Eq: Dev ex-US
This is Europe week for financial markets. Italy is currently engulfed in a political, and increasingly markets, crisis. Now the panic and political gloom is spreading to Spain. The country’s Prime Minister, Mariano Rajoy, is set to face a no confidence vote and the outcome is very uncertain. Accordingly, Spain’s sovereign yields have been rising alongside Italy’s. The no confidence vote will be held on Friday and comes following a ruling of corruption against the center-right party of which Rajoy is leader.
FINSUM: Southern Europe is back in the news this week after a six-year hiatus. We don’t think anything major will be caused by Spain, but the Italian situation is very dicey.
We do not cover too much European news. This is mostly because our readers don’t pay much attention when we do. However, we thought the crisis going on in Italy warranted special attention. Stocks are plummeting and bond yields soaring on the back of a political uproar over the future of leadership. In particular, two big parties (i.e. the Five Star Movement and the League) who are leading in the polls both propose lavish tax cuts and spending increases which look on the surface to possibly lead Italy to a default, which has bond investors and the European establishment worried.
FINSUM: We feel for Italy, we really do. We think the country has really been crippled by the Euro and now there is no easy way out. We expect positions will moderate, but this could cause some volatility.
For the first time in half a century, Sweden is seriously prepping its country for the possibility of war. Growing national anxiety over the threat of Russia has led the government to send out 4.7m information pamphlets to all households informing them of what to do in the event of war. “All of society needs to be prepared for conflict, not just the military. We haven’t been using words such as total defence or high alert for 25-30 years or more. So the knowledge among citizens is very low”, says the government. The country is also considering whether it should join NATO.
FINSUM: The Baltics and Scandinavia are particularly exposed to possible Russian military aggression, so it makes sense they are nervous.
While it has largely faded from the American consciousness, the fallout over 2016’s Brexit vote has been nothing short of an absolute mess. The negotiations for departure have finally made a little progress, but are plagued by internecine warfare at every level. Now, a push for a second referendum, which could refute the first, is gaining traction. Former PM Tony Blair is urging his liberal party to back a second vote. Blair and Liberals believe that leaving the EU is not the solution that will fix the worries of Leave voters.
FINSUM: We think this situation only has upside for investors. If the UK reversed its positon, it would lead to a rally in the Euro and Pound and be bullish for most asset classes.
The standoff between Madrid and Catalonia took an unclear turn yesterday. Facing the prospect of immediate arrest if he declared independence for Catalonia, the region’s leader, Carlos Puigdemont, did not declare full independence when speaking to the region’s parliament yesterday. Instead, he stopped one step short, saying he fully supported independence, but wanted to pursue dialogue. Madrid reacted by not arresting him, but simultaneously threatening to suspend Catalonia’s autonomy and demanding clarity on the region’s position after Puigdemont’s vague speech.
FINSUM: This situation is very tenuous, and it is difficult to predict where it might head. That said, the relationship between Spain and Catalonia seems very inflamed, especially on the Spanish side, which seems different than other recent sovereignty debates (e.g. Scotland and the UK).
Investors, get ready for what could be a very ugly situation. In a worrying sign of escalation in the ongoing struggle between Catalonia and Spain, Spain is reportedly preparing a team to arrest the leader of Catalonia. Madrid says that if Carlos Puigdemont declares independence for Catalonia, he will be arrested. He is due to speak tonight at 6pm Spanish time, and depending on the specific wording of his address, Madrid may decide to arrest him or back off. Puigdemont has already commented on the matter, saying it will be better to be in jail than stay Spanish.
FINSUM: This sovereignty debate has gotten very testy and personal. We are worried about Spain, especially given its history of internal strife. The situation seems like it could devolve quickly, and if it does, it may have brutal implications for markets.