We spoke briefly last month of our concerns around the German economy and the impact that the US’s protectionist trade policies would have on it. This morning we saw further reasons for concern with German exports and industrial output both falling unexpectedly in July. Both Europe and the wider global markets will remain on edge with Trump threatening further tariffs. The elephant in the room this week remains Trump’s latest threat of an additional $200 billion of tariffs on Chinese imports. Additional tariffs between the world’s two largest economies would further certainly rattle markets with emerging markets continuing to take the brunt of it. Turkey and Argentina’s woes have continued throughout the week, and the fear is now that this contagion (financial problems in one country spilling over into another) could spread and hit other emerging markets. The iShares MSCI Emerging Markets exchange-traded fund (EEM) is already down 10 percent for the year, with the threat of further downside a real possibility.
Closer to home, where the Eurozone knows all too well the risk of contagion. Since 2012 when the term Grexit came to fruition, a wave of anti EU populist parties have been gaining traction throughout Europe. We have seen this in the past 18 months in the Italian, French, German, Dutch etc. elections where we have seen these movements threaten the once dominant careful centrism parties. This weekend’s Swedish election has a similar feel. The Social Democrats have led the country for the last five decades relatively unopposed, but recently there has been a shift towards the populist movements who will look to become the country’s second largest party. The party’s leader, Jimmie Akesson, has called for tighter border controls on immigration while also calling for a referendum on Sweden’s membership in the European Union.
Euro traders will no doubt be looking over their shoulders at this weekend’s election and while we aren’t expecting any shock result it is just another example of the cracks in the EU. If you recall what happened in Italy back in May when the Italian populist government were appointed, we saw the 10 year yield climb to 3.39 percent such was markets apprehensions. Further uprising from other EU countries could put downward pressure on the euro as a whole.