An ‘Exchange Of Letters’, A Succession Plan Gone Awry And The Familiar Paradox

10-year US yields fell to a fresh “since 2017” low on Tuesday, a move one supposes will be attributed to ongoing concerns about the trade spat. Donald Trump, the recognized authority on ghost-written books about deals, swears China would like to make one, but he’s not ready yet. The longer this goes on, the more worried everyone will be about the outlook for growth.

In Italy, yields rose amid concerns that Brussels and Matteo Salvini are destined to lock horns. The EU will reportedly get the ball rolling on the budget disciplinary process next week, presaging another bitter dispute with Rome, only this time around, Salvini has what amounts to an electoral mandate to push back.

Pierre Moscovici sounded a relatively constructive tone on Tuesday. “I am going to exchange views with the Italian government on additional measures that might be required in order for them to be compliant with the rules”, he said, at a conference near Lisbon. “It’s quite likely that we will have an exchange of letters”, Moscovici added. “I’m not favoring sanctions.”

The idea of Moscovici and Salvini becoming pen pals was enough to help Italian equities pare losses, but the mood was sour. Banks were hit especially hard. This is shaping up to be the worst month for Italian banks since last May, during the BTP meltdown. 

Meanwhile, Angela Merkel has reportedly soured on AKK, which isn’t the best news for political stability in Germany, one of the last remaining bastions of sanity in a world gone stark, raving mad.

Kramp-Karrenbauer, Merkel frets, isn’t “up to the job”. That’s according to two officials familiar with the chancellor’s thinking who spoke to Bloomberg. Merkel is reportedly concerned after AKK presided over the worst election showing for CDU ever, but it also seems likely that AKK’s maneuvering to accelerate the timetable on Merkel’s exit isn’t sitting particularly well with the chancellor. That goes double when you consider that, to quote Bloomberg, “AKK’s approval rating slipped three points to 36% in the latest poll… the lowest since she became party leader and almost 20 points behind Merkel.”

This is yet another piece of news which suggests that if you want to parse the results of the EU elections, the more important stories are found at the national level. The 30,000-foot view is that the populist surge didn’t materialize. But the results in France, Italy and the UK have serious ramifications, even if we can’t yet say definitively what they are. Now, you can add internal CDU strife to the mix.

“Trouble is brewing for the CDU – the poor performance in the EU Parliament election is leading to increasing debate over the future of AKK and the ability to counter the threat of younger voters choosing the Green party”, SocGen said, in a quick blast. “Expect more political uncertainty and the possibility of another chancellor challenge ahead of the next elections in 2021”, the bank cautioned.

“The success of Green and Liberal parties will shift the focus of the ruling coalition, and the starting-bell has rung out for negotiations over key EU jobs, but the relative failure of populist parties will, if it does anything at all, marginally reduce fears of the system imploding”, the bank’s Kit Juckes wrote of the EU elections, in a separate note on Tuesday. “More important, at individual country level, are the possibility of Italian elections, and the reaction of the main contenders for the leadership of the Conservative Party in the UK.”

“While the results will have an impact on the direction of Europe in the medium term, perhaps a more immediate impact will occur at a national level”, BNP said Monday. “The results suggest that the coalition in Italy is more likely than not to break up in the not-too-distant future [and] in the UK, the poor showing for the country’s two main parties will force them to adopt a clearer Brexit stance in one way or another.” Here’s a timetable on what comes next:



Ultimately, all of this underscores a familiar paradox for market participants. Geopolitical tensions are seemingly unresolvable. As night follows day, a new crisis darkens the doorstep just when we thought we saw a light at the end of the tunnel. And yet central banks are resolute. There are more “tools”, we’re told. Policy is always described as sufficiently “flexible”. The people making the policy will “remain vigilant”. Maybe that’s all anyone needs to know.


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