Europe: Politics remains very much in the fore - BBH

In view of the analysts at BBH, European politics remains very much in the fore but it is a work in progress, and it is too early to expect an end game.  

Key Quotes

“Even the finance ministers meeting to start the week is unlikely to resolve matters with Greece.  Greece does not need funds until July.  One of the rules of brinkmanship is that has to go to the brink.”

“The key issue now is whether the IMF capitulates, contribute funds and agrees that Greece needs to achieve a  3.5% primary budget surplus next year, or whether Germany (and the Netherlands) accept that Greece is a European problem that Europe can and should address without the IMF's money (but perhaps with its expertise). A Reuters report at the end of last week suggested the former, while other reports pointed to some softening of the German stance on the necessity of the IMF.”

“Just as many investors began feeling more comfortable with French politics, reflected in the 10-year spread narrowing from 77 bp on February 6 to 66 bp on February 16, a new twist to the drama unfolding.  There was an initiative to run a united left ticket, the Socialists, to be led by its left-wing candidate Hamon, the former Socialist, Melenchon's faction and, the Greens, under Jadot's leadership.  Such a coalition is seen taking votes away from Macron, who had moved into second as Fillion is snarled in a scandal.  A left candidate running against Le Pen would give the National Front its best chance of winning the second round.  The prospects spooked investors, and the premium widened again.  The 10-year spread rose back to 73 bp before the weekend.  The two-year premium rose to 32 bp, the highest since the mid-2013.  It stood at 11 bp at the end of 2016.”