If you had to choose between the semi-global populist uprising on one hand and the threat of ongoing tensions between Washington and Moscow on the other, which would you pick as the greater threat in the context of markets?
It’s an interesting question for a number of reasons, not the least of which is that there’s an argument to be made that part of the calculus for the Trump administration when it comes to the imposition of harsh sanctions on Russia is the idea that those sanctions can be used as a smoke screen to combat allegations of collusion.
That alleged collusion was part and parcel of a broader effort by Russia to influence political outcomes in Western democracies by capitalizing off the surging popularity of populist candidates and nationalist sentiment in France (Marine Le Pen), Britain (Brexit), the Netherlands (Geert Wilders), Germany (AfD) and of course in the United States.
New research suggests a link between automated Twitter bot activity and Trump’s election victory as well as a link between bots and the Brexit vote. Needless to say, that just underscores the notion that Russian social media activity played a role in all of the campaigns mentioned above, from Le Pen, to Wilders, to AfD.
So there’s some reverse causality here, which makes the question posed at the outset all the more interesting. Frame it like this: “What’s more dangerous for markets, sanctions slapped on Russia by a populist American president in an effort to obscure his own Kremlin connection or the European populism that’s part and parcel of the same Kremlin tactics that helped said American president who is now imposing the sanctions?”
I don’t know how savvy sovereign bond investors are when it comes to disentangling that web, but you’d think they’d be more prone to carefully analyzing the dynamics at play than the metals market and FX, which reacted to the Russia sanctions in a knee-jerk fashion that was appropriate to those asset classes. There’s no time to worry about three-dimensional geopolitical chess when global supply chains have been upended and/or when foreign investors are running screaming for the hills.
But when it comes to credit risk, there’s something comforting about Steve Mnuchin’s demonstrable reluctance to go after Russian government debt or, if you’re the cynical type, you might just say that Trump is unlikely to turn the screws too tightly on Putin.
Meanwhile, there’s no telling what the populist coalition in Italy is going to do in terms of putting the country on an even more unsustainable fiscal path.
On Monday, BTPs were clearly spooked by the prospect of “mini-BOTs“, which in addition to sounding like something out of a bad science fiction movie (and to the extent you’d be inclined to characterize the resurgence of populism in Western democracies as something that could indeed serve as the plot for a bad science fiction movie, then I guess they are), would effectively represent the introduction of a parallel currency.
Given all of that, it should perhaps come as no surprise that when it comes to CDS, Italian spreads are now wider than Russia’s:
The punchline to all of this comes from Five Star and League’s policy platform which includes a call for the European Union to end sanctions on Russia.
So you know, pick your poison.
And do mind the self-referential absurdity of the whole damn thing