Weekly View: Mr. Scholz, tear down this wall!
Thirty years after the fall of the Berlin Wall, last week saw a small breach in another kind of wall. Up to now, some countries, notably Germany, have dragged their feet on euro area banking union. But last week Olaf Scholz, the German finance minister, voiced his support for the long-cherished idea and presented ideas for a common deposit protection scheme. Scholz’s set of proposals—which include ideas aimed at making banking union more palatable to German voters—could help increase the cohesion of the European financial sector and shore up confidence in the currency union. His proposals are still far from being turned into reality, but are welcome nonetheless. Less evidently so is the complicated coalition making and policy compromises that will be required in Spain, one of the euro area’s best-performing economies, after yesterday’s indecisive election.
Another small step in the right direction came from reports that the US and China were moving to roll back some tariffs as part of a trade truce. But this development still needs to be confirmed, and President Trump quickly stepped in to dampen any enthusiasm. In any case, we are talking about a truce, not a once-and-for-all conclusion to differences between the two superpowers. Although the weakening of both the Chinese and the US economies could be conducive to more positive noises on the international trade front, President Trump remains his unpredictable self. There is reason to be optimistic, but cautiously so.
Another good week for equities—helped by relatively good Q3 results as well as by trade developments—was matched by a further rise in the yields on government bonds and a fall in their prices. The 100-year Austrian bond has seen some of the most dramatic negative price performance in recent weeks. Are we starting to see the air seeping out of a bond bubble that has seen record volumes of negative-yielding bonds in circulation? Whatever the case, with data starting to show that prospects for the global economy are not all that dire, we are happy to remain short duration in government bonds.