By Charlie Morris – The Fleet Street Letter (Great Britain) –
Major events provide a good opportunity to bury bad news. Since the US election, the Chinese currency has continued to fall. It is now down by 12.5% since the peak nearly three years ago. In addition, eurozone bond spreads have misbehaved. Recall the eurozone crisis back in 2011?
These two bear stories concern me. The Chinese weakness is one reason that I sold that spectacular Taiwanese fund. It’s also why I’m not in a hurry to recommend Asia at this time. And that’s before we’ve even discussed Donald Trump’s repeal of the Trans-Pacific Partnership.
The recent wobble in the eurozone is also interesting. Consider that Trumponomics involves fiscal spending while raising interest rates, cutting taxes and allowing inflation to rise. Ever since Mario Draghi said “whatever it takes” in 2012, the eurozone bond market has calmed down. The high yields in Spain and Italy fell back towards German levels (as prices recovered).
If you stopped quantitative easing (QE) in Europe, there would be no mechanism to keep those yields close to German levels. If you stopped the printing presses, then eurozone bond yields would diverge. Imagine if you then eased the austerity rules and allowed the member states to spend money as they liked. I don’t think the bond market would stand for it. An Italian bond would soon resemble an Italian bond again (as opposed to a German bund). If this happened, the eurozone would fall apart.
Could Trump’s expansionist policies break up the eurozone? It’s a thought that I have been considering and will say more in due course. It seems that the eurozone is truly hooked on stimulus.