Rabo: Little Cause For Celebration And No Appetite For A Relief Rally

By Stefan Koopman, Senior Macro Strategist of Rabobank

For weeks’ on end, officials and analysts were on edge on what kind of deterministic event could happen on May 9. In the end Putin said the one thing only few expected, which was hardly anything at all. Certainly, his Victory Day speech included the usual sabre-rattling, and the address was such that political scientist Mearsheimer or other ‘offensive realists’ could have written it, but it seemed as if Putin is increasingly wary of the disparity between his glorified nationalism and the ugly deliverables of a real war. For all the rhetoric and the justifications of the ‘righteous battle for Russia’, the speech was devoid of a formal declaration of war, suggestions of a general mobilisation, or other concrete steps to further intensify the battle in the Donbas, let alone any nuclear threats directed towards Ukraine or NATO-members.

The parade was supposed to include a flyover of military jets and helicopters, but this was eventually cancelled because of ‘weather conditions’. Well, if Russian pilots can’t fly in these partly cloudy but friendly skies, no wonder they’re having so much trouble achieving air dominance in Ukraine…

Even as investors’ absolute worst fears weren’t coming true, there was little cause for celebration and no appetite for a relief rally. The war continues and concerns about the global production cycle being battered by high inflation, rising interest rates and stuttering supply chains are not letting up. Stocks, bonds, cyclical currencies and commodities were all down meaningfully on Monday, effectively only volatility was on the rise. Some recovery is taking place this morning, but as volatility remains elevated these periods of tranquillity tend to be short-lived. 

There too was little cause for celebration on Europe Day, which is being held in commemoration of the Schuman Declaration. In 1950, Schuman proposed the creation of a European pool for coal and steel to foster the economic recovery out of WW2, to mitigate the risk of shortages of these key commodities and, crucially, to create unity and prevent future wars between European nation states (i.e., France and Germany). It is now 2022, and we are still being confronted with the same issues: the recovery out of the pandemic is stumbling, the supply of key commodities is at risk, Europe is far from united, and, crucially, European institutions haven’t been able to prevent Putin’s war. 

With each crisis, these European institutions therefore seek to strengthen their authority and to broaden their scope, a process that political scientists describe as failing forward. At yesterday’s closing of the Conference on the Future of Europe, French President Emmanuel Macron proposed to create a “European Political Community”. This would be a new tier of political affiliation that could provide a faster but looser way of bringing Ukraine and countries such as Moldova and Georgia into the European fold than the lengthy process needed for full membership of the European Union.

He also called on other member states to support the creation of a new constitutional convention that will discuss treaty change. If it was up to Macron, options such as granting the European Parliament the power to initiate legislation, increasing the EU’s decisiveness with more widespread use of qualified majority voting and introducing explicit treaty commitments on matters on climate, social justice and full employment should be on the table. Such treaty changes do however require an unanimous vote, and even as the momentum is towards more integration with pro-EU leadership in Germany, France Italy and Spain, many other national governments will express their hesitations. 

Day ahead

The data calendar is sparsely filled today. The ZEW-index will be published at 11:00 AM CET. The figure that provides a gauge of Germany’s economic (mis-)fortunes in the months ahead is expected to fall to -43.5 from -41; a consensus view that is for the most part informed by the recent decline of the DAX. The US April NFIB-index will see the light of day an hour later – and here a decline to 92.9 from an already weak reading of 93.2 is expected. In March, a combination of soaring cost pressures and falling sales expectations induced the worst economic outlook on record; there haven’t been much signs of improvements since.

If you then can’t wait to hear more about ‘bonfires of red tape’ from a government which has actually done more than any other in recent history to impose it on businesses and households, you should definitely tune in for today’s Queen’s Speech. The speech will be delivered by Prince Charles after Queen Elizabeth II had to pull out due to health issues, but is actually written by the government to introduce its legislative agenda for the new parliamentary session. In an effort to convince ministers, backbenchers and the electorate in both the Red Wall and in the Tory shires that this time he really is serious with his plans for improvement, prime minister Johnson pledges to finally deliver on the promises of Brexit.

It remains astonishing that the Johnson government rushed through the exit from the EU without having articulated a long-term and coherent strategy on how to grow the economy going forward. Instead the economic sanctions Britain imposed on itself, in conjunction with the relentless and resources-consuming uncertainty about its relationship with its largest trading partner, have already started to reduce the country’s trade intensity and contributed to the UK missing out on last year’s boom in the international trade of goods.

Of course, the government will try to hammer home the message that the plans announced today will make an incredible difference in letting the British economy flourish, will promote levelling up and will ease the cost-of-living squeeze by amending, replacing or repealing retained EU law that is seen as unfit for the British economy. Investors have, however, heard this all before and in general there is a wide gap between what is being promised and what is being delivered.

Finally, there has been some speculation that the government may use the Speech to convey some new threats that it will override parts of the Northern Ireland protocol, in particular those articles that include the movement of goods, customs, VAT and excise, electricity and state aid. This issue has again shot to the top of the agenda after Sinn Fein’s victory in the Assembly elections, with the DUP refusing to re-enter the power-sharing agreement until the UK government takes decisive action on the protocol. Official talks between Foreign Secretary Truss and EC VP Šefčovič are set to resume on Thursday.