Notes From Underground: Franco/German spat ahead of this week’s SUMMIT of LOVE

This Thursday and Friday the European Union had hoped to put the finishing touches on the European Stability Mechanism that will go into effect in 2013. The Sarkozy/Merkel-crafted plan would give succor to Chancellor Merkel ahead of this Sunday’s elections in Baden-Wurttemberg and hopefully halt the German voters’ antipathy toward all things EU. However, there appears to be friction between the giants of the European Union. Sarkozy is reportedly furious at the Germans for abstaining on the UN vote to impose a no-fly zone in Libya. Also, the French believe that Frau Merkel played politics and an anti-French card by moving to halt electricity production at seven NUCLEAR POWER plants, thus making the French look bad as well as having the impact of driving up electricity prices.

It appears as if Merkel is in such deep political trouble that she has used the French as the foil to rally support for the CDU so as not too lose a long-held Lander that has voted for the CDU for five decades. Another problem for the SUMMIT is that the government of Portugal may fall tomorrow as the minority parties will not support another vote on a new austerity budget. This SUMMIT was supposed to be a rubber stamp vote and a victory for Merkel,but the political intrigues of old seemed to have undermined the scripted outcome.

As expected, the Canadian budget was tabled today by Finance Minister Jim Flaherty and it appears as if the coalition of minority parties will be able to oppose the budget and force a NO-CONFIDENCE vote and bring the government down. The Tories try to buy the votes of the New Democratic Party, but its leader Jack Layton was selling out the NDP for a few goodies. If the government falls, new elections will be held in May and if the public punishes the Coalition of Minority Parties, Stephen Harper’s Tories may well be able to win an outright majority.

There is still time to stop the no-confidence vote but it appears that each side thinks there chances are better with a new election. The Canadian economy is on sound footing even though yesterday’s RETAIL SALES number was very weak. The electorate may well award the Harper Government for sound stewardship during a very trying global economic period. As I always stress, markets dislike uncertainty so the election process will probably lead to the CANADIAN DOLLAR becoming relatively weak until some of the fallout of from a NO-CONFIDENCE vote begins to clear.

This morning all eyes will be on the U.K. as the minutes of the MPC meeting are released and the British Budget is tabled by the Chancellor of Exchequer. Investors will be waiting to hear if the vote at the MPC meeting was the same as the last meeting–6-3, with Andrew Sentance again voting for a 50 BASIS POINT INCREASE. Yesterday’s U.K. inflation number was terrible and placed the Bank of England further behind the Inflation Bogey making sure that Mervyn King will be taking pen to paper and writing a letter to the government explaining why the BOE again missed its inflation target. The BRITISH POUND gained against most currencies today as investors built in interest rate hikes to stem the rise of inflation. At 7:30 a.m. CST, Chancellor George Osborne will present the British budget to Parliament.

It is anticipated to be a relatively austere budget as the U.K. tries to rein in the stimulus spending that was necessary to limit the impact of the global downturn. In a piece in yesterday’s Financial Times, Gavyn Davies opines that an austere budget with EASY MONEY and a relatively weak currency is just the medicine that Britain needs. It is also the reason that the U.K. did not become like the PIIGS, as the easy money allowed the POUND to depreciate and thus lessen the impact of the recession.

The markets will let us know if Osborne has presented a credible plan. If the POUND begins to sell off after the TABLING of the BUDGET, check support levels and see if the POUND is able to hold support after its most recent rally. The market will tell us if the Brits have gotten right where the U.S. has dithered. Also, check the EUR/GBP cross to see if the GBP has gained investor confidence at the expense of a troubled EU—ah perchance to dream.

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2 Responses to “Notes From Underground: Franco/German spat ahead of this week’s SUMMIT of LOVE”

  1. Danny Says:

    What’s the most bullish and least bullish outcome from the political events in Canada?

    Also, I have the impression you place very high importance of capital flows as a substantial driving force in the market place, but I am curious of your thoughts on which asset classes are most/least susceptible to changes driven by capital flows?



  2. yra Says:

    Danny–this requires a great deal of thought.The least bullish outcome would be a victory by the Liberals and an enhanced role and power for Party Quebecois–most bullish be be an absolute majority by the conservatice Harper Tory party.Capital flows are very important for the health of the global financial system–probably the best investment would be dividend paying stocks in the foreign markets you most desire following along the path of the great Marc Faber

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