Confusion on Capitol Hill, Article 50 is triggered by Whitehall, and an election run-off in Quito.
Following Healthcare Debacle, Confusion Sets in on Viable Path Forward for Other Policies
Last Friday, the Republican Party suffered one of the worst policy defeats of the past decade; after trying to wrangle votes from arch-conservative (Freedom Caucus) Republicans and blue state Republicans with frequently contradictory goals, House Speaker Paul Ryan recognized that there weren’t enough votes to pass the Affordable Health Care Act (AHCA) and pulled the bill from the floor. The bill would have radically altered the Affordable Care Act, by ending the Medicaid expansion, shifting the penalty for not acquiring health insurance from the government to insurance companies, and would have radically reduced taxes for the wealthy. Considering the Republican Party and the President have spoken about “repeal and replace” the Affordable Care Act (Obamacare) for the past 7 years, this was a severe blow. The Republican Party and the President are likely to try to quickly shift gears to pursue other policy goals, with tax reform at the top of the list. However, tax reform would require at least some Democrats to support the bill in the Senate, so negotiations are likely to be far more drawn out and complicatedthan the AHCA (which was essentially an inter-Republican struggle with no Democratic votes needed and none likely to be given). This also introduces a significant problem in Washington; the Republican Party has based much of its philosophy around opposition to policy proposals with Democrats, but has consistently failed to offer its own proposals or build a coalition in favor of legislation (rather than against it). Additionally, the President seems unable to bring together disparate coalitions, due in part to his ignorance (and largely indifference) of policy issues. This is likely to preclude substantial challenges in other policy fields, and markets may have to adjust to the reality of a slow policy grind in Washington (unexpected given unified control of the branches of government under one party).
PM May Pulls the Trigger on Article 50
This Wednesday, Prime Minister Theresa May will formally trigger Article 50 to begin the 2 year process to withdraw the United Kingdom from the European Union. Although this has been a long time coming, the pound has been declining over the past few weeks and may continue to do so as the country formally begins exit negotiations. On the same day, Lloyds of London will be holding a governing board meeting in London to discuss moving some of their operations to either Luxembourg or Belgium in order to maintain the revenues it makes throughout the European Union. This move is likely to be mirrored by boardroom meetings across the UK as negotiating positions between the UK and EU play out or are leaked to the public in the months ahead. Already, signs of negotiating outcome goals by both parties are becoming apparent: EU Brexit negotiator and Liberals MEP Guy Verhofstadt is calling for a policy that allows UK citizens the ability to maintain their EU citizenship. On the flip side, Theresa May’s team has floated allowing EU citizens in the UK to continue to receive childrens’ benefits. Meanwhile, if the pound continues to fall (as expected) throughout negotiations, the short term benefit to UK exporters could begin to be outweighed by the increased cost of importing goods for UK consumption.
OPEC Mulls Extending Production Cut
This week, OPEC nations will meet in Kuwait to discuss the ongoing production cuts of the major oil producing nations. Yesterday, the OPEC and major non-OPEC nations recommended extending its output cut by at least 6 months, though the language was softened to be a “review [of] the oil market conditions and revert…in April 2017 regarding the extension of the voluntary production adjustments.” Expanded U.S. production has limited the ability of OPEC and major OPEC allies (like Russia) to maintain both market share and profitable prices at the same time. Talks of production cuts may lead to short term market oil prices to rise, though the ongoing other metrics to follow will be U.S. production and stored oil quantities. Since June 2014, prices have declined substantially from their peaks of $115 per barrel, and although dipping down to below $40, prices now usually hover around $50 a barrel. This is mostly due to an ongoing recognition that Saudi Arabia’s desire to maintain OPEC’s (and its own) market share in the oil market will lead to persistently low oil prices. The persistent hover around $50 a barrel may be a sign that U.S. shale oil production maintains a profit at around the level, meaning prices likely won’t change unless a major policy development by OPEC nations emerges (like a major production cut to raise prices and profitability, or a major acceleration of production to radically reduce prices and maintain market share). The production cut extension talks appear to be more of a holding position than anything else, as Saudi Arabia mulls profitability against market power.
Ecuador Runoff Presidential Election Pits Left Against Market Right
On Sunday, Ecuadorian voters will head to the polls in a runoff election to replace term-limited Rafael Correa as president after leftist candidate Lenin Moreno failed to receive at least 40% of the vote plus a 10-point difference from the next highest candidate. The candidates Lenin Moreno and Guillermo Lasso, represent some similarities to the Argentine presidential election between Mauricio Macri and Daniel Scioli. In both cases, more moderate candidates were knocked out in the first round, and were both following a leftist president with declining popularity. Additionally, concerns over corruption within government are taking a toll on the left-leaning candidate (Moreno), and it appears likely that success will depend on the extent to which voters who did not chose the left-leaning candidate in the first round largely consolidate around the other candidate (though there are obvious differences between the two, notably the politically amorphous nature of Peronism in Argentina). Both candidates are projecting confidence, but the fact that even voters are drawing comparison to the Argentina elections is probably not a good sign for Moreno. Should Lasso emerge victorious, one interesting international component of this election could be the expulsion of Julian Assange from the Ecuadorian embassy in London. Lasso has said he would remove Assange from the embassy if he becomes president, which if set off the international intrigue of Assange being arrested by British police forces and likely extradited to Sweden.
The Week Ahead provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, The Week Ahead presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes.
This edition of The Week Ahead was written by GRI Analyst Brian Daigle.