, and commodities sectors, Ramaphosa was installed as Deputy President in 2014. On December 18, 2017, he finally made his move, defeating the chronically embattled Zuma to snatch the position as head of the ANC leadership. Following this, Zuma duly resigned in February 2018, with Ramaphosa assuming the presidency, with the ANC’s electoral prospects at their lowest ebb. 

In terms of polling, Ramaphosa was and remains easily the most popular contemporary politician in the country, with a pre-election approval rating at a stratospheric 73 percent; he came to rely on this reservoir of goodwill to right the ANC’s electoral ship. The May 8, 2019 general election proved to be a victory of Ramaphosa’s leadership, if an ambiguous one, as on its surface the ANC’s win amounted to neither its usual landslide nor to a disastrous loss. 

This acceptable if unsatisfying result may well come to plague the new president as he sets out cleaning the Augean stables, casting aside the many corrupt, inept Zuma acolytes still in positions of power in both the ANC and the South African government itself. This must be the ultimate litmus test for investors as to whether the Ramaphosa regime is worth them giving South Africa another look.  

Overall, the ANC finished with 57.5% of the vote, with the main, moderate Democratic Alliance (DA) opposition a long way back at 20.8%, and the radical, leftist, Black Nationalist Economic Freedom Fighters (EFF) even further behind, winning 10.8% of the vote. In terms of seats in the 400-person South African National Assembly, the ANC won an absolute majority with 230 seats, while the DA has 84, and the EFF 44.  

Ramaphosa’s charisma and popularity righted the ANC ship from the storms of the Zuma years, pretty much on his own. Following the election, ANC campaign chief Fikile Mbalula spoke for many when he said that without Ramaphosa the ANC would have received just 40 percent of the vote. 

Yet even the campaign talents of Ramaphosa could not give the ANC its usual landslide victory. The May 2019 general election saw the ANC lose 19 seats in the South African national assembly, while its vote share declined 4.7 percent compared to the last parliamentary election in 2014. In other words, this ANC victory amounts to its worst ever electoral performance in the post-apartheid era. The election gives Ramaphosa a relatively weak mandate, though he ought to get credit for the fact that there is a mandate at all. 

Worse, and in contrast, the radical EFF improved its vote share by 4.4 percent, and gained 19 seats in the national assembly. Ramaphosa saved the ANC from itself, but the ravages of the Zuma years – characterised by puny growth, rampant economic inequality (South Africa has the world’s highest levels of income inequality), and extreme graft — could not be wholly overcome. He has won a victory, but the people of South Africa have placed both the new regime and the ANC on political probation. Ramaphosa has no choice but to deliver in terms of policy initiatives, and fast.  

[....]

The Last, Best Chance 

It is a credit to South Africa’s democracy that a man of Cyril Ramaphosa’s talents has ascended to power at a time of such crisis for the country. For looking around, it is clear that the dynamic new president is as good as it is likely to get for South Africa. If President Ramaphosa is able to curb his land appropriation folly and best the Zuma apparatchiks that still dominate much of the government and the ANC, South Africa—blessed as it is with resource abundance and low geostrategic risk—has every reason to hope for a long-awaited boom. 

However, equally, if Ramaphosa fails in political and policy terms, decades of stagnation under Zuma-like clones beckons. Ramaphosa is the last, best chance for both investors and for his country. 

(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. 

Week 15 - 21 July 2019

Economic Activity Slows And Growth Decelerates

In the US, economic activity is likely to have slowed down (IP Jun., c: 0.2% m-o-m; p: 0.4; Retail sales, c: 0.3% m-o-m; p: 0.5). 

In China, Q2 growth is expected to have decelerated (GDP, c: 6.2% y-o-y; p: 6.4) as economic activity remains sluggish (IP Jun., c: 5.2% y-o-y; p: 5.0; Retail sales Jun., c: 8.3% y-o-y; p: 8.6).

In the EZ, inflation is expected to remain unchanged (CPI Jun., c: 1.2% y-o-y; p: 1.2; core CPI, c: 0.8; p: 1.1). 

In Japan, inflation is likely to rise but remain below target (National CPI Jun., c:0.8% y-o-y; p:0.7; National core CPI, c:0.6%; p: 0.5).

Risks To Global Trade To Remain 

In the US, the Trump admin. is set to investigate French plans to tax US technology giants, e.g.: Facebook and Amazon, over concerns that “the move unfairly targets American companies” – reiterating the same rhetoric that brought the US to impose tariffs on China. 

In the US, Fed Chair Jerome Powell provided further hints about an impending rate cut. Despite strong-than-expected hiring in the US, Powell pointed at: i) low inflation in the Fed’s preferred inflation gauge, the PCE, due to slow wage growth; and ii) economic data showing that “manufacturing, trade, and investment are weak all around the world”. Ahead of the Fed’s July meeting, the market expectations of: i) “two rate cuts” rose to 22.5% (p: 5.4); and ii) “one rate cut” fell to 77.5% (p: 94.6). 

In the EZ, the EC cut its inflation outlook for 2019 and 2020 to 1.3% (p: 1.4). The ECB June meeting minutes revealed the CB’s inclination to inject fresh stimulus via: i) interest-rate cuts; and/or re-starting net asset purchases.

In the UK, Chancellor Phillip Hammond said that he would back a legal challenge against the government if the new Prime Minister tried to suspend parliament – in order to “force through a no-deal exit”. 

In China, the PBoC is expected to accelerate “reforms to simplify the policy rate transmission”, as the CB governor hinted at plans to: scrap the benchmark lending rate, while keeping the deposit rate to reduce borrowing costs for companies and lift domestic demand. 

In Turkey, after the delivery of the first shipment of the Russian S-400 system, the Trump administration will monitor developments - following earlier threats to punish Turkey by imposing sanctions over the purchases.  

Real Economy: Geopolitical Risks And Subdued Inflation Support CB Easing

In the EZ, industrial production remains sluggish (a: -0.5% y-o-y; c: -1.6; p: -0.4), as German industrial activity continues to weaken (IP, a: -3.7% y-o-y; c: -1.1; p: -2.3). 

In China, trade weakened in June (Exports, a: -1.3% y-o-y; c: -2.0; p: 1.1; Imports, a: -7.3% y-o-y; c: -4.5; p: -8.5), due to: i) the tariff-tensions between the US and China; ii) sluggish domestic demand; and iii) weaker commodity prices. Inflation remains muted (CPI Jun., a: 2.7% y-o-y; c: 2.7; p: 2.7).

In Japan, industrial production slowed further (a: -2.1% y-o-y; c: -1.8; p: -1.8). 

In Iran, the UK Navy intervened to allow a BP Plc-operated oil tanker, blocked by Iranian vessels, to leave the Persian Gulf. 

In Singapore, the economy - open and trade-reliant - unexpectedly contracted (Q2 GDP, a: -3.4% q-o-q; c: 0.1; p: 3.8), as trade tensions weakened business confidence and activity. Inflation remains subdued. In the US, core inflation came in slightly above expectations in June (core CPI, a: 2.1% y-o-y; c: 2.0; p: 2.0); however the broader inflation measure declined (CPI, a: 1.6% y-o-y; c: 1.6; p: 1.8). 

Financial Markets: Weak Economic Data Support Expectations Of Future CB Easing, Lifting The Markets

Market drivers: As Fed’s Powell all-but-confirmed a rate-cut in the July meeting, investors sought risky assets, in particular US equities. 

Stocks: w-o-w, global stocks rose (MSCI ACWI, +0.2%). Volatility fell (VIX S&P 500, -0.9 points to 12.4, 52w avg.: 16.4; 10y avg.: 17.2). US equities hit a record-high (S&P 500, +0.8%) and EZ stocks fell (Eurostoxx, -0.9%). 

Bonds: w-o-w, globally, indices declined (BAML Global bond index, -0.4%). A search for yield is driving investors to Italian bonds (10Y Italian bond, -1 bps to 1.73%). The country received EUR 17bn in orders at an offering of EUR 3bn of an existing 50-year security maturing in 2067. 

FX: the USD depreciated (DXY, -1.5%) against a basket of currencies and EM FX remained flat (MSCI EMs, +0.2% at 1,651). 

Commodities: Oil prices rose w-o-w, after: i) US Government data showed a larger-than-expected drop in stockpiles: ii) escalation of tensions in the Persian Gulf; and iii) a storm in the Gulf of Mexico (Brent, +3.9% to 66.7 USD/b). .