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The Weekly Rundown: Market Turbulence, Hong Kong Protests and Eyeing Greenland

11 MINS READAug 17, 2019 | 18:08 GMT
A supermarket cashier counts Argentine pesos in Buenos Aires on Aug. 15, 2019.

A supermarket cashier counts Argentine pesos in Buenos Aires on Aug. 15. Argentina's peso and stock market nose-dived this week after voters sent President Mauricio Macri to a distant second-place finish in a presidential primary election on Aug. 11. The country's general election is Oct. 27.

(JUAN MABROMATA/AFP/Getty Images)

On the Record

We're open for business, not for sale.

                                          Greenland's Ministry of Foreign Affairs


On Our Radar

After a Manic Week for the Markets, Some Perspective. First came the emerging market contagion fears when Argentina's Aug. 11 presidential primary elections triggered a massive currency and stock sell-off. Then came a big bounce when U.S. President Donald Trump announced on Aug. 13 that he would save Christmas and delay tariffs on China. Those gains were quickly erased the next day when the bond markets warned of a recession with the 10-year Treasury yield inverting and dropping below the two-year yield. The slump continued through Aug. 15 as data out of China and Germany pointed to a deepening industrial slowdown. And then the week finally ended with a silver lining: U.S. retail data revealed still-strong consumer confidence despite a darkening global economic outlook.

There are of course myriad factors that drive market behavior, but there is also no shortage of geopolitical factors driving market angst these days. As Bloomberg noted, investors had given a 99.994 percent probability that Argentine President Mauricio Macri would not get trounced in a primary election against his populist challenger Alberto Fernandez. And yes, polling in the lead-up to the vote was showing a tighter gap between the two candidates as the economy showed some glimmers of improvement. But, as we've been saying for the past 15 months, Macri is a dead man walking into Argentina's Oct. 27 presidential election after he had to crawl back to the International Monetary Fund for a bailout. He announced a raft of populist measures this past week but they will likely end up being too little too late.

Market ebullience over Trump's tariff delay may also have been a bit misplaced. Yes, this is a positive sign for retailers trying to avoid a Christmas tax on consumers. But the move was by no means a sign of progress in the U.S.-China trade negotiations. Instead, it was motivated by the White House's concerns about self-induced economic pain heading into a presidential election year. This was an encouraging sign for Beijing, which in planning its next moves on the trade front may want to test how much economic and political pressure Trump is willing to undergo as he seeks a second term. We'll be watching on Aug. 19 for what the White House does on Huawei: If it extends a "temporary general license" for U.S. companies to transact with Huawei and eases export restrictions against the embattled Chinese firm, Beijing may greenlight agricultural purchases to resuscitate the trade talks. (Citing sources familiar with the situation, Reuters reported on Aug. 16 that the U.S. Commerce Department plans to extend Huawei's reprieve another 90 days.) We're also watching for any showy moves by Beijing to crack down on Chinese chemical companies as a show of cooperation on Trump's demand to curb fentanyl sales. Stock markets will no doubt crave any hint of progress in the U.S.-China talks, but the impact of another U.S.-China truce will still be limited as deeper concerns grow over a wider industrial slowdown.

Is Hong Kong Crossing Beijing's Red Line? A dramatic week of protests that succeeded in shutting down Hong Kong's international airport has raised the potential for direct intervention by Beijing. And right on cue, Trump has started waiving a veiled threat against Beijing over Hong Kong as he grasps for leverage in the trade talks. But any U.S. move, from condemnation to sanctions, is not going to help the trade talks, nor is it likely to factor heavily into Beijing's calculations on Hong Kong. With protests continuing for an 11th straight weekend, we're watching for signs of widening cracks in the protest movement as the situation turns more violent, especially now that major business tycoons are voicing their concern about the heavy economic toll the protests are incurring on the financial hub. If unrest spills into Macau on Aug. 19, as protesters are calling for, it would be another strong driver in assessing the potential for Beijing to intervene.

The Taiwan Factor. Besides Hong Kong, there's another big complication to the U.S.-China trade talks: Taiwan. The Trump White House is moving ahead with an $8 billion sale of F-16V fighter jets to Taiwan. China already demonstrated its intent to restrict exports to U.S. defense companies over the sale of U.S. M1A2 Abrams tanks to Taiwan. The likelihood of U.S. defense suppliers getting in Beijing's crosshairs over the F-16 deal will also carry implications for their consumer businesses. For example, Gulfstream, which produces numerous civilian jets sold to China, is a subsidiary of General Dynamics, which is involved in manufacturing the Abrams tank. Honeywell, which makes the engine for the same tank, also produces numerous commercial and consumer products exported to China. Separately, we're watching the potential for U.S.-Taiwan trade talks to gain traction as Taipei tries to get other key countries like Australia, India and Japan to risk Beijing's ire and engage in trade negotiations.

Beijing, Seoul and Tokyo Convene. China will host a trilateral meeting on Aug. 21 with the foreign ministers of Japan and South Korea with an eye for a possible leadership summit by the end of the year. Amid simmering Tokyo-Seoul trade tensions, a key thing to watch for in this summit is whether Beijing could act as something of a mediator that Washington has so far been unable to do. Beijing does benefit from emphasizing the discord within the U.S. alliance structure and some Chinese companies can also benefit from the fallout of the South Korea-Japan trade war. But Beijing certainly won't waste the chance to underscore its role as a stabilizer in the volatile East Asian theater. Building on the first Sino-Japanese strategic dialogue meeting in seven years on Aug. 10, this summit will also allow Beijing and Tokyo to talk through key bilateral issues, including de-confliction and potential economic cooperation in the East China Sea.

The Problems With Labour's Brexit "Brakestop" Plan. The opposition Labour Party's plans to oust Prime Minister Boris Johnson and avoid a hard Brexit include a no-confidence motion, followed by a temporary government led by Labour leader Jeremy Corbyn, who will ask the European Union to delay Brexit so the United Kingdom can hold a general election. But there's a big problem: While most can agree that Johnson has to go and that a no-deal Brexit must be avoided, they don't want Corbyn to take his place. For a no-confidence motion to have a stronger chance of succeeding, we'll first need to see Corbyn put his ego aside and a consensus candidate emerge.

While Italy Bickers Internally, Germany Resists Fiscal Stimulus. The next chapter of Italy's political crisis will be written on Aug. 20, when Prime Minister Giuseppe Conte gives a speech in Parliament that could be followed by a no-confidence motion triggered by the right-wing League party. The League's plan to trigger an early general election is not going as planned, with the anti-establishment Five Star Movement working with the center-left Democratic Party to delay the election as much as possible. Despite the political drama, Italian borrowing costs are still low thanks to expectations of a European Central Bank stimulus package in September. For Germany's conservatives, this is all the more reason to stick to its sacrosanct "black zero" fiscal policy despite signs of an approaching recession.

A Compromising Peace in Afghanistan. While the White House is reviewing a pending peace plan with the Taliban, a blast in Pakistan targeting a mosque frequented by Taliban leader Mullah Haibatullah Akhundzada raises questions over whether all of the insurgency's factions support Trump's peace push. Speculation is also rife that a cease-fire under the proposed peace deal could be limited to the United States and the Taliban. If true, this suggests the nearly 18-year-long war between the Taliban and Afghan security forces could continue, even enticing some elements of the insurgency to seek a military victory. Whatever the shape of a final deal, it will be important to see whether the Taliban's factions can maintain a unified posture on peace, and how Pakistan — the Taliban's primary external sponsor — uses its leverage over the group as it seeks to improve relations with the United States.


On Our Minds

Greenland Is Not for Sale. Amid rumors that President Trump had asked aides to look into the purchase of Greenland, what could easily become a political punchline actually shines a light on a very important region and emerging strategic objectives for resource security and beyond. The United States may very well be eyeing Greenland both for its abundant mineral resources as a potential alternative to China as the threat to the supply of rare earth elements remains and as a strategic part of its military strategy in the Arctic. U.S. allies Canada and Australia have mining companies active in Greenland. So too does China. China's activities in the semiautonomous Danish territory illustrate the importance of the island far beyond rare earths. Greenland is a large part of China's broader national and Arctic strategy and the country has been making aggressive inroads into Greenland for some time. Beijing is seeking to gain influence through investments in airports or former military bases. Though the Danish government has rejected recent efforts, China will continue to focus on Greenland to gain advantages on Arctic issues in the future. With both the United States and China eyeing the island, the future of Greenland could be heating up in more ways than just on the thermometer.

The Color Revolution Threat. Chinese officials have used the term "color revolution" to describe the threat it faces from the Hong Kong protests. This is a phrase all too familiar to Russian President Vladimir Putin, who warned back in 2014 against the "tragic consequences" that come from Western-backed color revolutions. Both Beijing and Moscow will have their guard up against Western interference as their great power competition with the United States grows. In fact, Russian Foreign Ministry spokeswoman Maria Zakharova said Russia and China plan to hold consultations over U.S. involvement in protests that have taken place in both Moscow and Hong Kong and that Moscow "took seriously" China's claims that the United States and other Western countries have "directly participated in and organized unrest" in Hong Kong. Given its experience in dealing with U.S.-supported color revolutions in its periphery and pro-democracy groups within its borders, we're studying what lessons Moscow may be able to offer Beijing on Hong Kong and in what ways these two powers may try to expand their security cooperation in the cyber realm and in protest management.

Is Israel Expanding Its Military Reach? Three explosions in recent weeks in Iraq targeting Iran-allied Iraqi militia weapons stores appear to be the work of Israel, which has made a habit of striking similar targets in neighboring Syria. That would be a big expansion of Israel's strategic scope, bringing it back to a country it hasn't had a violent conflict with since the 1991 Gulf War when Baghdad launched Scud missiles against Israel. This is a very different Iraq, however, which has to balance a proliferation of Iran-allied militias that form a fundamental component of the country's security services with Baghdad's strong U.S. ties. Meanwhile, Iraq has few means to block Israeli strikes or retaliate against Israel itself. That means Iran-backed forces within Iraq could target U.S. or even Gulf Arab assets in retaliation for these kinds of incidents. With the White House already in a tricky spot between keeping heavy pressure on Iran while trying to avoid war, an Israeli uptick in attacks against Iranian assets could further complicate the U.S. position and make it that much harder to find a de-escalation path.


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On Our Calendar

In the coming week, a "temporary general license" that allows U.S. companies to sell supplies to China's Huawei Technologies expires Aug. 19 unless it is extended, China hosts a trilateral meeting to mediate trade tensions between Japan and South Korea and the Group of Seven summit begins in Biarritz, France. For more, see our Geopolitical Calendar.


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