A New Phase Begins

There were no celebrations; no horn or trumpets, nary a sound, but an important shift took place last week. The shift was signaled by two events. The first was the US strike on Syria, and the second was investors’ willingness to look past Q1 economic data.  

The US missile strike on Syria was significant even if it fails to change the dynamics on the ground. It undermines the Trump Administration’s ability to “reset” the US relationship with Russia. What the new Administration recognized last week is that the tension in the US-Russian relationship was not a function of personalities or leadership styles but a genuine and fundamental difference of national interests. Russia supports the Assad regime as it supported his father’s. It is the key way Russia can project its power and influence into the Middle East.  

The G7 finance ministers meetings understandably are important for investors. The meeting of foreign ministers hardly draws much notice. However, their meeting on April 10-11 will attract interest. Many have labeled the Trump Administration as isolationist due to its criticism of the WTO, the UN, and other multilateral arrangements. However, we have argued this misunderstands the thrust of the Trump Administration. It is unilateralist, not isolationist.   

An isolationist may argue that there is not a direct national interest at stake, and killing people (including children) with missiles from the sky to punish a government who killed people (including children) with gas does not make sense. A multilateralist would have allowed UN investigation and international law to run its course. The US, arguably, has a vested interested in the international rule of law. What Kremlin has called a significant blow to US-Russian relations may allow a new convergence of US and Europe perceptions of the threat Russia poses, but whether diplomats can work it out is a different matter.  

Nevertheless, the Russian ruble will likely yield to the changing circumstances. It has been the strongest currency in the world since the US election, gaining 11.4%. It had made new highs for the year last week prior to the US missile strike (as the US dollar fell to almost RUB55.80). It would not be surprising to see the ruble unwind a good part of these gains, giving the dollar scope to rise toward RUB60-RUB62. The dollar-rouble exchange rate and oil prices typically are inversely correlated. On a rolling 60-day basis, the correlation of the percent change in the exchange rate and the Brent prices is -0,34, which is among the least over the past year.  

Meanwhile, the EU and Greece appears to be nearing an agreement that will free up another payment tranche that will allow Greece to make a large debt payment to its official creditors that comes due in a few months. Greece’s 10-year bond yield fell 19 bp to 6.86% last week. The yield peaked two months ago near 8.10%. It began the year near 7.10%. However, one key piece of the puzzle is missing: The IMF.  

The IMF’s role is important because both the German and Dutch parliament say it is a prerequisite for their continued participation. The IMF has comes under criticism from many of its non-European members, including the US, for overruling its own internal policies and overexposing the multilateral lender to Greece. The US continues to enjoy a sufficient quota (votes) at the IMF to be able to veto a commitment of new funds.