Political newsflow abated this week. Only last week it looked potentially game changing, but it continues to rumble on in the background.
Following turbulence, Italy’s new Government led by Giuseppe Conte was fully empowered after winning its second confidence vote on Wednesday. It is still uncertain how confrontational the new populist coalition will be, but now at the helm, they will have to take responsibility for their actions. The experience of Greece suggests that public support for a stand-off with the rest of the Eurozone wanes very quickly when financial stress builds.
Spain also has a new Government, after Socialist leader Pedro Sanchez was sworn in as the country’s new Prime Minister on Saturday. The announced cabinet has a record number of female ministers in European history (64.7%) and was defined as feminist, progressive and pro-European.
Brexit gained a fair share of attention, but little clarity was achieved on an Irish backstop plan.
Tariff issues continued to be in focus, as global leaders are preparing to confront Donald Trump in a “G6 plus 1” meeting later this week. The EU has already announced a list of products (all partially made in the US) subject to 25% consumer tax, while France and Germany are threatening not to sign a joint statement of the G7 without progress on tariffs, the Iran nuclear agreement and the Paris climate accord.
Have markets been receptive to these simmering political risks? Not quite. After a brief sell-off last week, European indices have been trading higher. The S&P 500 rallied sharply, while the NASDAQ hit an all-time high. US 10 Year Treasury Bond yields went back to their ascending trajectory, although remain below a supposedly “critical” 3% level.
Such complacency can mostly be explained by continued optimism about global economic growth. US payroll data last Friday served as the most convincing evidence of that. The report was very strong across the board, with 223,000 jobs added during May. The unemployment rate declined to 3.8%, the lowest since December 1969, and average hourly earnings rose 0.3%, better than expected (reinforcing the case for a rate increase at the Federal Reserve’s meeting next week). Other US data has been positive as well, with various business surveys (on both manufacturing and services) coming in stronger than expected, indicating solid momentum in Q2. As a result, J.P. Morgan upgraded their global growth forecast for the current quarter by 0.1% to 3.4% and believes the actual number could be even higher.
This is the language markets seem to understand and they react, while politics remain just noise, at least for now!