Unresolved Political Risks Create Trading Opportunities: 3-Minute MLIV

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00:00And let's start with the trade tensions. Is there anything more than headline risk here?

00:05Is there anything substantial to take away from the latest news flow?

00:08Yeah, I mean, I think one thing that you need to put into context is that we're coming from very frothy valuations levels.

00:14So the past couple of days of trading action that you've seen, it makes sense that you're getting some kind of a sell-off on this news.

00:20Now, we can't say a lot about the headlines going back and forth.

00:23We know that that's kind of calling whipsaws within markets.

00:26But we can say is that there have been broad exemptions.

00:30And so when you think about the country level, those broad exemptions apply to Canada and Mexico.

00:34So Canada has an effective tariff rate. That's something like 3%. So that's quite low.

00:39Whereas somewhere like Europe, the tariff rate is quite high. There aren't exemptions.

00:43You're also having a very expensive currency. And so the worry then is export competitiveness.

00:47Now, on the sector level, there are broad tech exemptions.

00:51So as we head into earnings seasons, and it's more likely that the tariff impact is delayed rather than avoided,

00:56you need to think that they might not come for tech, the powerhouse of the U.S. equity market at all,

01:01because of those exemptions.

01:03Can we talk about France for a second?

01:04Should I expect a different outcome this week to all the outcomes that have come before,

01:11which is we get a new government, a new prime minister. We're full of hope.

01:16Actually, we're getting a second sort of go at it with the current prime minister.

01:20And we get a budget over the line. Is that a realistic prospect this week?

01:26I mean, it certainly could happen.

01:29That's your best case scenario, right?

01:32And in that best case scenario, you still have a debt sustainability problem.

01:36It's not like you're going to have fiscal deficits.

01:38So there's a hangover that comes with that.

01:39Exactly. And so you need some kind of premium in OATs and you need some kind of premium in the euro.

01:44And I think the issue is the market thinks the ECB will backstop the French bond market regardless of what happens.

01:51And, you know, there's a TPI instrument, but there are conditions on that instrument.

01:55We also haven't tested how far the ECB is willing to let spreads go.

01:59And, you know, if you have something like Macron resign, you could very well see that limit tested.

02:05I don't see him resigning.

02:06I don't hear anyone. No one tells me that they see him resigning or the ECB intervening unless that spread.

02:11He has a history of wild moves there.

02:14Calling that election was unexpected and devastating.

02:17That's true. I won't rule out surprises in French politics.

02:20But I take French politics and raise you Japanese politics because we're seeing some pretty wild moves out of the Japanese politics.

02:25And I do wonder whether that's more because of the collapse of the LDP coalition or more because of the worries about U.S.-China, Skylar.

02:33Yeah, I mean, I think there's just a lot of mess going on.

02:36And so when you're trying to kind of parse through what's happening, there's something that you should probably keep in mind.

02:41Regardless of who's actually going to govern Japan, the issue is inflation.

02:45Now, a weak yen is a consumption tax, essentially.

02:48And so it makes that worse.

02:50And so any kind of government that's coming to power, their incentive is to put a floor on the yen.

02:55And that's why I don't know.

02:56And so it's the only one that's coming to power, their incentive is to put a floor on the yen.

03:00And so it's the only one that's coming to power.

03:03So if you don't want to go to power, your incentive is to put a floor on the yen.

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