Notes From Underground

It is appalling that even political leaders are in such a hurry to gain recognition that they rush to put out tweets like any movie star or music artist in an effort to gain followers. The British prime minister rushed out this superficial bout of pabulum: “I am shocked by events in Paris tonight. Our thoughts and prayers are with the French people. We will do whatever we can to help.” This is what the leader of a nation with armed forces at his disposal rushes to send out to the world. It is so vacuous that mere words cannot measure the low esteem in which I hold the reigning British leader.What next? Selfies with tears pouring down his cheeks in order to show the French people how truly saddened are the Brits and how those across the channel feel the pain caused by the millenarian nihilists.

The words of the idiot Cameron will not assuage the loss of loved ones and will certainly not repair the tear in the fabric of European political harmony. What will the outcome be on markets and financial issues? There will be much spoken and written about the impact from the second major terrorist attack this year in France. So in an effort to bring some clarity to the readers of NOTES FROM UNDERGROUND I will make an effort to analyze the possible effects on markets:

1. Will the result in France be an increase in the popularity of Marine Le Pen’s Front National? This I think has the highest probability and it will echo throughout the EU where previous fringe parties have all been gaining in the polls. Ms. Le Pen is viewed by the Eurocrats as a threat to the EU project because she wants to claw back power from Brussels and possibly bring back the French Franc to France in an effort to regain control over fiscal and monetary policy by the authorities in Paris. French nationalists believe that the German effort to push a program of fiscal austerity has hindered faster growth across Europe. The stringent demands of German fiscal policy has caused France to labor under an overvalued currency that is made to accommodate a savings-based German financial system. The fear of a turn to the far-right will keep Mario Draghi jawboning the EURO currency lower by hinting at more QE and unconventional measures on monetary stimulus.

But this causes a problem for Draghi for the more he pushes for lower rates and enhanced QE to drive the euro lower to “theoretically” aid French, Italian and Spanish exports the greater the pushback from Jens Weidmann and the Bundesbank hard-money crowd. Also, the growing angst in Germany over the ECB‘s current policies will be elevated by Angela Merkel’s effort to make Germany a welcome wagon of over a million refugees, many coming from Syria. The pressure on Chancellor Merkel is going to increase and the rise of the AfD will continue. The call for Germany to fight against the lax monetary and fiscal policies of Brussels and ECB will result in a renewed effort to challenge the Lisbon Treaty in the German Constitutional Court.

Chancellor Merkel and President Hollande will face severe political backlash which will mean that ECB President Draghi will feel it is his duty to “DO WHATEVER IT TAKES” to sustain the European center and keep the economy afloat in these difficult times. Maybe Prime Minister David Cameron and his Treasury minister will tweet the code to the safe deposit box at the Bank of England.

2. Will the increased fear in the nations of Europe result in a renewed slowdown as consumers stay home and buy only life’s essentials? If the consumer retrenches, will European equity markets slump or will the increased monetary measures by the ECB to stem an economic downturn be enough to keep the equity markets elevated? The sovereign bond markets will be a good barometer as to ECB activity as the Draghi will bring forward future bond purchases to add surety to investors. The increased BOND purchases by the ECB will also result in a weakening of the EURO which will result in other central banks being vigilante to the possible deleterious effects of quick depreciation in the EURO relative to other currencies. The Swiss are going to be under pressure to prevent a renewed appreciation of the Swiss franc as a result of its haven status during times of geopolitical uncertainty.

If the SWISS NATIONAL BANK announces even greater negative rates will it result in GOLD regaining some of its lost luster. GOLD has a great deal of short positions as the Friday settlement gave indications of a new sell signal as the technicals provided new support for the bearish case for gold. The point to be made is that geopolitical events have the power to disrupt markets as what seemed to be sound investments on Friday can be turned upside down quickly as investors head to the sidelines in order to gain some measure of the financial fallout from political uncertainty. As I wrote several times this summer, in the realm of global ZERO INTEREST RATE POLICY politics becomes paramount.

3. The G-20 summit being held in Turkey today and tomorrow will have its attention directed to meeting the crisis in Europe and Syria and how to combat the widening effects of ISIS. Anything of economic consequence will be pushed back to future meetings so we will be left to read the tweets from the world’s leaders.

4. Pay close attention to the European sovereign debt markets as a barometer of ECB intentions. The peripheral bonds–Italian, Spanish, Portuguese, Greece–for these have the highest yields and can also be moved easily because of less liquidity. In a testament to the power of the ECB’s QE program, the largest move in any market this YEAR has been the GREEK yield curve. At one time the Greek 3-year notes will yield MORE THAN 50% and the 3s/10s Greek curve was an inverted to NEGATIVE 3800 basis points as investors were worried about a GREEK DEFAULT. There are still concerns about a Greek default but through the miracle of QE the Greek 2s/10s curve is now positively sloped and closed at +65 basis points on Friday. I advise treating all actions as a trade and not being married to any investment concept. I know that Rothschild said “buy to the sound of cannons, sell to the sound of trumpets” but I am at a loss to advise how to trade to the sound of TWEETS and certainly to the advice of twits.

Tags: ECB, Euro, Europe, France, Germany, Great Britain, Marine Le Pen, Mario Draghi, QE

This entry was posted on November 15, 2015 at 7:39 pm and is filed under ECB, Europe. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.