Daily Memo: Warnings on Hong Kong, the Iran Standoff, Economic Relief in Argentina

All the news worth knowing today.

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U.S. warnings on Hong Kong. U.S. President Donald Trump took to Twitter on Wednesday to call on his Chinese counterpart, Xi Jinping, to address the Hong Kong protests “quickly and humanely,” while appearing to warn that a trade deal won’t be reached otherwise. Trump also proposed a face-to-face meeting with Xi to resolve the matter. Beijing said thanks, but we’ll handle internal matters our own. This followed a Financial Times report citing White House sources claiming that, at the G-20 summit in Osaka in June, Trump told Xi that Hong Kong was a Chinese internal matter and that the White House would not condemn Beijing’s actions there. U.S. Commerce Secretary Wilbur Ross echoed this view in an interview on Wednesday. Others in the U.S. government were a bit more pointed; several U.S. lawmakers from both parties have warned of dramatic consequences if Beijing cracks down. All this comes as China’s People’s Armed Police conducted mass anti-riot drills in Shenzhen. We still think the odds are against Beijing intervening directly in Hong Kong until we see any evidence that the unrest is spreading to the mainland. And we think that a trade deal will remain elusive for months to come, irrespective of what happens with Hong Kong. The U.S. still has some leverage with which to influence Beijing’s actions there. China’s concern for preserving Hong Kong’s image as a Western gateway to the mainland gives international rhetorical warnings against interventions added weight. But neither the fate of the trade deal nor Western pressure will be the deciding factor in how things play out from here.

Gibraltar defies the U.S. The British overseas territory was set on Thursday to release an Iranian tanker seized a month and a half ago but was stopped at the last moment by a U.S. appeal to hold on to the Grace 1. (Separately, the Gibraltar government released the Grace 1’s captain and three officers on Thursday.) Gibraltar’s Supreme Court considered the U.S. request and then decided to release the tanker anyway. British Royal Marines seized the Grace 1 in the Strait of Gibraltar on July 4 on suspicion that it was transporting oil to Syria in violation of European Union sanctions. Iran then impounded the British-flagged Stena Impero in the Strait of Hormuz on July 19, officially for switching off its tracking devices, colliding with a fishing vessel and polluting the strait (and unofficially for being a British-flagged vessel near Iranian waters). The release of the Iranian tanker is expected to prompt Iran to release the Stena Impero, which would ease pressure somewhat on European powers to either join a U.S. mission to defend shipping in the Persian Gulf or to start their own mission. It would also aid British, French and German (as well as Russian and Chinese) efforts to keep the Iran nuclear deal alive.

Economic relief for Argentine voters. Argentine President Mauricio Macri announced yesterday a series of economic measures aimed at providing economic relief for voters. The minimum taxable income was raised by 20 percent, and self-employed individuals will see a tax cut of up to 50 percent for the remainder of this year. Gasoline prices have been frozen for the next 90 days, and Universal Child Allowance payments will be increased by 1,000 pesos ($17) per month in September and October. Public workers, the military and federal security forces will also receive a 5,000-peso bonus at the end of this month. The measures were in response to Sunday’s primary elections, in which opposition candidate Alberto Fernandez won a resounding victory, as voters rejected Macri’s austerity policies. The policies were in part an attempt to meet the conditions of Argentina’s International Monetary Fund loan agreement, which Fernandez also said he would honor if doing so does not come at workers’ expense.

Signs of a U.S. recession. For the second day in a row, the yield curve on U.S. two-year and 10-year government bonds has been inverted, which historically has been an indicator of an upcoming recession. Labor Department data on Thursday also showed a slightly larger-than-expected increase in weekly jobless claims and a 1.6 percent drop in manufacturing productivity in the second quarter. Many observers have been anticipating a U.S. recession for months now, though few can agree on its timing or severity. What we can say for certain is that the U.S. economy has been expanding for roughly 10 years now, and no expansion lasts forever. This may seem obvious, but it’s important to point out because we can’t overstate the impact that a recession in the world’s largest market would have on the global economy.

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