Geopolitics: noteworthy event risk coming into view - Westpac

Analysts at Westpac noted that there is some noteworthy event risk coming into view that will likely have an outsized impact on risk appetite.

Key Quotes:

"1) President Trump has until May 12 to decide whether to recertify the Iran nuclear accord. Trump approved a 120-day sanctions waiver back in January, threatening to terminate the arrangement at this upcoming recertification date if “significant flaws” in the deal were not rectified. Most observers expect that the US will walk away from the deal. That will see US sanctions automatically reinstated, contravening the deal’s terms and effectively spelling it’s demise. The prospect of increased mid-East geopolitical risks and curbs on Iranian oil have been a major contributor to the 16%+ increase in oil prices this year to 3 ½ year highs. US retail gasoline prices are up 14% this year and by more than 63% since their 2016 lows, though average nationwide pump prices remain below $3 a gallon. The Minneapolis Fed finds that a $1 change in gasoline prices is worth $800 per annum to the median household. By comparison the Trump/Republican tax cut delivered a $930 annual average income gain to middle income households. If gasoline prices hold at current levels through year’s end they will have averaged $2.81 for the year, US45c higher than mid-2017, meaning, the rise in gasoline in the last ten months has consumed/offset almost half the tax cut benefit to middle income households. The US is now a significant energy producer and benefits from higher energy prices too.

2) On May 15 the US Trade Representative begins public hearings on the first round of tariffs on $50bn in goods exports from China. The USTR is expected to complete its review by mid-June and have tariffs ready for implementation, awaiting Trump’s final decision. A senior US delegation returned from China last week without a deal. The most likely outcome among observers is that despite staking out an aggressive opening position and using plenty of provocation and brinksmanship the final deal will be a conventional middle ground compromise, as often happens with the administration (i.e. steel and aluminum tariffs).

3) NAFTA talks resume this week. This round of talks are widely considered a “make or break” moment if a “deal in principle” is to be reached and announced this month, before elections in Mexico in July and US mid-terms in November complicate progress, dragging negotiations into 2019.

4) Trump / North Korea summit. A formal date and location for the unprecedented talks has yet to be announced but they are widely expected to be in late May or June."