Elections across the EU
Showed people there no longer view
The powers that be
As able to see
Their woes, so support they withdrew

The weekend saw the conclusion of the EU elections which resulted in a significant change in the political landscape there. No longer do the two centrist parties represent a majority but rather, huge gains were made by more extreme nationalist parties in almost every country. For example, in the UK, the Brexit party dominated, winning >30% of the vote, with both Tories and Labour losing significant share. In Germany, Chancellor Merkel’s Christian Democrats saw their vote share decline dramatically, well below 30%, and in France, President Macron’s party lost out to the National Front’s Marine Le Pen. It appears that there is a great deal of anxiety afoot in the EU, which of course is only enflamed by the imminent (?) exit of the UK.

But getting trounced in EU elections is not nearly enough to stop those currently holding power in individual country governments from changing their ways, this much is clear. As evidence I point to the process for selecting the new leadership of the ECB, the European Commission and the European Council, which will continue to be managed according to the old rules of country size combined with the recentness of those nations holding one of the seats. The point is that while thus far there has been some lip service paid to the changes afoot, the entrenched political class are not about to give up their positions without a fight.

It is with this in mind that I continuously view the euro with such skepticism. Not only are individual countries riven, but the broad leadership seems unwilling to accept that the world is different than when the EU was formed. For now, markets continue to view the situation as tenable but weakening. And given the lack of fiscal policy initiatives across the bloc, (except for Italy which is on the road to getting penalized for them), currency values remain beholden to monetary policy efforts. With that in mind, all eyes will be on the ECB meeting next week when the latest economic forecasts are presented. Recent data has shown that surveys point to further weakness, but domestic consumption has held up well across most of the nations using the euro. However, given the clear slowdown being seen in both the US and China, it is difficult to believe that the ECB will sound remotely hawkish. I expect that the new TLTRO’s will have very favorable terms as Signor Draghi will do everything he can to goose the economy before he leaves in October. And despite the growing call for looser policy in the US, I expect the dollar to maintain its current strength.

In China a small bank went bust
And traders are losing their trust
The PBOC
Can preempt the spree
Of weakness that pundits discussed

The other interesting news over the weekend was that the PBOC assumed control of Baoshang Bank, a small lender that turned out to be highly overextended with off balance sheet transactions. This is the first time in more than 20 years this has been necessary, and the market impacts were mostly as one would expect. Shares in other small banks suffered, the PBOC injected ~$20 billion into the system to help offset some of the pressure and the yuan fell a further 0.25%. The one mild surprise was that the Shanghai Composite actually closed higher on the day, but that was in response to the new PBOC liquidity. Chinese data remains suspect and there is no evidence that anything regarding the US-China trade situation has improved since last week’s split. While the Chinese continue to claim they will maintain a stable currency, the pressure continues to build for the yuan to weaken further.

Away from those two stories, the wires have been relatively quiet. The dollar is firmer across the board this morning, rising about 0.2% uniformly, as risk continues to be reduced by investors around the world. Treasury yields have fallen back below 2.30% in the 10-year, while similar duration Bunds traded as low as -0.16% before edging back to their current -0.14% level. European equity markets are soft, albeit not collapsing, and US equity futures are pointing to a lower opening. The data to be released this week is relatively limited which means that markets are going to be looking for subtler clues from the central banking community for the next directional trends.

We have a much less active Fed speaker calendar with just two, Clarida and Williams, but given the overall consistency of what we have heard lately, i.e. patience is the proper policy but the possibility of easing has not been ruled out, unless one of these two sounds highly dovish, I don’t expect much response. The week is setting up to focus on Thursday and Friday’s data, as well as waiting to hear about the next steps on Brexit or European leadership. It seems for now that the trade story has moved to the back burner. Given all this, it is hard to get excited about pending movement in the dollar, and I imagine that barring a self-induced market sell-off, there will be little of note ongoing this week with the dollar remaining in a fairly tight range.

Good luck
Adf