This
weekend will be dominated by EU policy makers meeting in Brussels and representative of the G20 countries in Osaka. From a market
standpoint, we are not widely interested in the into EU summit which will focus on complexity of personnel issues. Yet the potential
successor of ECB president Draghi will have our attention. The probability of a Weidmann ECB presidency has increased significantly. The
legacy of Mario Draghi will likely the total domination of the Governing Council. This control was encapsulated by the “Whatever it takes”
speech and action which saved the EU monetary experiment in the summer for 2012. While Trichet had a strong hand, in most investors mind,
Draghi is the ECB. It is logical to expect the factions in the Governing Council to crawl back some power as Draghi departs. Draghi’s ECB
policy skew towards benefiting indebted peripheral nations (via loose monetary policy and delayed normalization), will likely be
diluted. Weidmann will need to hear minor member who are worried about the threat of an extended period of negative interest rates into
banking sector, pensions and savers, will now be heard. Barring a massive deterioration in economic outlook (ECB express real concern over
the decline of market-based inflation expectations) unorthodox easing will be delayed. Should Weidmann get the nod, markets will expect
less bond buying, supporting European yield curves and banking stocks. Yet with many moving pieces don’t expect a sharp correction.
Especially considering it only speculation how the President of the Bundesbank will act when represented 19 members’ states of the
European Union.
The ECB and Fed opening the door to rate cuts have seen bond yields in European and US drop meaningfully. Gold prices, however, have been
the primary beneficiary to expectations of currency debasing. That said, policy uncertainty in ECB could reverse monetary policy
safe-haven trades.
President Trump and Xi meet on Saturday on the sidelines of the G20 summit will likely have the broadest market impact. Unlike past meetings both domestic economies (prior weakness was isolated to China) have reported sharp deceleration. This rises expectations for a positive outcome (although a solid agreement is unlikely). Trump is now under significant pressure from constitutes to find a solution as negative consequences of the trade conflict mount. The US now risks structural shifts that could indeterminately damage agriculture and manufacturing sectors. Which in turn could spill over into the broader economy. The sharp downturn in consumer confidence indicates the trade war is having, at least, a psychological effect. While we don’t anticipate any breakthrough we suspect that Trump will take a moderate tone which will be risk positive Monday.
