Pro Perspectives 8/12/19

August 12, 2019

We open the week with a storm of rising geopolitical issues. 

Let's step through them, and then talk about which one matters most …

Today, Argentina had a 30% plunge in stocks, and as much as a 37% plunge in the currency (at the worst levels of the day).  That was on prospects that the incumbent reform government will lose power in the election, sending an already bust economy off-the rails of the IMF reform plan.

Here's what that stock market crash today looks like on the chart …


Next, the temperature is rising on the populist movement in Europe.  The new UK leader has already put a hard deadline of October 31 for the UK to leave the EU – putting the EU under the gun to make concessions on a deal or take the risk of a "no-deal" Brexit, which could entice European Monetary Union constituents to leave.  On that note, the Italian government (the second biggest debtor in Europe) is crumbling, with the prospects new anti-EU leadership could be coming.  That would re-introduce the risk of Italy leaving the euro and inflating away its debt load. 

As you can see in the chart below, Italian yields are decoupling from German yields (Italian yields rising, as German yields are on record lows).     

Keep in mind, Italian yields were running around 7% (unsustainable debt service levels) back in 2012, when it looked like Italy and Spain might default and destroy the monetary union.  Draghi (the ECB) stepped in and saved the euro by promising to buy unlimited sovereign debt.  Now 10-year Italian yields are beginning to rise from under 1.5%.
Next, the most imminent risk (and therefore important risk) remains surrounding China. 

Will they come back to the table and negotiate in good faith to get a deal done on trade?  Will they hold-out and devalue the yuan?  Will China overtly intervene and enforce its own law on Hong Kong, breaking its multi-decade accord with the UK?  

This happens to be the time of year when China's communist party leadership (current and past) is gathering at a seaside summit in China to strategize for official policymaking meetings in October.  With that, we probably don’t get any movement on the questions above in the next week (or more).

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