Binary risk in Germany
This weekend is event risk heavy with German SPD vote and Italian general elections. The market, judging from short-term vol, has shrugged of any significant impact. Yet in the back of everyone mind is the “what if”. The last few year’s investors have been plague by “white swans” and this weekend is not different. The SPD is currently holding a binding postal ballot of its 463,723 members on a coalition deal with Mrs Merkel. Currently the SPD and CDU (Merkel) are expected to form a central market, EU friendly coalition. Politically Merkel has been allow a final chance as her own party voted in favor of a grand coalition deal with the Social Democrats (SPD). But if Sunday SPD votes to reject, German politics become a mess with no center coalition and possibly no Merkel. If SPD members vote "no" the most likely, result will be new elections or possibly a minority government. A snap election open the door for further gains for the anti-immigrations AfD party. The current low polling suggest a tilt toward “yes” vote and grand coalitions. The binary aspect of this event make it more worrisome in our mind.
Italy voting distribution can lead to market stability
Overall, we don’t see a major immediate effect from the Italian elections. The reason is divided vote. We see the probability that all of a sudden a single bloc gets a majority is unlikely (less than the binary result in Brexit or US election) We are in line with market and expect a hung parliament, resulting in an extended period of coalition negotiations. The primary reason is not the end of Europe populist insurgency or satisfaction with the status-quo but division of voting blocks. Most polls indicate a proportional three-party/coalition race (Democratic Party, Forza Italia and Five Star), making wining a majority highly challenging. The most radical result were the Five Star-led (anti-establishment) government is only a tail risk. In this scenario, we do not expect any major policy changes (due to a lack of political or fiscal capacity or due to a lack of appetite) and lower anti-EU rhetoric that would spook the markets. Due to official blackout the most recent polls suggest M5S 26%, Center-right bloc 37%, PD 25% with 30-35% of vote are undecided. However, Italian voter polls have tended historically to be misleading. We believe there is a realistic probably that Berlusconi’s center right block reaches the 40% threshold. Yet, a Berlusconi upset will have limited real impact being dismissed as Italian politics a surreal.
A realistic tail risk this weekend is a “no” vote in Germans and Berlusconi party win in Italy. Walking in to the Monday paper yelling “Chaos in European politics”, significantly negative result for European assets.
South Korean Trade Balance approaching average capacity
South Korea’s decreasing export growth slowed in February to 4% (average: 8.70%), its weakest rate since November 2016 due to decreasing overseas demand and New year holidays that reduced the amount of working days and shipment for the automotive industry. As strong global demand remains, we are expecting South Korean March exports data to approach the 6% range but strong tariff headwinds on steel from second commercial partner (US) and estimated at 53% will be impacting South Korean export industry growth in the coming periods. South Korea remains US third steel supplier with a total amount of 3.6 million tons of steel, after Canada and Brazil.
South Korean February Trade Balance is given at USD 3.31 billion (average: USD 2.88 billion) and will be heading higher, supported by higher exports, stable inflation (4Q: 1.50%), improving private consumption (e.g. expansionary fiscal stimulus) and Bank of Korea’s cautious normalization measures (Repo Rate maintained at 1.50% since November 2017).
 are expected to form a central market, EU friendly coalition. Politically Merkel has been allow a final chance as her own party voted in favor of a grand coalition deal with the Social Democrats (SPD). But if Sunday SPD votes to reject, German politics become a mess with no center coalition and possibly no Merkel. If SPD members vote "no" the most likely, result will be new elections or possibly a minority government. A snap election open the door for further gains for the anti-immigrations AfD party. The current low polling suggest a tilt toward “yes” vote and grand coalitions. The binary aspect of this event make it more worrisome in our mind.){kind=link}