The equity market recouped some of yesterday’s loss as the entire trading day was position squaring ahead of the German Constitutional Court rendering its decision on the constitutionality of the ESM and the role of ECB moves to buy the primary issuance of European sovereign debt. There are many pundits trying to place probabilities on the court’s decision but I am not briefed enough in the BASIC LAW of Germany to even try to make that bold a prediction. To my mind, I will concentrate on the language the court uses and what position it takes in directing the German government to have to consent to the WILL OF THE PEOPLE. Will it direct the Merkel administration to return the issue to the Bundestag for approval of the new enhanced ECB “bailout” or will it suggest that the entire Maastricht Treaty needs to be approved by the entire citizenry through a REFERENDUM?
If the Court upholds the ESM but suggests a PLEBISCITE/REFERENDUM, which by the way was covertly suggested by Otmar Issing in his FT piece by raising the issue of TAXATION WITHOUT REPRESENTATION. If referendum is used in the court announcement I MAINTAIN IT WILL BE BEARISH FOR THE EURO, but if the language is neutral and non-specific as returning the issue to the Bundestag, it will give Draghi the ability to proceed in his battle to slay the Bundesbank and its austerity mantra. After the dust settles, it will be onto the Dutch elections, where an outcome of a solid labor victory will be another strength for DRAGHI THE FOX to further isolate Jens Weidmann and his BUNDESBANKERS.
***At 7:30 a.m. CST the USDA will release its report on crop production for 2012 and the amount of grain in storage. This report is of consequence for with the recent rains corn and bean prices have sold off a bit as the longtime BULLS have sold some positions. If the numbers are more devastating than the market has anticipated due to the drought in the Midwest, the GRAIN PRICES COULD RALLY TO NEW HIGHS. The idea of high food prices in a weak wage environment can have an impact on the November election so the USDA CROP REPORT CAN BE HEADLINE GRABBING. This is not a direct comment on inflation but rather just acknowledging the importance for its political potential.
***In a return to the hot issue of EUROPE, there was an article in the Sunday London Telegraph by Ambrose Evans-Pritchard, “Carthaginian Terms For Spain and Italy Threaten Draghi Bond Plan.” My readers are aware that I hold Mr. Evans-Pritchard in high regard as a sounding board for the EU political economy. In the article in which AEP was reporting from the Ambrosetti Forum, the author cites Mario Monti as the source as saying that “this minor revolution could not have happened without the defeat of French leader Nicholas Sarkozy in May. The election upset broke the Franco-German axis and reordered the strategic landscape of Europe.” I report this for the fact that I called the Sarkozy defeat the end of De Gaullism for Europe as France would now align itself with the Mediterranean countries of Italy and Spain, ending the cry for FISCAL AUSTERITY.
French President Hollande has been a quiet persuader for the Spanish and Italians to seek easier budget terms for ECB financing because France will soon be in similar straits. Hollande is already feeling the heat in France as the unemployment rate is at 10.2%, a post-Lehman high. The austerity plan that Hollande promised to adhere to in order to get France’s budget deficit down to the required 3% is being met with anger by those who elected him. It’s tough for a SOCIALIST PRESIDENT to embark on an austerity plan with 10.2%. Remember that Chairman Bernanke believes that 8.3% in the U.S. is a grave concern. For Hollande to meet the promised spending cuts and tax increases, he risks placing France into a severe recession.
The lessening of the deficit targets for Italy and Spain would be a big victory for France. In order for either Spain or Italy to get DEBT RELIEF for their BONDS, each would have to sign a Memorandum of Understanding that would basically surrender their fiscal sovereignty to the EU and ECB. France has fought for its independence with in a Franco-German centric EU for 60 years, it will not surrender its fiscal independence to German demands for austerity. Hollande is making a big political gamble in attempting to isolate the power of Bundesbank through a Draghi-led ECB. If the German Court rules the ESM unconstitutional President Hollande may be in the worst situation of all for France will be forced to choose which road it chooses. The path of severe austerity and a strong currency with Germany or the company of Italy and Spain at the DEBTORS’ BALL.
***Quick Hit: Long time readers of NOTES know that the AIG story has been of interest to me. I don’t tout stocks or anything else but from a Global Macro perspective AIG as a play on the global insurance business has intrigued me. I thought that the CHINESE INVESTMENT CORP, the sovereign wealth fund, should have made an offer to the U.S Treasury to but all of its holdings in the bailed out insurance company. AIG traces its roots back to Shangai in the 1920s and has done big business throughout Asia. The U.S. could have unloaded a politically troubled asset and the Chinese could have diversified some of its holdings of U.S. Treasuries. It was never done but today the U.S. Treasury announced it was unloading $18 Billion of stock (maybe more because of the green shoe) at a price of $32.50. AIG opened close to that price but wound up closing on its highs at $33.45. This stock is going higher for it has a successful business and a now pristine balance sheet. THIS WILL BE THE ANTI-FACEBOOK IPO.