The recent Italian elections wound up in a very inconclusive result. In a political lineup of the three Bs–(no Chuck, not Biggio, Berkman and Bagwell)–Bersani, Berlusconi and Beppe, the Italian populace dealt a massive defeat to Brussel-appointed technocrat Mario Monti. The vox populi raised its voice against continuing austerity and will look to whatever government is formed to be one of a pro-growth economic agenda. The biggest loser from the Italian election may in fact be another Italian, ECB President Mario Draghi. If European nations say no to more austerity then Draghi’s program of doing anything to stem the Euro crisis comes to an end. WHY? The Outright Monetary Transactions (OMT) are based upon ECB intervention and the quid pro quo of conditionality of acceptance of austerity budgets. If you accept that the basis of OMT is a form of quantitative easing and the recipients of the QE won’t accept the severity of conditionality that is demanded by the ECB, then emperor Draghi is truly naked and not dressed in a fine Italian suit.
Adding pressure to the Italian elections was the weekend news that Dutch unions oppose fresh austerity plans being debated in Parliament for the austerity budgets “will only worsen the Dutch economy and increase unemployment.” The present Dutch government is a coalition of the center-left and center-right. The right is in favor of public sector wage freeze and no tax hike while the center left favors just the reverse. Demands on governments to meet the stringent 3% deficit requirement are being met with public backlash. In Portugal, the weekend saw tens of thousands take to the street in opposition to further austerity plans. Portuguese citizens were calling for the removal of the Coelho government while also rallying against the IMF and the Troika.
The present Draghi program is under strain as the idea of CONDITIONALITY was a demand of the Germans, especially the Weidmann-led Bundesbank. The Germans cannot be happy about the recent Italian elections for if austerity is defeated at the polls and in the street what happens to President Draghi and “DOING WHATEVER IT TAKES?” The crown presented to Mario Draghi by the luminaries at Davos now rests very uneasy upon the head of the ECB. Your move, Mario.
***Tomorrow evening the Reserve Bank of Australia will announce its interest rate decision. Consensus is looking for the RBA to maintain rates at 3%. The economy has shown mixed signs. However, as commodity prices have eased, the recent softness in the Aussie dollar may support the consensus. But I have argued for the last few months that the inversion on the short end of the Aussie yield curve gives the RBA some latitude to cut rates. The overnight rate in Australia is 3% while the two-year note is yielding roughly 2.7%, thus the RBA has room to cut. There is recent selling of the Aussie dollar and if the RBA wanted to buy some protection against lower commodity prices it would be an opportune time to cut overnight rates. If the Aussies believe in the global currency wars it is now time for them to fire a shot.
***Question to the global macro traders: Can the global equity markets become a GOLD-type investment? I have discussed the idea that the GOLD BULL is tired having carried the weight of the investment community as the main haven asset–think preservation of value. Since October 2007, the S&Ps are virtually unchanged while GOLD is up nearly 100%. Are investors desiring to give equities a chance to be a haven and act as a store of value with possible upside potential? I am not making the argument for it as the correct action just merely opening it for DISCUSSION. Seeing how the equity markets have held up in the face of such massive global political uncertainty and the non-reaction to the SEQUESTER the question must be asked. Can the equity market attain a role of a HAVEN ASSET? The FED is going to stay the course as the Bernanke and Yellen group holds sway over the FOMC. This is just something to ponder especially as long-term debt is certainly not a haven.