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“Negotiations Will Be Short”: From Biden’s Putin Option To The Fed’s Put Option

Courtesy of ZeroHedge View original post here.

By Michael Every of Rabobank

So, it’s Fed day – or rather very late night in Asia: and the key question remains if the majority of the FOMC dots will say 2023 or 2024 before rates next rise. The most recent data backdrop is of another disappointing US retail sales print (-1.2% m/m headline, -0.7% ex-autos) and Empire PMI (17.4 vs. 22.7 expected), and that commodity prices continue to fall. Not so much PPI, which was up 0.8% m/m headline, 0.8% core, and 0.7% ex trade, translating into 6.6%, 4.8%, and 5.3% y/y. However, that will be seen as “transitory” by the Fed given the other data – though as the cost of shipping containers continues to soar, there could be a lot more ‘transit’ in that transitory yet. Even so, it looks a safe bet to assume a continuation of the Fed’s de facto ‘put’ option.

Before the Fed we get to focus on the US president’s de facto Putin option. What will emerge from the Geneva summit, only set up a few months ago on the serious concern Russia might invade/bifurcate Ukraine? NATO just made no progress towards bringing Ukraine in, and realists know the few in Europe with an army have no intention of sending troops to fight there. Even the US has only made a vague promise to support Kiev. Indeed, American focus is very obviously on China; and with the EU just as obviously not interested in confrontation --and in buying Russian gas-- the West’s position is hardly a strong one: expect the negotiations to be short. And just to rub (sea)salt into the wounds, as a backdrop, Russia is today conducting its largest naval exercise in the Pacific since the Cold War, with ships just 300 to 500 miles off the coast of Hawaii, showing that it too can play on more than one front (albeit weakly).

So what to look for? US National Security Adviser Sullivan has stated President Biden will look for “areas where, in our common interest, we can work together to produce outcomes that are — that work for the US and for the American people,” but that his other message would be: “How do we send a clear message about those harmful activities that we will not tolerate and to which we will respond?” Nobody knows the answer: but not many in strategy circles had flagged green-lighting the Nord Stream 2 pipeline as one of them.

Surprisingly, there was steely rhetoric towards a “strategic rival” yesterday from European Commission President Von der Leyen – and I don’t mean Charles Michel, President of the European Council. After a carefully-coordinated meeting with Canadian PM Trudeau and Michel in which no sofas were present, VDL tweeted:

“We will set a strategic partnership on raw materials. We Europeans want to diversify our imports away from producers like China. Because we want more sustainability, less environmental damage & transparency on labor conditions.“

While this is a much shorter litany of complaints than from the US, the underlying message backs many US hawks. The US and EU also agreed to a five-year hiatus on their legal claims and counter-claims against Airbus and Boeing. Moreover, the US statement at the end of the EU-US summit saw specific pledges to:

  • Set up a joint US-EU COVID Manufacturing and Supply Chain Taskforce to expand vaccine production capacity;

  • Work towards a Transatlantic Green Technology Alliance to foster cooperation and promoting markets to scale them, including a US-EU Trade and Technology Council (TTC) to set global standards;

  • Use trade to fight climate change, promote workers’ rights, expand resilient and sustainable supply chains, cooperate in emerging technologies, and create decent jobs, as well as “resolve to stand together to protect businesses and workers from unfair trade practices, in particular those posed by non-market economies that are undermining the world trading system.”;

  • “Reject authoritarianism in all its forms around the globe, resisting autocrats’ efforts to create an environment that protects their rule and serves their interests, while undermining liberal democracies.” (Note “liberal democracy” given the China Daily yesterday argued China is “the world's largest and most substantial democracy.”); and

  • Enhance cooperation on sanctions to pursue shared foreign policy and security objectives, while “avoiding possible unintended consequences for EU and US interests”, with specific mentions of China and human rights, of Xinjiang and Hong Kong, and of Taiwan.

Again, however, there is a huge gap between rhetoric and reality – and not everyone acts in a once-a-year talk-fest fashion. Sometimes negotiations don’t happen at all.

EU decoupling from Chinese imports can easily see Beijing say it wants to decouple from EU imports too; EU coordination on sanctions to promote liberal democracy opens up EU firms to legal consequences in China under the legislation passed last week; and Beijing just sent 28 military jets, including nuclear-capable bombers, through Taiwanese airspace. The underlying picture is similar to that on the Fed: not a lot is happening on the surface – but lots of pressure is building up below it that will eventually blow back to markets in a big way.

On which note, Bloomberg reports that Asian central banks are building up “war-chests” of US dollars for the day when the Fed eventually flags a change in policy, hoping that they have learned the lesson from 2013. Of course, the true lesson is that whatever you think you have in the chest, it likely isn’t going to be enough when push comes to shove – and more than doubly so if the eventual Fed shift conflates with a US and EU political shift towards green tariffs and/or sanctions against “non-market economies that are undermining the world trading system.”

On a more micro level, the EU yesterday also announced that due to past antitrust transgressions, 10 global megabanks are to be frozen out of syndicating bond sales for its upcoming $970bn NextGenerationEU program. That’s a big cash cow that now gets to be eaten solely by other market players. And the negotiations were short.    


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