Three Thoughts from London

Ilan Solot discusses how Angela Merkel made a school girl cry, why two of the three central bank meetings in EMEA could be eventful, and why the political situation in Brazil is going from bad to worse.

1/ Last week, German Chancellor Angela Merkel came under the spotlight in a televised meeting with school children in Rostock, when her comments about immigration brought a Palestinian girl to tears. The emotional video has gone viral, being appropriated by critics of Merkel’s policies and widely debated by segments of the global media – though perhaps less so in the financial community. This, of course, was used to build on mounting criticism over Germany’s position towards Greece and its role in the international community. Domestically, there are two polls worth juxtaposing. First, according to the newspaper Welt am Sonntag and a YouGov, 56% of Germans disapproved of the bailout pushed by Merkel, and 48% preferred Greece to leave the euro. Second, a poll by newspaper Bild am Sonntag showed that hard-line finance minister Schauble’s popularity has surpassed that of Merkel (70% vs. 67%). Now we get headlines suggesting that Merkel is willing to entertain debt relief, in sharp contrast to Schauble’s more recent proposal of giving Greece a 5-year break from the euro-area. A change in the political balance in Germany seems to be underway. The country’s locus of power, Merkel, is being openly challenged in the international and domestic arena, while at the same time pleasing the two audiences is becoming increasingly harder to conciliate. Perhaps the inflexion point in Merkel popularity came in May, knocked by reports that Germany helped the US’s NSA spying agency, and now we have entered into a phase of managing decline. Time will tell.

2/ Two out of the three central bank meetings in EMEA could prove eventful. The South Africa Reserve Bank could resume the short tightening it started in 2014, raising rates from the current 5.75% level. Markets are split. We are leaning towards waiting a bit longer given the lukewarm economy, lower commodity prices, energy production problems, high unemployment and labour disputes.  Still, we recognize that inflation has been picking up as ZAR continues to lose ground and the central bank has turned accordingly more hawkish. In Hungary, many are looking for a signal that the roughly 3-year long easing cycle is coming to an end (see graph). Inflation looks to be bottoming out and the central bank’s communication changing, with the committee tweaking the forward guidance. The Turkish central bank is expected to keep rates steady.

3/ The political situation in Brazil is going from bad to worse. We have noted several times before, the tail risks in Brazil are getting fatter. Over the weekend, major newspapers carried (unconfirmed) stories about former president Lula’s involvement in the developing corruption probes. This knocks the central pillar of the ruling party PT, and its greatest hopes to remain in power. Meanwhile, the government’s coalition is fracturing, threatening governability and even risking backtracking on some of the progress made. There has already been talk of trying to reduce the fiscal targets. But perhaps more importantly, the president of the Senate harshly criticized the government’s economic plans and Finance Minister Levy over the weekend.