Blain: "Don't Underestimate The Instability The Passing Of Merkel Will Engender"

Blain's Market Porridge, submitted by Bill Blain

“We are not now that strength which in old days, moved earth and heaven, that which we are, we are;”

UK will be distracted by UK Budget. Loads of stuff in the papers - so I won’t bore you further…

Instead, I’m adding a new list to my list of Blain’s Market Mantras: “The deeper you delve into a problem you perceive to be the next crisis, the more certain you can be it will erupt somewhere else.”

Politics are a major driver of market sentiment. As the US is front and centre of global growth, the market is fixated on the looming US mid-terms. This morning there are plenty of headlines about Germany.. concluding Merkel had a narrow escape in the Hesse elections. The CDU got a spanking, but it was the SDP that suffered the usual fate of Merkel’s coalition partners - a complete shoeing. Analysis and commentary seems somewhat relaxed about it.

I reckon there is more to come. Despite some reassuring post result comments from the SPD, the sustainability of the coalition in doubt as the CDU wakes up to the reality of Merkel past her sell-by date, and Europe heads into a very dangerous 2019.
I did joke earlier this month – who gets chopped first? May or Merkel?

I suspect the noise we heard from the East last night was the prelude to Merkel’s Gotterdamerung. A slow motion crisis as German politics unravels could prove a massive distraction for Europe. It’s certainly worth keeping a close eye upon.

When it comes to the US, analysts were predicting Democratic gains next month but that is being discounted as Trump’s resurgence means republicans could hold on to both houses. A strong Democrat showing could rock the current accommodation - where Trump can make lots of populist noise about trade, immigration and all the other stuff that press his voters, while pumping the economy with tax cuts/bribes and legislation. The fact the economy is trundling along, and the Fed shows no sign of slowing, is something of a sideshow.

In the UK, Theresa May is given “48 hours” as regular as a bowl of All Bran. Ho Hum. Only an idiot would take that job - one problem may be the Tory party is apparently full of them. (da dum… Blain accepts Nobel prize for the cheapest but most effective joke of 2018.)

So while, the market focuses on the US, I’m still wondering about Europe. We’re all aware next year will be challenging in terms of the EU agenda if there is a populist sweep in the European parliamentary elections next year, plus a new head of the ECB. It certainly won’t help if Germany is distracted in fractious coalition, the end of the Merkel era and a succession struggle - which is exactly what we’re likely to get.

Peak Merkel was a long-time ago. While Germany is navel-gazing, she’s become an increasing irrelevance to the European narrative, disconnected from the closer union/harmonisation agenda, disengaged from the looming clash with Italy, and mired in the potential of a collapsing coalition. Like all political lives hers is headed for failure.

The elections in Hesse saw voter support for CDU coalition with the SPD fracture. It's more than the votes going to anti-Merkel parties. Its an example of populism in action as the Greens benefit as a function of the anti-AfD vote. (The AfD are the far-right extremists everyone detests, (except for the millions of Germans who vote for them.))

What’s the end-game? The CDU could well dump Merkel sooner rather than later, reinvent and rebrand itself to form a new stronger coalition - hoping disassociation with Merkel is attractive. That’s bound to mean a sustained period of domestic focus in Germany – at a time when Europe faces enormous challenge from populism, Italy, and Brexit.

In France it feels like Peak-Macron has also past. The gilded President now looks tarnished. His vision for a European harmonisation looks rather hollow without Merkel’s support. Maybe one of Merkel’s successors will take up the cause, but they better do so quickly because Macron’s En-Marche looks increasingly short-lived… Good luck saving the Euro on yer own mate.. (Macron did recently say he was the only person who could do so…)

Don’t underestimate the instability the passing of the Not-Quite Iron Chancellor will engender.