The weekend strike by the US, British and French forces against Syria appears to have been conducted in ways that minimize the risks of escalation by Russia. The limited nature of the strike and objectives suggest that the impact on the constellation of forces in Syria will be minimal.
There is unlikely to be much of an impact in the global capital markets, though thin markets in early Asia could see a knee-jerk effect. The fact that strike took place may lift some uncertainty seen ahead of the weekend. US President Trump warned a strike was coming. The deployment of forces demonstrated the capability. There may be unpredictable asymmetrical responses, but at least initially, investors will look past.
Trade tensions remain high but have been given a respite. Trump has chosen to hear a conciliatory tone by President Xi last week and went as far as suggesting that perhaps tariffs might not be implemented. NAFTA negotiations are proceeding. Trump also instructed his top economic and trade advisers to look into possibly joining the Trans-Pacific Partnership, which the 11 remaining members signed an agreement last month.
Late Friday the US Treasury issued its biannual report on foreign exchange and international economic policy. No country met the legislative definition of currency manipulation. The Treasury provides a watchlist. In addition to China, Germany, Japan, Korea, and Switzerland, the US added India.
Its concerns about India seemed a bit reluctant and largely on strict definitional grounds. India has intervened in the first part of 2017, but not so much in Q4. Still, intervention passed the two percent threshold. India also enjoys a bilateral trade surplus with the US of $23 billion, just above the threshold. The Treasury Department acknowledges that the rupee is not undervalued according to the IMF and that India runs an overall current account deficit of 1.5% of GDP.
There was little acknowledgment in the report that the large fiscal stimulus that is being provided will likely to widen the US external deficit, all else being equal, as it is fond of saying. There is a slight hint of why. Consider that the US recorded a current account deficit of $466 billion in 2017. Yet, the Treasury’s report indicates that the US net international investment position improved by $470 billion. Despite the US living 2.4% beyond its means (investment in excess of savings, which is the current account deficit as a percent of GDP), its net indebtedness to the world fell.
