Well, I’m sure most investors will be happy to get the hell out of February and on that score, there’s good news! Odds are, the month will be over on Wednesday. And hell, Trump’s still President last time we checked which means there’s a non-zero chance he fumbles the nuclear football and history stops without warning, so in theory, February could be over tomorrow if he watches the wrong Fox News segment on North Korea.
Anyone have the Colombo All Share on their February market bingo card?
BBG's Garfield Reynolds: "Indonesia and Sri Lanka are clinging on as the only Asian bourses in the green for this month."
ok, who had Sri Lanka on their best-performing February market bingo card?
— Heisenberg Report (@heisenbergrpt) February 25, 2018
Europe will dominate the event risks in the week ahead. Italy holds closely-watched elections next Sunday and the Five Star Movement is still leading the polls. The results will be mixed – literally, as in a hung parliament. Apparently, Five Star Leader Luigi Di Maio is looking at the possibility of offering a “government contract” to other parties in the event he wins but falls short of a majority. The idea (I guess) is to build a coalition although he doesn’t want to surrender any ministerial seats to anyone who joins his imaginary coalition, so I’m not sure what the incentive is other than to avoid a prolonged period of uncertainty.
“The election will likely reveal little immediately about Italy’s next government [and] even if M5S does eventually form a government, we note that the Italian constitution prohibits referenda on treaty changes and an M5S-led coalition would lack the two-thirds majority needed in parliament to make treaty changes,” Barclays notes, adding that nevertheless, “an M5S-led government would challenge the EU, while its presence on the European council could make moves towards EU integration more difficult.”
“Opinion polls on the Italian general election continue to paint a highly fragmented picture, with none of the major political parties or coalitions being able to form a government,” Goldman wrote earlier this month before breaking things down as follows: “Although a centre-right coalition (Forza Italia -FI, centre-right party of Mr. Berlusconi; Lega Nord -LN, another anti-European anti-immigration party; and Brothers of Italy) is leading in the opinion polls, it is still polling between 35% and 39%. According to our simulations, the centre-right alliance would gain between 40%-46% of seats in Parliament.” Here’s a visual:
Long story short, that’s a fucking mess. We’ll have more on it closer to election day, but for now, just note that this will be in focus all week long.
As if that wasn’t enough on the European political front, SPD will vote on Sunday (so, the same damn day as the Italian elections) on joining Merkel’s CDU in a renewal of the Grand Coalition in Germany. Here’s Reuters:
Merkel needs SPD members to vote ‘yes’ in a postal ballot for a renewal of the 2013-2017 grand coalition. The outcome, to be announced on March 4, is unclear although there are some signs that the deal will go through.
If SPD members reject the deal, the most likely scenarios are a new election or a minority government.
Needless to say, if something goes “wrong” in any of this, it would likely weigh on the euro and probably on periphery spreads.
Here’s some more color from AFP:
European Commission chief Jean-Claude Juncker warned Thursday that financial markets could face turbulence after Italian elections next month, saying Brussels was prepared for a worst-case scenario.
Italians vote on March 4th amid uncertainty, with polls indicating a coalition between the centre-right opposition Forza Italia party and far-right, anti-immigrant groups could end up in government.
Juncker said it would be a “very important week in the European Union” because the result of a membership ballot of Germany’s Social Democrats on whether to join a coalition led by Chancellor Angela Merkel’s is due on the same day.”
“I am more worried by the outcome of the Italian elections than by the outcome of the voting of the SPD members, but we have to prepare ourselves for the worst scenario,” Juncker told an event at the CEPS think-tank in Brussels.
“The worst scenario could be no operational government in Italy,” he added. “Combining all these uncertainties, the SPD, Italian elections, minority governments here and there… we could have a strong reaction on the financial markets in the second week of March, so we are preparing for this scenario.”
On the data front, we’ll get CPI in Europe this week, which will of course be watched closely and comes on the heels of the January ECB minutes which betrayed some caution about removing the easing bias from the forward guidance. Data from Germany and Spain is out Tuesday, with the broader eurozone measure on Wednesday as well as readings from France and Italy.
In the U.S., Powell will testify (Humphrey-Hawkins). In case Powell is inclined to listen, BofAML counsels that this is not the time Jay, this is not the time:
Fed Chair Powell’s first semi-annual monetary policy testimony is on Tuesday. The speech will likely have a similar tone as the FOMC minutes, noting that growth has picked up and the FOMC has become more convinced of continued momentum. We think Powell will sound cautiously optimistic, reiterating the need for patience when it comes to the hiking cycle. This will not be the place for Powell to hint at 4 hikes for this year.
“Bond traders know Yellen was painstakingly measured in her words,” Bloomberg’s Brian Chappatta reminds you. “They’ll soon find out just how much continuity Powell brings in live testimony.”
We’ll get PCE on Thursday which will be scrutinized for obvious reasons. Here’s Goldman with a short preview on that:
Based on details in the PPI and CPI reports, we forecast that the core PCE price index rose +0.30% month-over-month in January, which would leave the year-over-year rate unchanged at 1.5%. Additionally, we expect that the headline PCE price index increased 0.39% in January, or 1.7% from a year earlier. We forecast a 0.3% increase in January personal income and a 0.2% gain in personal spending.
Let’s see, what else? Oh, keep watching the yen. Here’s a fun chart from Barclays:
That’s a headache for the BoJ and pretty much everyone else (well, save maybe asset managers who are long in stark contrast to specs).
Full calendar via BofAML
