President Donald Trump’s decisions over the past week are throwing both global equities markets and oil markets into tantrums. Christmas week started with dismal developments in Washington. On Monday, the president and key Democratic leaders argued over the partial shutdown of the government. Reuters said on Christmas Eve that there was no sign of tangible efforts to reopen agencies closed by a political impasse over Trump’s demand for border wall funds, one of Trump’s 2016 campaign pledges.
Due to the government shutdown, Trump will stay in Washington over the holidays. On Christmas Eve Trump bemoaned the fact that he had to stay alone in Washington. On Twitter, he wrote: “I am all alone (poor me) in the White House waiting for the Democrats to come back and make a deal on desperately needed Border Security. At some point the Democrats not wanting to make a deal will cost our Country more money than the Border Wall we are all talking about. Crazy!”
Both sides of the aisle accuse each other of the impasse, while it remains to be seen when government funding will be restored. However, it’s likely that the partial government shutdown will continue at least until the start of the year.
If that wasn’t enough to spook markets, both at home and abroad, the development comes just a day after the president announced that outgoing Secretary of Defense Jim Mattis was being pushed out of office sooner than expected. Last week, Mattis announced that he would be stepping down in February due to differences with the president's controversial plan to withdraw troops from Syria and to reduce troop strength in Afghanistan.
Concern has mounted that withdrawing troops from Syria too early will leave a power vacuum since ISIS still holds a swath of land within the country, a decision largely chastised by both Republican and Democratic lawmakers as well as U.S. allies. The withdrawal of U.S. troops from Syria, even though they were numbered only around 2,000, will also give more leverage to Iran and Russia in both Syria and the overall region as they continue to support President Bashar al-Assad’s fight against anti-government forces in the 8-1/2 year long civil war
A forced exit for Mattis
Moreover, on Sunday, the president said that Mattis would be replaced by Deputy Secretary of Defense, Patrick Shanahan, effective on January 1. The next day, Trump took one last shot at Mattis, claiming that he had failed to recognize the true costs of U.S. militarily support around the world. Another one of Trump’s 2016 campaign pledges was to reduce military spending in support of allies around the globe, including those like Saudi Arabia, who, according to Trump, have taken advantage of the U.S. for decades. Related: Saudi Oil Minister: Crude Stocks Should Drop Very Soon
On top of these developments, Trump has been criticizing Federal Reserve policy over interest rates, claiming that Fed policy was the “only problem our economy has.” However, Trump’s troubling intervention over the Fed’s interest rate policies is nearly unprecedented in a country that places a high priority on the independence of monetary policy. Only one other president, Richard Nixon, had ever sought to overtly influence the direction of monetary policy while in office. Standard procedure for decades is that an independent Fed is necessary to ensure that undue partisan political influence doesn’t come into play with its decisions. Trump’s tampering with both the Fed and even the Supreme Court could set a dangerous precedent going forward.
Markets convulse on turmoil in Washington
All of this dismal news and uncertainty coming out of Washington has not been lost on markets and home and abroad. On Monday, equities around the world declined for the eighth straight day over ongoing concerns coming out of Washington, particularly uncertainty with the Federal Reserve. The Fed raised interested rates again at the end of last week by a quarter percentage point which had already weighed heavily on global equity and FOREX markets, particularly emerging economies. When the Fed raises interest rates, an exodus of funds often ensues for higher-yielding investments instruments, including U.S. bonds supported by higher interest rates.
Investec economist Philip Sha said, “there are a whole number of factors that have triggered this latest risk-off climate, including the Fed’s very modest deviation from its (rate increase) plan and the government shutdown in the United States.” MSCI’s world equity index that tracks shares in 47 global markets was 1.57 percent lower Monday and down 8 percent over the last eight trading session. U.S. stocks are faring even worse, with the NASDAQ off some 22 percent from its high on August 29. The ongoing trade war between Beijing and Washington has also been spooking both global equity and oil markets, creating a potent holiday cocktail that may take weeks or even months to unravel.
Oil prices for both global benchmark, London-traded Brent crude and U.S.-benchmark, NYMEX-traded West Texas Intermediate (WTI), also continued their downward trajectory. On Monday, Brent dropped around $3, to close at $50.80, while WTI fell $2.94 to close at $42.65.
The problem for oil markets is plenty, especially given that the low $40s price point for oil is now breaching the all-important production break-even point for most U.S. shale oil producers which will also cause producers to pare back their 2019 oil production plans. The plunge in Brent likewise will also see oil producers readjust and trim their 2019 budgets to cut back on more oil and gas exploration and production. Both Brent and WTI crude futures are nearly 40 percent off recent highs reached in early October.
By Tim Daiss for Oilprice.com
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