In our Sunday night post, Merkel Retains Power, Far Right Moves To Bundestag, we asked:
This morning the headline on Politco.eu reads,
‘It’s over’: end of the Schäuble era – Poltico.eu
Not getting much buzz in the U.S. but this is big news.
Sound likes Merkel is trying to woo the Free Democratic Party (FDP) into a coalition government and dangling the Finance Ministry as the carrot. We hear the FDP wants the Finance portfolio.
If the liberals [FDP] succeed in taking over the finance ministry, they’re unlikely to abandon Schäuble’s parsimony. Like Schäuble, FDP leaders are champions of budget discipline and take a skeptical view of plans put forth by French President Emmanuel Macron, such as a substantial eurozone budget. – Politico.eu
Recall Germany’s concerns that a euro area fiscal union morphing into a transfer union.
How could Germany, with a budget surplus last year of 0.8 percent of GDP and the public debt of 68.3 percent of GDP, accept a fiscal union with Spain running the euro area’s largest budget deficit of 4.5 percent of GDP and a public debt of 100 percent of GDP? – CNBC, May 14
If the Green Party gets the Finance Ministry it will be good news for Greece, the rest of Southern Europe and the anti-austerians.
Merkel has asked Schäuble, 75, to become speaker of the parliament, which is sure to become much rowdier with the arrival of the Alternative für Deutschland (AfD), the first far-right party represented in Bundestag. The AfD won 94 seats in the house by securing 12.6 percent of the vote on Sunday.
The euro has been hammered since the election and it looks like the European bond market temper tantrum is underway, as we suspected.
The soon to come European bond market temper tantrum is the external shock we expect to ignite a decent sell-off in global risk markets in October. There are other events, such as an economic or policy shock coming out of China’s 19th National Congress of the Communist Party, that can also rock the markets.
Don’t discount a potential big macro swan coming out of Washington either.
We are not looking for a bear market, but a decent size flash-type crash that may last a few days or a few weeks, which can be bought. Everyone is waiting to pounce — until volatility spikes and fear takes over. It should be fast and furious, especially with the rise of the buy the dipper algos and trading ‘bots.
– Global Macro Monitor, September 20
Euro sovereign weakness spilling into an already weak U.S. bond market, adding to the hawkish Feds speak, we believe will lead to a decent sell-off in risk assets sometime soon. The 10-year U.S. yield is up almost 30 bps since September 7th.
Another 10 bps higher in the 10-year Bund yield will break resistence and the European bond sell-off could gather some momo. Watch this space.
U.S. Tax Reform
U.S. stocks getting all lathered up over tax reform especially small caps as tax cuts affect small caps disproportionately positive. “Harder than health care” is the word on the street in Washington about passing a tax reform bill. The lobbyists bring out the big weapons and money during tax reform. Budget hawks want offsets, which will take away the goodies from many special interests.
The Republicans are in their hurry-up offense as they smell a wave election coming in 2018 and they will soon be out of power.
It is starting to get interesting.
Mr. October on deck. Stay tuned.