Frank Kelly’s Geopolitical Week Ahead | August 4, 2024

Middle East tensions reach a new high point

It may be the Dog Days of Summer in the Northern Hemisphere, with Washington, Brussels, and many other G7 capitals emptied for much-needed vacations. But markets are closely watching the Middle East as tensions reached a new high point as Iran is likely to launch retaliatory strikes against Israel following the assassination of Hezbollah leader Fuad Shukr in Lebanon and Hamas political leader Ismail Haniyeh in Tehran. The U.S. has bolstered its naval presence in the region in a show of support for Israel. But they are also there as the risk of Iranian-backed militia groups in Syria and Iraq will attack U.S.  military targets in the region, too.

U.S. and Australia "2+2" meetings in Annapolis, Maryland

Meanwhile, following successful meetings of the Quad (India, Japan, Australia, and the U.S.) foreign ministers and defense ministers last week, U.S. Secretary of State Antony Blinken and Defense Secretary Lloyd Austin will hold "2+2" meetings in Annapolis, Maryland, with their counterparts from Australia. The conference aims to further strengthen security and diplomatic relations between the two nations, particularly around the AUKUS (Australia, UK, U.S.) security arrangement, in the face of growing Chinese aggressive behavior in the Indo-Pacific.

Kamala Harris is expected to announce her running mate

Finally, U.S. Vice President Kamala Harris is expected to announce her running mate on Wednesday, capping three weeks of extraordinary momentum as she seeks to win the presidency in November.  The Democratic Convention begins on August 19.

Global economic radar screen

Looking at the global economic radar screen this week, there are no major central bank speeches scheduled as most central bankers are on vacation in advance of the annual Jackson Hole Conference on August 22. But there are still a healthy number of economic reports being released. 

Markets will focus on the Bank of Japan's summary of opinions following last week's interest rate increase. Also, in Asia this week, China will release its inflation print and trade figures on Friday.  

Europe is mostly quiet this week, aside from Germany and France releasing factory orders and industrial production figures. 

Finally, in the U.S., the ISM services index and international trade balance figures are released this week, as well as the Fed's Senior Loan Officer Opinion Survey, which offers a clearer snapshot of credit conditions. 

U.S. Financial Regulatory Week Ahead

Last week, we said the Dog Days of Summer were not officially here. Well, this week, they are here in force. Washington collectively ran out of town for the summer holidays. There is very little going on this coming week – no Fed speeches, no big regulatory agency meetings, no Congressional hearings, not many think tank events or trade association events.  

But last week was anything but quiet. The Federal Deposit Insurance Corporation (FDIC) issued a bipartisan agreement among the board on a proposed rulemaking to step up oversight of asset managers and the amount of shares in banks that they own. Until now, this has been a self-certification process with the asset managers promising to live by the rules.  No more.  Bank examiners will be looking much more closely at who owns what amount of shares in banks – something the asset management industry does not like. But when you have the FDIC Board – Republicans included – agreeing more has to be done, that is tough to fight back against. 

But that was not the only action happening at the FDIC last week: The agency’s Inspector General released a scathing report further detailing the abusive atmosphere allowed to persist among employees, including how FDIC leadership failed to properly address allegations of sexual harassment of employees or to implement programs designed to prevent such misconduct.  The Inspector General also revealed a separate report is forthcoming detailing  “FDIC executives’ knowledge of harassment and related misconduct” as well as “factual findings regarding selected allegations that senior officials personally engaged in harassment or related misconduct.” 

Somehow, FDIC Chair Martin Gruenberg continues to hold onto his seat, saying he will step down only when a replacement is confirmed by the Senate – which, considering the Senate Banking Committee failed to move on an expected confirmation vote last week, kicking it into September – makes us believe Gruenberg could be still sitting in the chair for months and months to come.  That is a true scandal in and of itself. 

Turning to Congress, the House of Representatives left for the summer break two weeks ago while the Senate was in session last week.  Despite hanging around an extra week, they did not get two expected actions done: First, as mentioned above, the Senate Banking Committee did not move on the nomination of Christy Goldsmith Romero as the next FDIC Chair. Senate Banking Committee Chair Sherrod Brown (D-OH) put it off until September. But we think he will still have trouble moving the nomination forward as – so far – all Republicans oppose her nomination. 

Over at the Senate Agriculture Committee, Chair Debbie Stabenow (D-MI) pulled back from marking up her crypto regulatory bill, also choosing to wait until the Senate comes back in September. We have a feeling the dynamics and concerns over the draft bill will be pretty much unchanged by then, ending Stabenow’s efforts (she is retiring at the end of this session). 

Meanwhile, the House of Representatives – while out of session – still fired off two missives of note. First, the House Republican Environmental, Social, and Governance (ESG) Working Group—led by Oversight and Investigations Subcommittee Chairman Bill Huizenga (MI-04)—released its final staff report Thursday.  The report is the culmination of the Working Group’s comprehensive examination of the factors contributing to the rise of ESG initiatives and the consequences for everyday investors, in addition to recommendations to protect American capital markets from the threats posed by these politically motivated mandates.

The report calls for legislative action on a number of major points, including:

• Reform the proxy voting system to safeguard the interests of retail investors.
• Promote transparency, accountability, and accuracy in the proxy advisory system.
• Enhance accountability in shareholder voting by aligning voting decisions with the economic interests of shareholders.
• Increase transparency and oversight of large asset managers to ensure their practices reflect the pecuniary interest of retail investors.
• Improve ESG rating agency accountability and transparency to safeguard retail shareholders.
• Strengthen oversight and conduct thorough investigations into federal regulatory efforts that would contort our financial system into a vehicle to implement climate policy.
• Demand transparency, responsibility, and adherence to statutory limits from financial and consumer regulatory agencies.
• Protect U.S. companies from burdensome European Union (“EU”) regulations, safeguarding American interests in global markets.

And second, this past Wednesday, the Chairman of the House Financial Services Committee, Patrick McHenry (R-NC), and all the Committee Republicans sent a letter to Federal Reserve Chairman Jay Powell demanding the Fed withdraw and re-propose the Basel III Endgame rulemaking in its entirety, given the substantial changes to its original form. The letter follows Chairman Powell’s testimony before the Committee in support of re-proposal where he suggested it needed substantial re-writes. It is another hammer blow against the draft rules, which are already on life-support as Fed Vice Chair for Supervision Michael Barr scrambles to salvage the proposal.