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Many are concerned about the protectionist signals sent by candidate Trump. The widening of the trade deficit the coming months as a result of growth differentials may make for fertile ground for the rhetoric to be operationalized. The implication of less commitment to free-trade while the US is a net international debtor (the world owns more US assets than American own foreign assets) is not clear. Those issues seem to be a medium term challenge, and by the time they are salient the world could look a lot different.  

That brings us to the second driver of the shift in the investment climate: Europe. It is not the European economy per se. Eurozone growth is near trend, and the flash November PMIs raise the hope of some modest improvement. However, unemployment has been slow to improve. After finishing last year at 10.5%, it has been stuck at 10.0% since July. Money supply growth has stabilized near 5% since the middle of last and lending is slow. Both will be on exhibit to start the week.

Those at the ECB who want to extend the asset purchases anchor their arguments in the weak price pressures. The preliminary CPI will be the last look at inflation before the ECB meets on December 8. The headline rate may tick up slightly to 0.6% from 0.5% in October. It would be a two-year high, but the increase since the 0.1% rise in July is largely a function of oil prices, as the core rate has been steady at 0.8% in recent months and is expected to remain there in November.

The prospect that the ECB could alter is self-imposed rules about its asset purchases, which would allow it to buy more German bunds helped drive the German two-year yield to new record lows last week. The yield fell to minus 76 bp ahead of the weekend before closing near 74 bp.  Although most of the media coverage has focused on the rise in US yields, last week, the German rate move was larger Its two-year yield fell almost eight bp, while the US two-year yield rose less than five bp.

Another consideration that may have contributed to the pressure on German yields is the rising political anxiety. At the end of next week, Austria elects a new president, and Italy holds a referendum on constitutional changes to the Senate, after earlier reforms for the Chamber of Deputies was approved.

The Austrian election is a do-over after the May election results were voided by the courts for the improper handling of postal votes.  The populist-nationalist Hofer is polling a little ahead of the Green's von der Bellen. A victory would make Hofer the first far-right head of state in Europe since WWII. The post may be largely ceremonial, but the symbolic victory may be underestimated by the focus on the Italian referendum.

Expectations that the referendum will not be approved are widespread. The key unknown is what follows. Although Renzi has threatened to resign if the referendum fails, his signals have been ambiguous. If he resigns, the idea is that the PD would select a caretaker, perhaps a current minister, that would attempt to complete the political reforms and hold the parliamentary election as scheduled in 2018.

However, Renzi could force an early election. It is a scenario he played down but came back to the fore last week.  The most important point is that investors' anxiety over the possibility that 5-Star Movement is swept is getting ahead of events. However, a weak government or a caretaker government means that the reform efforts slow. Italian assets have underperformed recently as the referendum drew near.  The Italian 10-year premium to Germany widen nearly 50 bp over the past month, and at 1.85%, is the largest in more two and a half years. The rising sovereign yield (Italy's 10-year yield has risen 63 bp over the past month, the most in Europe) is one of the factors that have weighed on bank shares. The Italian bank share index is back to its lowest level since early October. 

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