Daily Comment (November 17, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EST] Global equity markets are mostly steady to higher this morning.  The EuroStoxx 50 is flat from the last close.  In Asia, the MSCI Asia Apex 50 closed up 0.8% from the prior close.  Chinese markets were lower, with the Shanghai composite down 0.5% and the Shenzhen index down 2.8%.  U.S. equity index futures are signaling a mostly steady open.

It was a mixed overnight trade.  Here is what we are watching this morning:

The House passes a tax bill:  With 227 votes, the House passed its version of the tax bill.  Although this is one of the hurdles for getting a final bill done, it isn’t the most difficult.  The Senate will be far more difficult given the narrow GOP majority there.  The Senate bill did emerge from committee but only on a party line vote.  Our policy has been to avoid going into detailed analysis of the bills simply because what is eventually agreed upon won’t look anything like the current proposals.

PBOC injects cash…lots of it:  The PBOC, the central bank of China, injected $47 bn into its financial system, the biggest in nearly a year as the Chinese 10-year yield reached 4.015%, the highest level since 2014.  In the wake of the Party Congress, it appears the Xi government is applying some austerity to the Chinese economy in a bid to wrestle with China’s excessive debt.  The injection did lead the 10-year to dip just under 4%, but a move to austerity will likely pressure Chinese rates higher.  Given the isolated nature of China’s financial system, rising Chinese rates won’t have much of an effect on global financial markets, BUT if rising rates lead to significant economic weakness that would be noticed, with the most likely effect being weaker commodity prices and likely some declines in emerging equities.  China’s policy pattern has been “stop/go” for some time and the market does not expect Chairman Xi will allow a major economic slowdown to occur.  We tend to agree.

Mueller to subpoena Trump campaign for Russia documents:  Several media outlets reported that the special counsel was asking for all related documents that show contacts with Russians during the campaign.  The importance of this request is somewhat uncertain.  Some legal experts see this as routine, others argue it bodes for a wider investigation.  The market effect from this headline was worth noting.  Although U.S. equity futures did decline modestly, the biggest impact was dollar weakness.  That has been the pattern for a while; if the Mueller investigation does start to expand, the market that will likely bear the brunt of the adjustment is the greenback.

Venezuela triggers default swaps:  The International Swaps and Derivatives Association, or ISDA, declared Venezuela and the state oil company, PDVSA, in default.  That means that credit default swaps are now triggered.  The market reacted immediately.

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