<< back
ReachX logo

Macro view: An EU summit for markets to care about

Publication Date: 27 Jun 2018 - By Marcus Dewsnap By Marcus D.

Events Macro Environmental, Social & Governance FX Fixed Income/Credit UK EU


For once, the latest European Union Heads of State Summit (June 28-29, 2018) has several issues that markets should care about. 

Migration is a subject causing more than a little tension within Germany's coalition government and at the EU level. German Chancellor Angela Merkel will be looking for European solutions, even bilateral or temporary ones, to save her government as well as the principle of border-free travel with Europe.

If she fails to find something that resembles a solution, her interior minister, Horst Seehofer, has vowed to defy her, as his party - the Bavarian Christian Social Union - faces a strong challenge from the far-right Alternative for Germany in state elections in October. Some think his defiance could bring down her government and end Merkel's 12 years in power.

Markets don't need that uncertainty, or even a tail risk of the collapse of Merkel's government at a time when data indicates the Economic and Monetary Union (EMU) economy is weakening. Long-term, economic growth is driven by population and productivity growth. With the baby boom generation going into retirement and presumably wanting all those (unfunded pensions), there needs to be economic growth.

But if barriers to migration are in place to an extent that causes working populations to shrink – then either baby boomers will need to put off retirement (would you with a ‘healthy’ pension in-waiting?), accept lower benefits, or productivity growth will have to drastically improve (there isn’t much sign of this). These used to be trends to worry about for the distant future but this future is arriving fast.

Progress towards a Banking Union - uppermost in minds is prevention of the self-reinforcing ‘bank-sovereign-doom-loop’ from taking grip in a crisis and by its nature making the crisis much worse. Eurozone bank equities have had a torrid 10-years for a variety of reasons, underperforming both the broader Euro Stoxx and their US counterparts.

This forms part of the wider agenda for more powerful macro-stabilisation tools, such as the much talked about European Monetary Fund, and fiscal integration. These, however, run into objections from those who think financial markets should be the disciplinarian and fear wealthier nations will end up footing the bill for ‘profligate’ nations. 

Political concerns and slowing economic growth do not add up to euro positives (cue Italy and Spain, and Merkel's ongoing woes in Germany too).

Not only is the 2017 euro appreciation negatively impacting, but equity market fund outflows also weigh, itself a function of relative economic performance versus the US especially. Trade matters here too. It is worth noting that trade flows in the rest of the world ex-US should continue as is and over the medium-term may even grow to replace US-related disruption.

And then there is Brexit. Nobody really knows the UK government’s position, but business is becoming more vocal (for example - Airbus/automakers). With or without clarity (an unlikely event!) there are implications for UK economic growth via investment and therefore market pricing for the BoE’s rate path. Therefore this particular outing of EU heads of state does have the power to move markets, and ought to be keenly monitored. 


Most read