European Elections And Tolstoy’s Portugal

I will admit that I don’t know much about European elections.  How exactly does their cycle work? How is the leader chosen? etc.?

Almost bizarrely, that lack of detailed knowledge of big political cycles hasn’t been necessary to look at what is going on in Europe, but I think it is becoming more crucial.

For better or worse, all of last year had Merkel and Sarkozy on the same page.  Saying whatever it took to calm markets.  They didn’t really spend a whole lot of time worrying about their own citizens.  With the elections coming up, expect more negative and potentially confusing headlines to come out of Europe.

In the US, we can listen to the State of the Union speech and immediately figure out what is being said that has a chance to be passed (almost nothing), what will even be developed into an actual bill (not much), and what was said to make some segment of the population happy, even knowing it’s purely a talking point (most of it).  Same with the Republican nominees, not a single investor spent any time trying to figure out what companies would benefit from Newt’s moon colony.

The problem is that many people in the US don’t have the ability to immediately filter what is an actual “plan” in Europe and what is political posturing for the campaign trail.

Does Germany really want to control the Greek budget process?  Lots of soundbites on it.  Some of it seems plausible, but is it real or just posturing for the election?

Sarkozy wants to “unilaterally” impose a financial transaction tax in France by August.  The announcement was light on details, long on recriminations.  The market doesn’t seem to believe it (and neither do I), because this seems like something purely intended to make the voters of France happy.

That is the problem, what the politicians have to say to appease the voters is not always what the financial markets want to hear.  As opposition candidates start aggressively campaigning, will they say the policies of the existing governments were good, but just didn’t go far enough, or will they promise to overturn policies?

Europe already has more than enough people willing to make market moving headlines, I expect this will get worse.  I think we are far less likely to see positive moves on the back of every “summit” not only because the market now realizes they largely fail to deliver on any promises, but because there will be a growing number of senior people willing to speak against the decisions.  That is a new dynamic.  It doesn’t affect the long-term direction of the market, but I think it will impact one of the trading patterns that we have gotten used to – rally into the summit, wait for a somewhat weak announcement, then rally more.  It will be harder to rally on the back of weak announcements if the opposition in Germany and France (and other countries) becomes more vocal against the agreements.

Portugal

The EU continues to try to perpetrate the myth that Greece is unique and that Portugal is different.  That may be true, but only in the sense that every good country is the same in  being good; whereas, every bad country is bad in their own way.  Portugal has the benefit of being smaller, but they are next in line for principal write-downs (or whatever they are calling haircuts now).  Portuguese 5 year bonds are down 5 points today and the 2 year is down 4 points.  Keep an eye on the Portuguese 2 year as it is within the LTRO’s maturity, so weakness there is a sign that cheap money can’t support bad debt (for long), and may scare banks that were thinking of buying more Spanish or Italian 2 year debt now that they watch the slide in Portugal.  Hungary and Ireland will be watching developments in Portugal very closely.  The 75% of people working in Spain may also be paying attention (I’m not sure what the 25% who are unemployed there do, but somehow guess it has more to do with soccer than financial markets).