Weekly View – Boris plays hardball

The CIO's view of the week ahead.

Last week’s ousting of Matteo Salvini’s Lega from the Italian government and its replacement by the centre-left Democratic party holds out the prospect of much less-heated budgetary discussions between Rome and Brussels this autumn and lessens the risk that Italy’s sovereign rating will be cut by Moody’s this week. Helped also by the prospect of a substantial stimulus package from the European Central Bank, Italian bond yields and yield spreads sank last week and Italian equities outperformed. Of course, it remains to be seen how long the new coalition lasts. Mr Salvini is lurking just around the corner.

Boris Johnson’s five-week suspension of parliament in a bid to deliver Brexit on 31 October is guaranteed to cause ructions in the House of Commons this week. A no-confidence vote followed by the calling of a general election looks quite possible as we write. We have been able to play sterling volatility as the political debate in the UK reaches a crescendo. Meanwhile, we note that Johnson—if he survives—seems intent on providing a significant fiscal boost to the UK economy to offset the disruption caused by Brexit, hard or soft.

The excitement continued with two important regional elections in Germany yesterday. While the far-right AfD came only second in Saxony and Brandenburg, it did seriously dent the power of the governing parties there, who also share power at the federal level. This increases the fragmentation of the political landscape in Germany just as business confidence there has dropped to levels last seen during the financial crisis in 2009.  Given the current backdrop, German Bund yields resumed their decline last week. We remain underweight euro government bonds, believing subdued demand at a recent 30-year Bund auction signals that investor patience for low or negative yields has its limits. US Treasury secretary Steven Mnuchin, who last week talked about issuing a 100-year bond, should take note.  Overall, global data remain patchy, testing many big economies. Yet talk of a global recession is premature — the latest evidence being better-than-expected Brazilian GDP figures. But there too, markets are at the mercy of erratic politicians.

César Pérez Ruiz, Head of Investments & CIO, Pictet Wealth Management

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