AGF Management: High Stakes in Taiwan – and in Today’s US Election; Plus the amazing 10-year bond yield
BESIDE A LAST MINUTE SURPRISE, Speaker of the House Nancy Pelosi is due to land in Taiwan tonight or tomorrow morning (local time). Her visit has heated up US relations with the regime in Beijing; all hopes of trade liberalization are gone.
FEAR OF MISCALCULATION: Asian markets are shaky this morning as fears grow that PRC jets could be orbiting Pelosi’s plane amid Chinese cross-strait military drills ramp up. The potential for an error on either side is pretty serious.
WHY is PRESIDENT XI JINPING taking such a sharp stance? intelligence experts
believe he needs a distraction while the Chinese economy struggles and the country recovers from exceptionally severe Covid restrictions. Plus, he can’t afford to look weak as he seeks a third term this fall.
BROADLY, the government in Beijing sees a threat from Taiwan – with its solid economy and personal freedoms; Xi appears to believe that economic stability cannot be achieved without tight government controls (there is an excellent column in TheHill.com this morning that contrasts the climate in both countries).
CONCLUSION: Despite the very real threat to Pelosi’s plane, we don’t believe there will be a significant military showdown. But this incident will have major repercussions: a further deterioration in Washington-Beijing relations, with little hope of trade reconciliation – and growing US support for more defense spending as the West faces threats in both China and Ukraine is faced.
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MITCH McCONNELL’S ELECTION NIGHTMARE: Could the GOP crash this fall’s election? Joe Biden has had some legislative victories and killed the leader of al Qaeda, but the real threat to Republicans is that they will nominate candidates seen as too radical. The party’s fear of this scenario could increase tonight.
ELECTIONS TODAY are being closely watched in Arizona and Missouri, where potential GOP winners still refuse to accept that Biden won the 2020 election. Donald Trump’s influence over these candidates and their supporters overlooks the key factor – can they win the November general election?
REPUBLICANS ARE STILL LIKELY to retake the House, but their prospects in the Senate – tied 50-50 – are shaky. In addition to wildcards in Arizona and Missouri, the GOP Senate candidates suddenly look vulnerable in Pennsylvania (Mehmet Oz) and Georgia (Herschel Walker).
IT’S TOO EARLY TO CALL THE Senate, where Democrats have a plausible path to a 51-49 seat majority. It shouldn’t be close, but McConnell knows from past elections that GOP candidates could gather the base in the primaries, which isn’t enough in November.
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WHAT GIVES? Amidst all the news at the start of August, there was relatively little comment on the astonishing 10-year Treasury yield, which appears to be heading towards 2.5%. Why? Is this a safe haven as China’s saber-rattling intensifies? A sign that inflation has peaked? A sign that a recession is likely?
IT IS LIKELY A COMBINATION OF ALL THREE, but not a market misjudgment as many analysts claim; The markets don’t make such big mistakes. Imagine the Fed’s dilemma: If central bankers tighten aggressively in September, will yields fall even further? As for fears of a recession, it’s difficult to worry about
Unemployment rate of 3.6% and a violent bond market rally.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or affiliates, funds or investment strategies.
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