- In Italy, Deputy-Prime Minister Salvini announced to withdraw his right-wing Lega from government with the Five Star Movement (M5S). Encouraged by a lead in the polls, he aims at snap elections in late October. Given the need to prepare the 2020 budget and the fear of loss of seats in new elections, M5S and Democratic Party (PD) may yet overcome deep-routed hostilities and agree to temporarily support a technocratic government. Yesterday, they jointly pushed back the date for convening the Senate to Aug. 20, defying Lega’s call for an earlier date.
- Uncertainties are amplified by the slump in European manufacturing and brinkmanship in British politics. One of the biggest risks for the next couple of months is that a no-deal Brexit looming for Oct. 31 could tip Europe (and potentially even the global economy) into recession.
- Finally, Trump’s announcement of new 10% tariffs on all so far untaxed Chinese imports and the slump in the Chinese yuan have sparked fears that the trade conflict will morph into an outright currency war. There is still hope for a more constructive tone in the US/China conflict. Trump’s announcement on Tuesday to defer the new tariff for some items to mid-December is pointing in this direction. But amid the growing tensions, this is becoming an increasingly close call.
- The culmination of political risks is adding to headwinds to global investment, while trade is in the doldrums. Solid consumption is still helping to prevent a global downturn, but this call is getting tighter.
- Despite the depressed yield levels already reached (the whole German government bonds term structure is negative with 10y at -62 bps and 30y at almost -15 bps), the political and economic risks are likely to prevent an increase in core yields. Corporate earnings are being revised down, but the likely bold monetary policy support from the Fed and the ECB helps equities to hold up. Credit additionally benefits from investors’ search for yields. We expect more volatility in BTPs, but an agreement on a technocratic government may help to keep a lid on risk
- A global downturn, which is not our core scenario, would radically change the investment picture for risky assets.