AGF Management : High Stakes in Taiwan — and in U.S. Elections Today; Plus, the Amazing 10-Year Bond Yield

BARRING A LAST MINUTE SURPRISE, House Speaker Nancy Pelosi will land in Taiwan late this evening or tomorrow morning (local time). Her visit has inflamed U.S. relations with the regime in Beijing; any hopes for trade liberalization are gone.

FEAR OF MISCALCULATION: Asian markets are shaky this morning, as fears grow that PRC jets could buzz Pelosi's plane, with Chinese military exercises increasing in the Taiwan Strait. The potential for a mistake, by either side, is quite serious.

WHY IS PRESIDENT XI JINPING taking such a strident stance? Intelligence experts
believe he needs a diversion as the Chinese economy struggles and the country recovers from exceptionally harsh Covid restrictions. Plus, he cannot afford to look weak as he seeks a third term this fall.

MORE FUNDAMENTALLY, the government in Beijing sees a threat from Taiwan - with its solid economy and personal freedoms; Xi apparently believes economic stability cannot be attained without harsh government controls (there's an excellent column in this morning's TheHill.com that contrasts the climate in both countries).

BOTTOM LINE: Despite the very real threat to Pelosi's plane, we don't think there will be a significant military showdown. But this incident will have major impacts: a further deterioration of relations between Washington and Beijing, with little hope for a reconciliation on trade - and growing support in the U.S. for more defense spending as the West confronts threats in both China and Ukraine.
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MITCH McCONNELL'S ELECTION NIGHTMARE: Could the GOP blow this fall's elections? Joe Biden has won some legislative victories and has killed the leader of al-Qaeda, but the real threat to Republicans is that they will nominate candidates who are viewed as too radical. The party's fear of this scenario may increase tonight.

ELECTIONS TODAY will be carefully watched in Arizona and Missouri, where the potential GOP winners still refuse to accept that Biden won the 2020 election. Donald Trump's hold over these candidates and their supporters overlooks the key factor - can they win general elections in November?

REPUBLICANS ARE STILL LIKELY to re-capture the House, but their prospects in the Senate - which is tied, 50-50 - are shaky. In addition to the Arizona and Missouri wild cards, the GOP's Senate candidates suddenly look vulnerable in Pennsylvania (Mehmet Oz) and Georgia (Herschel Walker).

IT'S TOO EARLY TO MAKE A CALL on the Senate, where the Democrats have a plausible path toward a 51-49 seat majority. It shouldn't be close, but McConnell knows from past elections that GOP candidates may rally the base in primaries, that's not enough in November.
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WHAT GIVES? Amid all the news as August begins, there's been relatively little commentary on the astonishing 10-year Treasury bond yield, seemingly headed for a 2.5% print. Why? Is this a safe haven as China's saber rattling increases? A sign that inflation has peaked? A sign that a recession is likely?

IT'S PROBABLY A COMBINATION OF ALL THREE, but not a market mis-read, which many analysts assert; the markets don't make mistakes this big. Imagine the Fed's dilemma - if the central bankers tighten aggressively in September, will yields decline even more? As for a fear of recession - it's difficult to worry about one with
unemployment at 3.6% and a roaring bond market rally.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

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