Italy’s SNAFU

The Italian referendum is defeated and PM Renzi immediately announces his resignation. With the No vote winning by around 60% on a 68% turnout, there was little he could do. However let’s not forget this is the nation where Bunga Bunga Berlusconi popped up with far more than nine lives, and Renzi himself could be asked to lead an interim government. They can’t have a snap election while their electoral law is still undergoing reform. For an excellent round-up of the outlook for Italy, read this piece from Open Europe. The upshot is that we are in for a period of political instability, followed by potentially more instability and a merry-go-round of Prime Ministers. In short: exactly how it’s always been in Italy. The BAU for Italy is SNAFU. So why were people so wound up about this referendum?

It was right that it should have been on the “mind the gap” list of risks ahead several months ago. But since then quite a bit has happened, not least that it looked already that Renzi had miscalculated, would lose, and would resign. Oh and the small matters of Brexit and Trumpquake. After which, the market rushed to price in some mayhem. And now, as we know, any kind of mayhem-induced dip should be bought; therefore don’t expect much of a dip. The clear and present risk ahead is now whether the Italian banks can be recapitalised. But as 1) banking stocks are now globally in demand due to yield curves steepening and 2) the ECB stand ready to prop up any systemic risk via the fact they’re already doing QE …. this shouldn’t be too much of a problem. Monte Paschi already had enough expressions of interest on Friday in its debt swap to deliver 1bn of the 5 it needs. That can all change of course, but the risks you want to worry about are the ones you didn’t already know about.

Step forward….

1) The Donald on Twitter, announcing “Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete), heavily tax our products going into their country (the U.S. doesn’t tax them) or to build a massive military complex in the middle of the South China Sea? I don’t think so!


Let’s leave aside that he is using social media to announce policy; or that this just randomly came out on a Sunday afternoon… but weren’t we all getting excited that President DJT was rather different to Candidate DJT? We need to continue to expect the unexpected – or at least expect volatility ahead in US assets.

2) Brexit. We’ve now moved on from Hard vs Soft to White vs Black, with The Sun describing “Grey Brexit Anger” over the government’s plan to plough the middle ground. The government is indeed making this up as it goes along, but then how could it have been anything else? Again, expect this to create continued volatility in UK assets.


The risks are never those that have already been rehearsed and played out (see “Grexit”, 2012, 13, 14 etc). It’s those we haven’t tested nor fully understood that should be occupying your mind as we go into the rump of the year. Oh and what’s that about this week’s ECB meeting….. kicking the can into their January meeting as they too struggle with what to do now Monetary Policy is Dead?


Inflation’s Alive! Part 3

What a difference two years makes. At the Thanksgiving OPEC deal last year we were slapped in the face by the failure to deliver production cuts, sending oil into freefall and ultimately leading to the “Hands Up If You’re Not Easing” club, as central banks fell over themselves to pump up inflation. It got so bad that many moved into negative rate territory, let alone what had become the standard unconventional tool of QE. And now this year we have “OPEC in first joint oil cut with Russia since 2001”, sending oil shooting back up over $50 a barrel. Even without this, inflation had already started to rise. Here’s how underlying CPIs have been looking, with the red line marking when the ECB started to indulge in asset purchases:


All have been stable or rising, with the most notable at the bottom – Switzerland storming back from the precipice of despair! Still negative of course, but getting there. Meanwhile the one that stands out in the opposite direction is poor old Japan. An uptick recently but not enough to arrest the downward momentum. No wonder the BOJ don’t know what to do.

As all good economists know, however, it’s not supposed to be about the level of inflation now. It’s about what is expected for the future. Hence why central bank inflation targets are supposed to be 2-3 years down the line. For this, we look at inflation expectations – and just look at what has happened for both Eurozone and US inflation expectations:


A rather nice pick up in the past 6 months, even without the alleged Trumpflation boost, and even without a lasting agreement from OPEC keeping oil supported. Taking this further, we can see that EUR/USD has tracked the relative performance of these inflation expectations:

So even as Mr Trump and his new team takes centre stage – with new Tsy Sec calling for 100yr Treasury issuance and the new Commerce Sec calling for “punitive tariffs for people who dump” – let’s not forget that inflationary momentum was already in place. True, those new policies might turbocharge it, as would a market who still doesn’t believe OPEC won’t renege on their deal… but it’s your judgement call on the likelihood of those outcomes. Blondemoney tries to stick to the facts, ma’am.

The bigger question is whether growth can accompany this reflation. Blondemoney is an optimist about that. But with US 10yr Tsys hitting 2.50% yesterday, are we sure that there’s enough growth in the pipeline for this to be 75bps higher than it was pre-Trump? Or was it just a necessary correction for a word where lower-forever had become too much of a one way bet….

and we haven’t even mentioned the Italian referendum! More on that tomorrow

Expect the unexpected

As the month draws to a close, thoughts already turn to the raft of final events that will see us into the end of this constantly surprising year. OPEC meeting today, where the bar for expectations is so low, they might just surprise us. The Italian referendum this weekend, where again the expectation is now so high for mayhem, that it may pass without event. For the ECB and Fed meetings, where we expect business as usual, but still use it to sell EUR/USD on rate differentials.

For anyone who thinks that the unexpected is unexpected, have a read again of this excellent prescient piece from Niall Ferguson, written in March of this year, and looking back on a Trump victory from the year 2024.

‘FROM the vantage point of 2024, as President Trump prepares to run for His third term in the White House, the events of 2016 have an air of inevitability about them. It is easy to forget — as we celebrate The Donald’s masterful decision to repeal presidential term limits by executive order — that it was only by a series of flukes that Mr Trump became president in the first place….

Nowadays, if you’re careful, you can still meet people who think it was all a horrible mistake. The wall that ended up keeping Mexicans in rather than out. The tariff war that triggered the depression. The alliance with Putin that encouraged the Russians to retake the Baltic states. The repeal of the first amendment’

The only article you should read

There is always much to read, much to divert us. We know deep down that much of it is noise, but we also know that deep down we can’t ignore all of it. In the weeks ahead we know some big questions will be answered: Will the Fed hike? Will the Italians vote No to reform? Will Italy’s bank recaps fail? Will Austria elect a far-right President? How good is the US data? Will the ECB extend QE or try to taper? Or both??

Ah, but once we have the answers, will we not just have more questions? Sure the Fed hikes, but how much will it do next year? And if the ECB continue QE, for how long into the new year? Does Renzi try to form a new government without elections? Does Austria signal a shift for France or the rest of Europe? Oh for the days of a simple monetary policy decision from a central bank! Up or down 25bp, how you left…

But the market will keep on plugging away. Blondemoney reads that this morning the EUR/USD options market has less downside skew because Fillon just won the Republican primary… as if an election still five months away, with the Socialist candidate still to be decided, could right now be measured in basis point shifts on a currency derivative! But god bless the markets for keep trying to price this stuff.

No, the most important thing you can do with your time today is read this article from “Trump Advisers Hit Mitt”.


It’s all about how some of those closest to Donald Trump, such as his key campaign manager, Kellyanne Conway, are now publicly coming out against appointing Romney as Secretary of State. You might wave this aside as the usual political jiggery pokery. But hold on a minute. This was a deliberate outspoken attack by someone close to Trump about how appointing Mitt would be a “betrayal”. Maybe it was said to make those who feel betrayed feel better, thus shoring up core Trump support; maybe it provides an excuse for Trump to ditch Mitt while looking like he was trying to make friends with the core Republican party; but maybe, and most disturbingly, it was a deliberate attempt by Trump to humiliate a man who called him “a con man, phony and a fraud” during the campaign.

Either way, it means that we cannot judge the new President as we would have done those of the past. There are going to be pronouncements that are just not rooted in the way we are used to Presidents doing things. This market continues to think it has the new administration all mapped out. It should realise the new administration is going to be in a state of flux for far longer than just the next few days: potentially for all of the next 4 years.

The World of One Trade


A messy chart, for a messy Friday. On here we have USD/JPY, EUR/USD, the offshore Chinese Yuan, the S&P 500, and the US 2s10s yield curve, since Trumpquake. The main point is that yes, they are all one trade, which has no doubt led to the sense that there is indeed a coherent overall macroeconomic thread that connects them all – and that man’s name is Reagan Trump!

We discussed yesterday how there are indeed many themes starting to come out, about the end of QE forever, the return of inflation, and challenges ahead for EM.  These are common themes for many a BM reader. But one thing that does stand out from the attached chart is just how close the USD/CNH and USD/JPY charts are…. drilling down:


Literally tick for tick they move in unison. Could the Chinese intervention to prevent their currency depreciating out of all control be driving the fortunes of the dollar much more than those lovely macroeconomic fundamentals?

Ohhhh let’s see….