Could European financial markets be hit by a perfect storm next year?
Fed hikes in H1 but the economy runs hot and markets start looking for higher terminal rates which pressures discount rates and duration
UK has a hard Brexit with WTO rules. UK economy is doing OK and BoE hints at rate hiking cycle in Q2, investors shift assets from EZ to UK
As part of WTO rules the UK will have a 10% tariff plus VAT on car imports. Luxury car sector has been hit by Dieselgate and lack a full PHEV/ EV model line up. The EZ economy is already near recession. Germany product dumps into France, France into Italy and Spain. China facing US tariffs dumps at the low end into Europe. This guarantees deflation/ slow down
ECB is tapering/ ending purchases. TARGET2 imbalances are over €1Tn already. As the Italian confrontation with the European Commission escalates, financial conditions tighten which is then compounded by financial markets pricing the chance of a crisis which tightens conditions further. The 'doom loop' is back
What can the way out be? A weakened Germany post-Merkel or lame duck Merkel could be pressured into a pro-growth framework with a €500bn-1Tn EIB infrastructure/ export support/ a Mid-East and African Marshall plan
But we need the crisis first...
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