Europe Wallows in A Deadlock Holiday

The weekend news will not have given investors much clarity to start the week, after a listless New York session on Friday night. The main story to emerge was that the European Union talks on the mooted EUR 750 billion pandemic recovery fund had stalled. As ever with Europe, one team, one dream, becomes a deadlock holiday whenever the subject of jointly issued debt, or fiscal transfers between the countries of the block comes up.

Germany and France left the talks early, in a sign talks weren’t going well. The intractable fiscal trust issue between the Northern Europe “frugal four,” and the Southern “Club-Med” countries is as strong as ever. The EU’s weak underbelly has always been its inability to respond quickly to urgent situations and fiscally work together, leaving the ECB to paper over the cracks. The only person who will be happy with the weekend events will be the UK PM Boris Johnson, who is probably humming “I told you so” under his grey mop. The EU has dodged several bullets since the inception of the euro, mostly by the rest of the world doing the hard work for them, and a hefty dose of good luck. One day that luck is going to run out.

It is symptomatic of the lack of inertia in global markets at the moment that the effect on the euro has been precisely zero. EUR/USD is sharply unchanged from Friday’s close at 1.1430. Traders may still believe that the EU will cobble something together at the last moment, and the steady price action will comfort euro long positions.

The US Congress faces its very own fiscal cliff this week, somewhat lost in the noise of the Covid-19 pandemic. This week is the last for the direct monetary transfers to the general populace from the Federal Government. Washington DC will have to immediately and quickly decide whether to extend the programme, and if so, in what shape, form and size. Depending on how ugly or not the bipartisanship becomes, this story has the potential to move markets later in the week.

Those discussions are taking on more urgency as Covid-19 continues its rampage across the southern and western United States. Enhanced shutdowns are now a genuine possibility as the US failed to emerge from even the first wave of the pandemic. Elsewhere, the news was equally bad. Things are going from bad to worse in India and Brazil. Worryingly, countries such as Hong Kong, and Victoria and New South Wales States in Australia are facing second waves, with social restrictions ramped up once again. That trend is being repeated across the globe and could well undermine any incipient global recovery in Q3. Markets have not priced in or are refusing to countenance this outcome.

Japan’s exports for June were released this morning. Exports YoY shrunk by a larger than expected 26.2%. Japan remains the region’s laggard and is now confronting its own escalating Covid-19 issues. The rest of the day’s calendar is strictly second-tier across Europe and the United States, hinting at a listless day ahead with attention focused on headlines and US earnings reports.

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