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Asian Tensions Spoil Carnival

Last week’s Carnival celebrations were spoiled by geopolitical tensions. Fortunately, economic developments provided some reassuring stability.

Low expectations for the nuclear summit in Hanoi between U.S. President Donald Trump and North Korean leader Kim Jong-un were confirmed when the summit ended abruptly on its second day. Mr Trump suggested North Korea wasn’t making a generous enough offer in terms of denuclearisation in exchange for its demand for a full lifting of economic sanctions. “Sometimes you have to walk away,” Mr Trump said. Better preparation, from the American president may have yielded better results.

Further to the west, tensions between India and Pakistan flared up again after Indian fighter jets destroyed a terrorist camp in Pakistan. India was retaliating against a terrorist attack in India-administered Kashmir two weeks prior. The situation escalated further the next day when an aerial skirmish between the two countries resulted in two downed planes. Each government is giving a conflicting version of events, and the war has broken out for real on social media, making de-escalation more difficult. The one thing that is sure is that India’s retaliation has bolstered Prime Minister Narendra Modi’s election chances.

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The geopolitical tensions from Asia were balanced by upbeat USA GDP figures for the last quarter of 2018, which were finally published after delays due to the government shutdown. The USA grew by less than in the previous quarter, but the figures were above expectations which came as a nice surprise. GDP figures published for a wide range of other countries seem to confirm that the global economy is cooling, but not yet in recession.

On Wednesday, Fed Chairman Jerome Powell went to Congress to present the Semiannual Monetary Policy Report. As expected, his testimony made no reference to an acceleration in interest rate hikes or quantitative tightening. Present market expectations seem to be pricing the next rate hike for the summer of 2021.

In the UKBrexit (what else?) was once again in the news. Theresa May promised to postpone the UK’s exit from the EU until June if no deal could be found by March 12. Further delays would create an embarrassing situation whereby the UK, by staying in the EU, would need to hold elections for the European Parliament.

Estonia went to the polls yesterday to elect a new parliament. The two main coalition blocks were joined by a third force, EKRE, a right-wing populist party polling at 20% just before the vote. Successful coalition building to exclude that party would require better showings for the smaller parties than those projected. Nevertheless, the main takeaway is that despite a relatively strong economy, tribal sentiment is surfacing in the country like elsewhere in Europe. The election result gave the incumbent coalition 48 of the 101 seats in parliament, three short of a majority.

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