The loser in Brussels was … FRANCE. The markets were giddy as they drank deep from the KOOL AID spring of separating BANK AND SOVEREIGN SOLVENCY  did this really occur? It is far too early to tell. For all the “PUNDITS” it seems that Chancellor Merkel has capitulated to the needs of Spain and Italy as France cheered on the brinkmanship of Mario Monti. The French, led by President Hollande, has now ended the 50-year-old policy of Gaullism as France will no longer be deemed a responsible partner for Germany as being the mainstay of Europe.

The French have made a 180 DEGREE TURN and for the benefit of hoped for growth versus German-enforced austerity, European politics is now entering a period of great uncertainty. Many are thinking that Chancellor Merkel has been bested by the likes of Monti, Rajoy and Hollande, but I and others warn not so fast in declaring the defeat of German fiscal control of Europe. The German elections are scheduled for 2013 and there is ample time for Merkel to resuscitate her image as the “IRON CHANCELLOR.”

While the German leader placated the markets and assuaged the global financial chieftains, it is no certainty that the German Constitutional Court will uphold the European Stability Mechanism, leading to great turmoil in Europe. For now the markets breathe a RELIEF SIGH but keep alert to the EUROPEAN BOND MARKETS. If BUND/ITALIAN, FRENCH, SPANISH spread differentials fail to narrow, European policymakers will have a tumultuous summer. The Brussels Summit outcome may only be the end of ACT 1.

1. SNB PRESIDENT Thomas Jordan maintained in an interview today that the Swiss policy of holding the EUR/CHF peg at 1.20 was the correct route to take as the printing of SWISS FRANCS to purchase EUROS was preventing a deflationary spiral from choking the Swiss economy. Yes, the EURO/SWISS chart looks like the EKG of a dead person as the 1.20 is a FLAT LINE. While the Swiss view this as a great success, it is too early for a celebration. There is a great deal of talk about the possibility of the Germans eventually leaving the EURO. If that were to happen the SWISS CENTRAL BANK will be left with a massive amount of a devalued currency, so unless THOMAS JORDAN is aware that the Germans will never leave the EURO, the Swiss are playing financial roulette.
The uncertainty in Europe is a very unsettling proposition for many other actors in the global financial system … THE SNB ESPECIALLY. While Thomas Jordan deems the present SWISS POLICY a success, I find it very disconcerting that a massive currency intervention has barely kept the EURO/CHF rate above the proscribed floor. Even in the hoopla of Friday’s market celebration of “GERMAN CAPITULATION”, the EURO/SWISS CROSS IS 1.2015.
2. Last week, the Mexican peso was the top currency as the markets awoke to the possibility of a significant change in policy on behalf of a new government. Presently I have no results to today’s Mexican Presidential election, but the market believes that Nieto will win and that the PRI leader will muster the strength to create a very favorable environment for foreign investment. The PESO held last week even on days when the financial markets were in the throes of market RISK OFF MODE.
It is time to pay close attention to the PESO TECHNICALS as further confirmation of improving fundamentals. Decent interest rates, improving competitive position for Mexican manufacturers and an opening up the MEX energy sector may prove a compelling story. Also, as I wrote last Sunday night, look at the Chinese YUAN/Mex Peso cross to technically measure the enhanced competitive position of the Mexican economy in terms of global trade.
NOTE: Preliminary results show Pena ahead by 6 percentage points

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7 Responses to “Notes From Underground: Has The FAT LADY BEGUN TO SING OR WAS THIS THE QUEEN’S ARIA?”

  1. Danny Says:


    What role would you say increasing unemployment in Germany may shift public sentiment towards Merkel & Co with respect to the level of support for crafting a solution to the EU problems? While Germany has substantially less unemployment currently, if the German economy started to come under pressure with rising unemployment…I just wonder if Merkel will find herself a good deal more support and a hightened sense of urgency to arrive at an optimal solution sooner rather than later.


  2. arthur Says:

    Hi Yra, paying close attention to Mexico, very interesting story. I have one doubt: the fate of Mexico’s economy is linked tightly with the health of its giant neighbor, the US. So remains vulnerable to a slowdown in the US…

    “Germany will never leave the eurozone,” said acclaimed geopolitical expert Ian Bremmer (FT)


  3. yra Says:

    Arthur–thanks for the Bremmer link.To say never is always dangerous.The Germans have several cards to play and in time we will see –but the Gaullist model seems to be in serious trouble.The history of modern Europe has been the balancing of power to contain Germany by France allying with Russia or the U.K.–this will not be the way forward and so again let us watch Putin and the games he will play.As for Mexico–yes well tied to the U.S. but the PESO is at 13.4 versus the DOLLAR well down in value so don’t let the risk on/risk off be the only determinant.

  4. yra Says:

    Danny–very good point and certainly something to consider.There are voices in Germany pushing the alternative argument and that Germany is such a well oiled export machine that it is not worried about Europe as its main markets–this will get very volatile in the year ahead.

  5. Arthur Says:

    Thanks. Let me add something else about Germany. Eastern Germany still lags behind West. Income per head is still only 70% of that in the West. Few German business and political leadership positions are held by people from the former East Germany. Unemployment in eastern Germany stands at 12 percent (Leipzig and Dresden around 14%), nearly twice as high the 6.9 percent in the west. None of the 14 cabinet ministers appointed by Merkel come from the former East Germany, and none of the 30 top German companies in the DAX market index is led by someone from eastern Germany.

  6. yra harris Says:


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    […] July 2, I wrote a blog post after a key summit in Brussels in which German Chancellor Merkel was bested by Italy’s Monti […]

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