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Authored by Jeffrey Snider via Alhambra Investment Partners,

And just like that, it’s all different. For more than a year, two years, really, we’ve heard constantly about wage pressures. The US economy buoyed by several domestic factors as well as globally synchronized growth was in danger of getting too far out of hand. The unemployment rate said it was time – three years ago in 2015.

The lower the unemployment rate fell, the more likely the dangers of labor pressures. Orthodox thinking is consistent in its Phillips Curve rituals. This was the basis for “rate hikes” plus balance sheet normalization (what some call QT, or quantitative tightening).

The last hike was barely three weeks ago. In announcing it, the Federal Reserve’s Chairman Jay Powell played resoundingly confident. Not just in the view of economic risks, inflation, but also why. The economy was strong, stronger, and stronger still.

The minutes of that meeting, just released, curiously paint a very different picture of both the debate and offered result. This actually isn’t a surprise. Outwardly, officials project what they think is required. Monetary policy has no money in it, therefore what’s left is confidence and confident-sounding declarations. Powell featured exactly that.

Markets responded quite differently, of course, explaining the not-so-subtle change. The Chairman bluffed, eurodollar futures, oil prices, stocks and UST futures (pretty much everyone) called him on it.

The result is how the same FOMC meeting has produced very different interpretations of it. Powell says strong, the official minutes say “muted.” As in:

With an increase in the target range at this meeting, the federal funds rate would be at or close to the lower end of the range of estimates of the longer-run neutral interest rate, and participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier. Against this backdrop, many participants expressed the view that, especially in an environment of muted inflation pressures, the Committee could afford to be patient about further policy firming. [emphasis added]

Wait a minute. Inflation was in danger of being a monster the Fed could ill-afford to delay in resisting. That was the whole “strong” economy thing. Now it’s muted?

Some participants cited a weaker near-term trajectory for economic growth or a muted response of inflation to tight labor market conditions as factors contributing to the downward revisions in their assessments of the appropriate path for the policy rate. [emphasis added]

The highlighted parts give it all away; the labor market can’t have been “tight” if there aren’t any inflation pressures, and if it was and they failed to materialize in broader fashion among consumer prices the economy can’t have been “strong” else companies would most certainly have passed on the increased input costs.

Something big is clearly missing, and the official minutes admitted this fact (in their own muted fashion).

Of course, this is all theater. The only thing moving the CPI was WTI not wages. That didn’t stop the media from playing along with its constant, fatuous writings about the non-existent labor shortage. The LABOR SHORTAGE!!!! was nothing short of emotional projection (including the Beige Book).

The greatest boom in decades has turned out to be the most fragile boom ever; therefore, it wasn’t a boom.

This more than anything explains what happened in December, as well as all the escalating warnings leading up to it. It wasn’t financial market volatility so much as the curtain being pulled back exposing reality.

Globally synchronized growth would have benefited EM’s more than anyone after the beatdown they suffered in the last downturn three years ago. But Eurobonds and currencies reversed to begin last year, leaving the entire system a May 29 to puzzle over. Central bankers chose to pay it little mind, lip service suggesting “strong worldwide demand for safe assets” was somehow a mispricing of them (the FOMC should’ve consulted 2007 Bill Dudley about this first).

Rather than stay an EM crisis, or “overseas turmoil” in the parlance of 2015, after May 29 the cancer (contagion) spread inward. Late in the year, it became pretty obvious the disease was serious. If slight eurodollar futures inversion wasn’t enough to get your attention, then WTI contango. And if that wasn’t enough, broad UST and eurodollar inversions.

And like that, from inflation hysteria and a resistant strong economy to “muted” and “volatility in financial markets and the increased concerns about global growth.” Always behind, concern about global growth was January 2018 not January 2019; we’re way past that.

I can’t recall before ever seeing meeting minutes so opposed to the crafted message of the actual meeting they were taken from, and I don’t think on balance that’s a good sign. Bernanke wanted transparency but ambiguity benefits a central bank at times (the Montagu Norman doctrine). The difference is Bernanke (and his successors) believed the central bank was actually a powerful and accurate economic tool, becoming even more effective when opened up. He wanted the world to marvel in, and be reassured by, the technocratic prowess he was sure would always be on display.

We’ve been treated instead to the bumbling dissembling and absurd psychology of the emotionally desperate. 

Transparency in this latter case only confirms what people increasingly suspect. Policymakers really have no idea what they are doing and that’s what’s being exposed. I expect that over the coming months policymakers here and elsewhere are going to really regret overhyping 2017’s small economic uptick. Market reaction, more than what’s already at stake, might not be muted.

via RSS http://bit.ly/2H62c7Q Tyler Durden

Despite the first round of US-China trade talks reportedly reaching an “optimistic” conclusion as the two sides made progress on a number of issues – including China’s controversial officially-sanctioned IP theft – the Wall Street Journal reported on Thursday that the US is continuing its crackdown on Huawei Technologies by prohibiting a US-based Huawei subsidiary from exporting technologies developed in a Silicon Valley lab back to the mainland.

The escalation comes as the US is warning its allies to avoid Huawei’s telecoms equipment due to concerns about its vulnerability to infiltration by the Chinese government, to which Huawei reportedly maintains close ties (though Huawei insists that it is an independent company cooperatively owned by its employees). The US is also in the process of extraditing Huawei CFO Meng Wanzhou over charges that she knowingly lied to banks to try and conceal violations of US and EU sanctions against Iran.

Commerce has handed down an ‘export ban’ to Futurewei – the name of Huawei’s US subsidiary – by signaling that it intends to deny Huawei’s application to renew its license. And while most of the technologies developed by Futurewei don’t require a license to export, the export ban will severely restrict its operations.

The license covered the export of telecommunications technology and software, including high-speed data-transfer technology, according to the documents. The technology had an operating budget of more than $16 million and involved more than 40 full-time-equivalent personnel.

The Commerce Department’s move isn’t a death blow to Futurewei because the majority of technologies the unit exports from the U.S. don’t require an export license, according to people familiar with the matter. The company continues to operate in the U.S.

Futurewei is contesting the decision, but the ban will remain in effect as the appeals process unfolds. The company is threatening to move its R&D division outside the US.

Wilbur Ross stressed in a statement that the Huawei export ban is “independent” of the trade negotiations (we imagine Beijing will see it that way, too).

“The process for granting export licenses is independent from our ongoing trade discussions with China,” Commerce Secretary Wilbur Ross said in a statement to the Journal.

The ban comes after Futurewei was accused in a lawsuit filed by CNEX Labs of trying to steal CNEX’s semiconductor technology.

Huawei maintains a modest presence in the US with some 1,200 employees despite being banned from selling its telecoms equipment in the US since 2012 due to being labeled a national security threat.

Huawei has been effectively blocked from selling its telecommunications equipment in the U.S. since a 2012 Congressional report labeled it a national security threat. Huawei has long denied that it is a threat, saying it is owned by its employees and operates independently of Beijing.

The company maintains a modest presence in the U.S., where it employs about 1,500 people. Many are involved in sales of telecom equipment to small carriers servicing rural areas. But the company has scaled back its public-relations outreach and curtailed efforts to communicate with Congress and federal agencies, people familiar with the matter have said. It has redirected its fight to the courts, hiring additional law firms to deal with potential challenges.

As a delegation of senior Chinese trade officials prepares to travel to Washington next week, the ban raises the question of whether the US’s treatment of Huawei will be a factor in trade talks going forward (will Beijing retaliate), or whether the Chinese will object to the US giving them a taste of their own medicine – after all, many suspect that the US’s scrutiny against Huawei is partly motivated by the race for dominance in 5G, where Huawei is facing off against Verizon and US carriers to become the preeminent purveyor of 5G technology.

via RSS http://bit.ly/2Rk0a98 Tyler Durden

The sharpest stock market rally in the past decade, which started with the Steve Mnuchin call to the Plunge Protection Team on Christmas Eve and resulted in a 10% gain in two weeks, is in danger of falling apart this morning as a result of disappointment from the failure of the latest round of US-China trade talks to reach any tangible agreement coupled with dismal Chinese inflation numbers released overnight.

With S&P futures sliding 0.5%, and European and Asian markets sliding, it is a day of reversals in global markets as the new-year rally has stalled, while the dollar rebounded and oil dropping for the first time in two weeks.

Today’s decline follows four consecutive daily gains for the S&P 500 which is something the index hasn’t seen since September, and the rally of +5.60% over that stretch is the best such four-day performance since August 2015. Buying continued to be broad based, with 68% of S&P 500 companies advancing, though equities did fade off their intraday highs as acrimony between President Trump and Congressional Democrats intensified. In a highly-anticipated meeting between the two sides, President Trump walked out of the meeting, calling it “a total waste of time.” So the federal shutdown is set to continue.

Following a vague statement from the USTR after the conclusion of trade talks in Beijing, China said the three days of talks in Beijing had established a “foundation” to resolve the two country’s differences, but gave virtually nothing in the way of details on key issues at stake.  The “nothingburger” was confirmed when China’s Mofcom issued a statement on trade talks in which it stated that China and US agree to continue close communication on trade and that sides had “broad, deep and detailed” communication. Furthermore, Mofcom said that talks promoted mutual understanding and established a foundation for resolution of each other’s concerns, while both sides agreed to maintain close contact.

Additionally, a slew of weak data also dampened the mood when China reported the lowest wholesale inflation in more than two years, the 6th consecutive month of declines…

… while worse-than-expected industrial figures in France provided more proof that Europe is spluttering again.

After last Friday’s surprisingly dovish Powell statement, the Fed Chair takes to the podium for the second time in a week when he addresses the Economic Club of Washington later today; separately, Richmond Fed President Thomas Barkin (non-voter, moderate hawk), St. Louis Fed President James Bullard (voter, dove), Chicago Fed President Charles Evans (voter, moderate dove) and Minneapolis Fed President Neel Kashkari (alternate voter, dove) speak.

Meanwhile, concern surrounding the partial government shutdown in America continues to weigh on sentiment ahead of earnings season: Trump stormed out a meeting with top Democrats on Wednesday, confirming that the current government shutdown episode is set to at least tie the longest on record when it hits 21 days tomorrow.

As Bloomberg notes, investors may well be catching their breath after recent rapid gains, while the lack of any concrete details from trade discussions between China and the U.S. meant there was no fresh catalyst to sustain momentum. Futures for the S&P 500, Dow Jones and Nasdaq all slumped after the four straight gains.

Stoxx Europe 600 Index erased most of Wednesday’s advance, and dropped 0.7%, led lower by carmakers as Germany’s trade-sensitive DAX dropped 0.8% and Britain’s FTSE 100 fell 0.5% on persistent Brexit concerns.

“I am beginning to get a little concerned about the path of the European industrial data,” State Street Global Markets’ head of strategy, Michael Metcalfe, said. “It is raising the possibility of a technical recession in Europe. One of the big challenges is that if this is replicated in Italy’s data tomorrow, that potentially brings the budget questions back into the market’s thoughts.”

Earlier, Asian shares had edged up overnight on the weaker dollar and hopes of more economic stimulus in China following its latest data disappointment. But many stocks seesawed, and Tokyo and Shanghai both closed lower as markets finally grasped that the trade talks were a dud. Japanese stocks paced declines across much of Asia dragged lower by a sharp slide in the USDJPY, though the MSCI Asia Pacific Index was down only marginally.

The soured sentiment saw the normal move into safe-haven government bonds with yields on German and French and government bonds dropping again toward recent two-year lows.  U.S. Treasury yields last stood at 2.657 percent, down from 2.710 percent on Wednesday when Fed minutes showed policymakers were becoming more cautious about future rate hikes.

The dollar rebounded after hitting its lowest level since mid-October. The greenback was flat against the euro at $1.1525. The single currency gained 0.9 percent against the dollar during the previous session, its biggest one-day gain since late June. The pound weakened as British Prime Minister Theresa May mulled options for a Brexit “Plan B.” Gold fluctuated and emerging-market shares climbed.

China’s yuan also muscled higher, breaching the 6.8 per dollar level for the first time since August in both onshore and offshore trade in Asia. “This drop in the dollar is an overdue correction following a surprisingly robust few weeks despite the massive collapse in U.S. rate expectations,” said Ulrich Leuchtmann, currency strategist at Commerzbank.

After entering a bull market following a furious post-Christmas rally, crude fell back $1 having jumped overnight on signs of OPEC-led crude output cuts. Brent crude was last trading 1.4 percent lower at $60.58 a barrel and U.S. WTI was down 1.5 percent at $51.57 cents.

In US political news, the US House voted to approved bill to reopen Treasury Department and several other agencies without border wall money, although the White House had previously threatened to veto the bill. Elsewhere, there were reports that US Republican Senators are said to be planning on courting Democrat senators to reach a deal on border wall.

In the latest Brexit news, UK PM May was said to be mulling supporting an amendment that would keep EU regulations regarding pay and conditions, health and safety as well as environmental standards in an effort to garner support for her Brexit deal. A spokesperson for May later stated that the PM is attempting get further assurances from the EU on her Brexit deal before the conclusion of the debate in Parliament. Spokesperson added that PM is to consider backing Labour MP’s Brexit worker-rights plan. Meanwhile, the Times reported that May’s Brexit approach is seen as being in tatters after Conservative Rebels opened discussions with Labour regarding an alternative to her deal. Finally, UK Labour Leader Corbyn states that a general election should be the priority before a 2nd Brexit referendum and added “Labour will table a motion of no confidence in the government at the moment we judge it to have the best chance of success”.

In geopolitical news, South Korean President Moon said he expects a 2nd Trump-Kim summit soon, However, there were also comments from the South Korea Ambassador to US that US-North Korea nuclear talks have slowed and that it could take years to realize goals in North Korea.

Expected data include jobless claims, while the publication of wholesale inventories is being delayed by the government shutdown. Cogeco Communications and Synnex are reporting earnings

Market Snapshot

• S&P 500 futures down 0.4% to 2,571.50
• MXAP down 0.1% to 150.98
• MXAPJ up 0.3% to 489.22
• Nikkei down 1.3% to 20,163.80
• Topix down 0.9% to 1,522.01
• Hang Seng Index up 0.2% to 26,521.43
• Shanghai Composite down 0.4% to 2,535.10
• Sensex down 0.2% to 36,126.07
• Australia S&P/ASX 200 up 0.3% to 5,795.27
• Kospi down 0.07% to 2,063.28
• STOXX Europe 600 down 0.5% to 346.04
• German 10Y yield fell 1.7 bps to 0.262%
• Euro down 0.2% to $1.1526
• Italian 10Y yield fell 7.4 bps to 2.518%
• Spanish 10Y yield fell 4.5 bps to 1.447%
• Brent futures down 0.8% to $60.97/bbl
• Gold spot little changed to $1,292.97
• U.S. Dollar Index up 0.1% to 95.33

Top Overnight News

• The Trump administration is pushing for a way to make sure China delivers on its commitments in any deal the two nations reach to defuse a trade war that has roiled financial markets and dimmed the outlook for global growth. China says Beijing talks lay foundation for trade resolution
• The pound fell against all of its Group-of-10 peers as U.K. Parliamentary debate on May’s deal continues, with Labour leader Jeremy Corbyn due to call for an election if it fails in Jan. 15 vote; gilts rose as disappointing retail sales added to economic slowdown concerns
• Theresa May is openly contemplating a Brexit “Plan B” amid growing signs the British Parliament will reject the deal she’s reached with the European Union and try to take charge of what happens next
• U.S. central bankers could place interest rates on hold through March or longer as they wait for clarity on risks to global growth that could affect the U.S. economy. That’s the signal from recent comments by Fed officials, reinforced by minutes of their Dec. 18-19 meeting on Wednesday
• Chinese policy makers are continuing their piecemeal approach to arresting the slowdown in the world’s second-largest economy, as further details emerged of measures to ensure credit to small businesses and ease their tax burden. China factory prices rise at slowest pace in more than two years
• Oil stormed back into bull market territory, as investors who’d abandoned crude just a month ago were lured back by an OPEC-led campaign to bring runaway supplies in check
• The woes for U.K. retailers are mounting as new report suggests that 2018 was their worst Christmas since the financial crisis. Shops saw no growth in sales in December vs year earlier, the worst performance in a decade
• Norway’s krone advanced after faster-than-forecast inflation data
• The yen lost some steam in the European session after earlier getting support from a slowdown in Chinese factory prices
• Australia’s dollar gained for a second day after industry data showed iron ore exports improved last month; the Aussie earlier fell following the China data

Asian stocks were mixed as the equity rally somewhat stalled overnight which momentarily saw all regional bourses in negative territory, despite the gains in US where a dovish tone from the FOMC Minutes and several Fed speakers underpinned the US majors to their longest winning streak since September. ASX 200 (+0.3%) and Nikkei 225 (-1.3%) were subdued after sentiment in the region soured with BHP shares hit in Australia as it traded ex-dividend, while the Japanese benchmark underperformed as exporters took the brunt of detrimental currency moves. Hang Seng (+0.2%) and Shanghai Comp. (-0.4%) initially weakened as trade-related momentum began to wane, with sentiment also dampened after the PBoC drained another CNY 70bln from the interbank market and after soft Chinese inflation data added to the despondent tone. However, Chinese stocks then staged a gradual recovery throughout the session, while in terms of trade news, both US and China have issued separate statements in the aftermath of the trade discussions, although the sides refrained from a joint statement and there was also no mention of a timeline moving forward. Finally, 10yr JGBs were underpinned by the initial safe-haven demand which coincided with gains in T-notes in the wake of the Fed dovishness, although prices are off best levels as risk sentiment in the region began to recover, while mixed results at today’s 30yr JGB auction proved to be inconclusive for prices.

Top Asian News

• China’s Rekindled Deflation Fears Add to Global Growth Concerns
• Further Rally Seen for China’s Yuan as It Breaks Key Level
• SBI Is Said to Select Arrangers for Institutional Share Sale
• Time for ‘Reality Check’ on Trade as Asian Stock Rally Fades
• Citic Securities Surges on $2 Billion Purchase of Rival

Major European equities are in the red [Euro Stoxx 50 -0.4%] following on from the mixed performance seen in Asia on the lack of US-China trade clarity. Some underperformance is seen in the CAC (-0.8%), weighed on by Safran (-3.6%) who were downgraded at JP Morgan Chase, and Airbus (-1.7%) in the red after posting fewer net orders than Boeing for the first time in 5 years. Sectors are similarly in the red, with slight outperformance seen in utility names. Other notable movers include Sodexo (+1.8%) who are up after posting an increase in Q1 revenue. Separately, Tesco (+1.0%) are positive after the Co say that they remain on track to deliver their FY outlook, similarly Marks and Spencer (+1.5%) are in the green after the Co saying their FY guidance remains unchanged; despite UK BRC retail sales for December missing with -0.7% vs. Exp. -0.3%.

Top European News

• Tesco Bucks U.K. Holiday Retail Gloom as Small Chains Suffer
• With Brexit Vote Approaching, Companies Make Plea to Cut a Deal
• Ericsson Takes $687 Million Charge to Fix Digital Services Unit
• Past Sins Forgiven at a Price as Saudi Arabia, Turkey Sell Bonds
• Carige Leaders Resist Italy Populist Nationalization Push

In FX, the DXY is on a firmer footing in early EU trade despite yesterday’s dovish Fed speakers and FOMC Minutes which stated that many policymakers said the Fed could be patient about further tightening amid muted inflationary pressures. Additionally, policymakers stated that it was appropriate to hike rates in Dec 2018, though some members favoured no change. Furthermore, due to the recent stock rout, volatility in markets and global growth concerns, the extent and time of future policy tightening is “less clean than earlier.” As such the DXY tested 95.000 to the downside during Asia-Pac hours in a continuation of USD weakness from Wall St., though the index rebounded off the psychological level and marches closer towards 95.500 (intra-day high of 95.381) ahead of a plethora of Fed speakers including Chair Powell, Vice Chair Clarida and 2019 voters Bullard and Evans. It is also worth bearing in mind that US President Trump is to participate in a roundtable meeting on border security around 18:00 GMT as the government shutdown reaches its 20th day.

• AUD – The G10 outperformer, albeit marginally after the Aussie was dented by the release of disappointing Chinese December inflation figures which briefly pressured the currency during the Asia-Pac session. An overnight rebound in copper prices however underpinned AUD/USD north of 0.7150, just below its 50 DMA at 0.7190 with options scattered around 0.7190-0.7220 (1.1bln).
• NOK, CAD – Firmer than expected Norwegian CPI gave the Crown impetus to extend gains below 9.80 vs. the EUR, thought EUR/NOK saw volatile trade shortly post-release amid negative price action in the oil complex. Ultimately, the NOK regained composure as EUR/NOK sits below its 50 HMA at 9.7750 ahead of its 50 DMA at 9.7290. Meanwhile the Loonie bears the brunt of declining oil as USD/CAD trades just below its 50 HMA at 1.3250.
• EUR,GBP – Both victimised by the firmer greenback, though the single currency was unfazed by dismal French industrial production numbers ahead of the ECB Minutes later today (full preview available on the Research Suite). EUR/USD is subsequently only marginally above 1.1500 with the next level to the downside at its 50 HMA (1.1490) ahead of its 100 DMA (1.1478). Large option expiries may cap upside in the pair with 1bln on the money at 1.1515-25 and 1.3bln around the psychological 1.1500. Moving on, Sterling suffers a similar fate as the strengthening buck sent cable further below 1.2800 to breach 1.2750 and test 1.2730. In terms of the latest, Opposition leader Corbyn is again call for a general election today amid the Brexit deadlock, if PM May’s deal does not pass the meaningful vote on January 15th. In light of this, the Premier is reportedly considering supporting an amendment in an attempt to court some Labour MPs into supporting her deal. Cable sits around the middle of a 1.2750-2800 range with its 100 DMA at 1.2746.
• JPY – Marginally softer following overnight upside from the dovish Fed and FOMC minutes as the buck eased and the Yen appreciated on safe-haven demand. As the greenback gained traction in EU trade, USD/JPY reclaimed the 108.00 handle to the upside with the pair’s 100 and 50 DMA at 108.46 and 108.50 respectively with 800mln in option expiries around 108-40-50.

In commodities, Brent (-0.7%) and WTI (-0.7%) are in the red, though the benchmarks reclaimed USD 61/bbl and USD 52/bbl respectively in EU trade with no attributed fundamentals to the recent price action. Previous sessions EIA showed a smaller than expected draw in crude oil inventories of -1.68mln vs. Exp. -2.7mln. Elsewhere, Saudi Energy Minister Al Falih comments that he would not rule out additional OPEC+ action at some point in the future. Gold (Unch) was initial buoyed by the dovish FOMC minutes, although the yellow metal is now trading towards the bottom of today’s USD 6/oz range as the dollar modestly firms. Elsewhere, according to reports US Treasury Secretary Mnuchin is to meet Democrats today to discuss plans to end sanctions against Rusal; of note Democrats have asked for the removal of these sanctions to be delayed. In a vote on January 16th, EU countries are expected to approve a scheme limiting imports of steel into the bloc; placing a cap on steel imports for 3 years.

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 226,000, prior 231,000; Continuing Claims, est. 1.74m, prior 1.74m
• 9:45am: Bloomberg Consumer Comfort, prior 59.6
• 10am: Wholesale inventories/sales data postponed by govt shutdown
• 8:35am: Fed’s Barkin Speaks on Ensuring Long-Term Growth
• 12pm: Fed’s Powell to Speak to The Economic Club of Washington
• 12:40pm: Fed’s Bullard Speaks on Economy and Monetary Policy
• 1pm: Fed’s Evans speaks at Economic Forecast Event
• 1:20pm: Fed’s Kashkari Speaks on Immigration and Growth
• 5:30pm: Fed’s Clarida Speaks to Money Marketeers in New York

DB’s Jim Reid concludes the overnight wrap

The opening para today is a little niche but if you like both music and comedy then I’m about to change your life forever. The highlight of my Xmas TV viewing was a documentary charting the recent comeback gigs of 1980s UK boyband “Bros”. For a brief period of time they were (for some reason) one of the biggest acts in the world. I’d not thought a lot about them since but this documentary is dynamite. For those familiar it is like Spinal Tap meets David Brent (The Office) but rather than fiction it is pure real life. It’s on the BBC iPlayer but also on YouTube for those outside the U.K. Its called “After the screaming stops”. Please, please hunt it down. You won’t regret it. Worryingly Bros consist of identical twins and I’m hoping mine end up with a more functional relationship in the years ahead.

When will I, will I be bearish? The answer is probably before mid-year again but we’d continue to ride the rally for now as things to us don’t look nearly as bad in the near-term as they were made out to be just before Xmas. Yesterday was another day of gains for risk with the VIX trading below 20 again (close 19.8) for the first time since 3 December. In Q4 2018 it traded above 20 for 58.7% of the time after not spending a singleday there between 4 November 2016 and 2 February 2018. How things can change. When the dust settled, the S&P 500, DOW and NASDAQ posted more modest gains yesterday than of late but climbed +0.41%, +0.39% and +0.87% respectively. Still, that is four consecutive daily gains for the S&P 500 which is something the index hasn’t seen since September, and the rally of +5.60% over that stretch is the best such four-day performance since August 2015. Buying continued to be broad based, with 68% of S&P 500 companies advancing, though equities did fade off their intraday highs as acrimony between President Trump and Congressional Democrats intensified. In a highly-anticipated meeting between the two sides, President Trump apparently walked out of the meeting, calling it “a total waste of time.” So the federal shutdown is set to continue.

Prior to this, the STOXX 600 had closed +0.53% in Europe while in credit HY spreads in the US and Europe finished -9bps and -11bps tighter respectively. That’s -85bps of tightening for US HY since last Thursday. One factor supporting US HY credit has been the move in the oil prices, which are up every day this year. In fact, WTI has risen for the last 8 sessions (for a cumulative gain of +17.15%) including a +4.98% move yesterday to take it over $52/bbl. That run is the longest winning streak since June-July 2017. You have to go back to December 2009-January 2010 to find the last time that we were up 9 days in a row. We’re also back in bull market territory as Oil is up over +20% from the lows. The continued slide in the dollar (-0.81%, more color below) certainly helped, while news from Saudi Arabia also buoyed prices. Energy Minister al-Falih told reporters that “we have to remain vigilant and agile and respond, so I would not rule out calling for further action of some kind.” These comments reiterating the Saudi’s commitment to cap production come as the kingdom plans to export 7.2m barrels per day this month, down from 7.7m in November and in-line with the 2018 average in an effort to support prices.

There was a steady drip of newsflow feeding the broader risk on moves yesterday. Initially there were some positive soundbites coming out of the US-China trade meetings after talks had wrapped up although later in the day the USTR published an official statement. At 192 words though it was lacking slightly in substance with the text confirming that talks “focused on China’s pledge to purchase a substantial amount of agricultural, energy, manufactured goods, and other products and services from the US”. It also stated that “officials conveyed President Trump’s commitment to addressing our persistent trade deficit and to resolving structural issues in order to improve trade between our countries”. So not particularly ground-breaking, although the mention that any deal should include “ongoing verification and effective enforcement” was perhaps a reason for risk stalling a bit post the statement being released, as the likelihood of such a comprehensive agreement being reached in the next 50 days seems challenging. China for its part said that the meetings were “extensive, in-depth and detailed,” and laid the foundation for a resolution of the conflict.

Elsewhere we got a warning out of rating agency Fitch that the US could potentially lose its AAA credit rating later this year should the government shutdown continue to March and the issue of the debt ceiling is not resolved. Markets didn’t appear particularly bothered by that though, and the spotlight quickly jumped to the various Fedspeakers thereafter. The most interesting comments came from Boston Fed President Rosengren, Chicago President Evans, and Atlanta President Bostic.

Rosengren is slightly more hawkish than the committee’s median, and our economists had penciled him in as a supporter for three hikes this year. However, he cited “recent data from China, the potential for increased trade tensions, and heightened volatility” as an argument for policy to remain “flexible and patient.” He said that “there should be no particular bias toward raising or lowering rates until the data more clearly indicate the path for domestic and international economic growth.” So perhaps evidence that he wants to see more data before supporting another policy change, but he nevertheless remained confident overall, saying “the economic outlook is actually brighter than the outlook one might infer from recent financial-market movements.”

The second most interesting Fed official was Evans, whose views are roughly in-line with the center of the committee. He said that “developments in the first half of 2019 will be very important for making this assessment of our future monetary policy actions” and hinted at a six-month type of pace for rate hikes going forward. He mentioned tepid inflation data, which could be the key factor for him; recall that he dissented against the rate hike in December 2017, the last time he was a voting member of the committee. However he also flagged that “if the downside risks dissipate and the fundamentals continue to be strong, I expect that eventually the fed funds rate will rise a touch above its neutral level”.

The Atlanta Fed’s Bostic largely reiterated his Monday comments, though he indicated that he may view the hiking cycle as already over, depending on how data develops. He said “we are not locked into a particular trajectory for policy,” and answered “yes” when asked if the next move could be either a hike or a cut. So he’s taking data-dependency to a new level, prompting another leg lower in the dollar yesterday and drop in fed fund future-implied rates, which now see around an 20% chance of a hike by the June FOMC meeting.

Finally, St. Louis Fed President Bullard, a well-known uber-dove, said that the Fed is “bordering on going too far and possibly tipping the economy into recession” and that bond markets are “signalling that there might be some recession risk ahead”.

Capping yesterday’s busy session of Fedspeak, we also got the minutes of the December FOMC meeting. They mostly ratified what we already knew, saying “many participants” want “to be patient about further policy firming” and that “a number of participants” favour assessing “the risks that had become more pronounced in recent months.”

There wasn’t a huge reaction in bond markets to any of those communications. Benchmark 10y Treasuries traded in an intraday range of just over 4bps and eventually settled -1.8bps lower at 2.710%. Two-year yields fell -3.3bps, consistent with the move in fed funds futures, and the 2s10s curve steepened 1.5 bps to 15.3bps. As mentioned, the dollar slid another -0.81% and is now at the lowest since 16 October. The euro ended up +0.97% while for completeness bond markets in Europe yesterday were broadly unchanged with the exception of BTPs which rallied -7.6bps following recent underperformance.

Those comments out of the Fed will be followed by a heavy schedule of Fedspeak today. Indeed we count no fewer than six separate scheduled speakers. In order we’ve got Barkin (1.35pm GMT), Powell (5.00pm GMT), Bullard (5.40pm GMT), Evans (6.00pm GMT), Kashkari (6.20pm GMT) and Clarida (10.30pm GMT). Given that we’ve just heard from Evans, and it would be a surprise if Powell said anything different to his comments on Friday, the most interesting should be Vice-Chair Clarida. Seen as relatively dovish, the market should be on the lookout as to whether or not Clarida takes the opportunity to amplify the message sent by Powell last week. It’s worth noting that Clarida is expected to have prepared remarks while Powell is not expected to release a formal speech. Both are expected to feature Q&A.

This morning in Asia markets are trading mixed with the Nikkei (-1.30%) down while, the Hang Seng (+0.16%), Shanghai Comp (+0.23%) and Kospi (+0.14%) all up. China’s announcement of a package of tax cuts for small and micro-sized businesses worth CNY 200 bn ($29 billion) per year over the next three years is aiding sentiment even as China’s December CPI ( at 1.9% yoy vs. 2.1% yoy expected) and PPI (at +0.9% yoy vs. +1.6% yoy expected) data disappointed with the later continuing the slowdown for a sixth straight month to the weakest level since September 2016. Meanwhile, China’s onshore yuan is up +0.33% to 6.7937 – the highest since August 2018 on positive sound bites from the concluded US-China trade negotiations. Elsewhere, futures on the S&P 500 are down -0.34% while oil prices (WTI -0.95% and Brent -0.76%) are also trading lower this morning after the stunning run discussed earlier.

Moving on. The latest Brexit development was the confirmation yesterday that PM May had effectively lost control of the timetable for what happens should Parliament vote against her Brexit deal next week as expected. Downing Street will now be compelled to report to Parliament and hold a vote on how to proceed within three days of losing a vote on the Withdrawal Agreement. The government will also accept a Tory amendment to limit the backstop to one year, though it’s not clear if that will be acceptable from the EU’s perspective. Separately, Labour’s shadow Brexit minister said that extending Article 50 “may well be inevitable now.” Nevertheless, this chaos was outweighed by the dollar’s broad weakness, leaving cable +0.66% stronger versus the greenback, though the pound did slide -0.31% versus the euro. Elsewhere, Bloomberg reported that the Labour party leader, Jeremy Corbyn, is set to deliver a major speech on Brexit today, in which he’ll call for a general election if May loses next week’s vote. According to released extracts of his speech Corbyn will say, “a government that cannot get its business through the House of Commons is no government at all. So I say to Theresa May: if you are so confident in your deal, call that election, and let the people decide.”

Turning quickly to yesterday’s data, Germany’s November trade balance printed at $20.5bn as imports declined more than exports. So another signal of soft demand in Europe’s largest economy. French consumer confidence fell to 87 from 92, its lowest level since 2014. In the US, mortgage applications rose 23.5% last week, the fastest pace since October 2015, though the series is notoriously noisy.

To the day ahead now, where the aforementioned speeches by the Fed’s Powell and Clarida this evening are likely to be the main focus, alongside the raft of other Fedspeak. As for the data that is due out, this morning we’ll get the November industrial production report in France shortly, before we then get initial jobless claims and November wholesale inventories data in the US. Away from all that we’ll also get the ECB minutes of the December 12-13 meeting where the market will be on the lookout for any hints on the timing for the first rate hike, before the ECB’s Villeroy speaks this evening.

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In the latest confirmation that global auto sales are sliding and that US automakers are struggling to compete in the hypercompetitive European car market – something that President Trump might interpret as another reason to press ahead with auto tariffs presently being studied by the Commerce Department – Ford has announced a massive ‘restructuring’ of its European operations, following in the footsteps of GM’s much broader restructuring, that will entail thousands of job cuts and possibly factory closures.

The cuts are hardly a surprise after the carmaker’s foreign profits have plunged over the past two years thanks in part to exchange rate-related losses spurred by the strength of the dollar, as well as poor sales of its diesel models. According to the BBC, which broke the story, Ford will lay off ‘thousands’ of workers and contemplate factory closures. Ford’s decision to curtail its European operations comes two years after GM sold its European subsidiary to French carmaker Peugeot.

The FT reported that Ford employs 53,000 people in Europe (13,000 in the UK alone) across 15 factories, including two engines plants  in the UK at Bridgend and Dagenham. The Bridgend plant in particular could be in danger because Ford lost a major contract to build engines for Jaguar Land Rover in 2020. Meanwhile, Ford’s Dunton Technical Centre in Essex could potentially benefit from new investment in the commercial vehicles

Globally, the automaker is targeting $14 billion in cuts outside North America to try and revive its international business. Analysts have projected that the company could shed up to 24,000 of its international employees as it struggles to reach its 8% profitability target by 2020 (which would put Ford back ahead of Fiat Chrysler). In the region, Ford is targeting profitability of 6% after the restructuring (something it has never before achieved).

Its restructuring will focus on culling its offerings to only the most popular models while exiting markets where performance has lagged. The carmaker is also in discussions with unions to save costs, while planning to expand its profitable commercial vehicle business.

Every part of Ford’s business will face a review as the carmaker “tears up its strategy” for competing on the Continent (and in the UK).

“This is not about making the business today more efficient but completely redesigning it,” Ford’s European president Steve Armstrong told the Financial Times.

[…]

Mr Armstrong said Ford intended to stay in Europe, but that “everything is possible if we can’t get the reset done.”

News of the European restructuring follows the company’s decision to shutter most of its car brands in North America as it focuses on popular SUVs, pickup trucks and its Mustang sports car.

A similar pattern appears to be playing out in Europe, though the company said it intends to focus on the “mass market” segment. Its European arm will be subdivided into three segments: Commercial vehicles, passenger cars and imported vehicles. In a partnership expected to be announced next week, Ford plans to work with VW on commercial vehicles.

In Europe it has begun winding down the C-Max small minivan, and will “look at the line up, Fiesta, Focus, Mondeo, everything else,” said Mr Armstrong.

All new models sold in the region will come with an electric or hybrid option, as the carmaker tries to lower the CO2 output of its fleet ahead of stringent EU targets that come into force next year.

After a year of abysmal auto sales – and ahead of what’s expected to be another difficult year – Ford last week joined rival GM in saying it would no longer report monthly car sales after reporting a 9% drop for December. Despite the Trump tax cuts having goosed its bottom line, the underperformance of Ford’s shares last year portends more cuts ahead – likely in its flagship North American market, which would could potentially elicit blowback in Washington (see Trump’s furious response to GM’s decision to cut 15,000 jobs in North America).

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Authored by Rostislav Ishchenko (translated by Ollie Richardson and Angelina Siard) via The Saker blog,

Source: https://ukraina.ru/opinion/20190109/1022191926.html

The European Union enters 2019 with a mass of unresolved problems, in addition to being torn apart by the most severe contradictions…

The first and main problem is that the EU was created as one of the mechanisms of the US’ control over Western Europe. Without the American Marshall Plan, without opening American markets for European goods, without American troops on the European continent, without NATO, eventually, the European Union wouldn’t be possible.

When it is said that the EU was conceived, among other things, as a way of removing German-French contradictions, for the purpose of preventing future conflicts that led to the First and Second World Wars, it is the truth. But it must be kept in mind that the German-French unity was necessary and favourable exclusively for the US. Great Britain, on the contrary, during all its history fought to split Europe and to prevent a situation where one state or a union of states could dominate on the continent.

The US was separated from Europe not by a strait, but by an ocean. In addition, they were much stronger than Great Britain was at the peak of its power. A strong and united Europe was needed by the US as an ally in the fight against the USSR. This approach ensured trade preferences and military protection for Europe. I.e., the US allowed the EU to earn money on their market, shared out bonuses from it neocolonial policy, and in addition it also bore the main weight of the armed protection of the EU, exempting Europe from a considerable part of military expenses. In exchange, Europe was becoming a theatre of military operations of the nuclear Armageddon being prepared, allowing the US to remain once again on the sidelines. At least, that’s what Washington thought.

In the 21st century the situation started to slowly change, and in 2017, with the coming to power of Trump in the US, it changed at once and with drama. The US faced a deficit of resources, which at first was supposed to be filled at the expense of looting Russia and China. But when it became clear that this plan can’t be realised, the US cutting its expenditure on the EU became the only way of reducing its resource deficit. Moreover, by the beginning of the 2010’s Washington started to consider their European allies as a lawful trophy. Looting the EU could also temporarily and partially solve the American problem of a deficit of available resources.

In these circumstances, the renaissance of conservative forces challenging the power of globalists started in Europe. And since globalists leaned on the US and received support from Washington, conservatives, at least some of them, started to turn their heads towards Russia.

The erosion of the foundations of the European-American union, as well as the split of the European elites and the reorientation of some of them towards Russia, led to Washington losing (fully or partially) its mechanisms that allowed it to control the European Union. The danger of the EU switching to an economic, and then military-political, union with Russia actualised for the US the old British concept of a shattered Europe. Washington didn’t and doesn’t have the desire to give Moscow a mechanism for the management of Europe that is as effective as the European Union. In this regard the US tried to start the dismantlement of the EU.

Great Britain’s exit from the EU, unrest in France and Hungary, attempts to spread this disorder to Germany (so far unsuccessfully), Warsaw’s actualisation of Polish-German contradictions, in general – setting Eastern Europe against Western Europe (Polish-Baltic-Romanian bloc vs German-French bloc). Against this background the contradictions between the rich North and the poor South, which until recently were the main contradictions for the EU, temporarily faded into the background, but didn’t disappear anywhere and at any moment can flare up with a new force.

We can ascertain that intra-European contradictions are too strong, and centripetal forces don’t have a notable superiority over centrifugal forces. That’s why the sustainable and stable development of the EU is possible only in conditions where the concept of a united Europe and its implementing forces receive political support from a powerful external ally interested in the unity of Europe. Today only Russia can be such an ally, especially since Moscow sees the advantage of an alliance with the EU not in paying Europe for a self-destructive policy, but in achieving a cumulative effect from economic interaction.

Russia has extended a hand to the European Union for more than twenty years. However, traditions of Eurocentrism, political inertia, ideological tunnel vision, and also the initial absence of trust towards Russia’s ability to revive itself as a global power inhibited the turning of the EU towards cooperation with Russia. As a result, that moment when Europe could rather painlessly, without hurrying, and quietly carry out a strategic turn was ineptly missed by Euro-politicians and Euro-bureaucracy.

Nowadays the European Union is under threefold pressure.

Firstly, this is the pressure of the people at large, who don’t like the inevitable decrease in the standard of living. They got used to considering themselves as the “salt of the earth” and are sure that they are owed high social standards by their birthright.

Secondly, this is also the pressure of national states pulling in different directions.

Having lost the opportunity to ensure financing for the globalist policy at the US’ expense, Euro-bureaucracy started to be uninteresting for national governments. It does a lot of squealing, but it doesn’t have enough wool. Respectively, ethnic contradictions, which in the past were softened by the all-European policy, again come to the forefront, tearing “united Europe” apart.

Thirdly, the US isn’t interested anymore in maintaining a high standard of living in the EU, closes its markets to them, and tries to kill off European industry as a competitor to their own one. Washington is also interested in redistributing the resources controlled by the EU in its own favour. And lastly, seeing the danger of the in-motion (although slow) drift of the EU towards Russia, the US isn’t interested in leaving for Moscow a united European Union, which can be put into order rather quickly. The policy of Washington over the past two years is designed to destroy the EU.

What happens next depends on the European Union. Its rescue lies in accelerating the reorientation towards political-economic cooperation with Russia. American pressure cannot penetrate a Russian-European bloc. Today this reorientation is most strongly slowed down by “Euro-Atlantic structures”, which have no place in the new European world, and these are the thousands of influential politicians and military men, as well as representatives of traditional globalist bureaucracy. People who built their career over 20-30 years on the unconditional submission of Europe to the interests of the US aren’t able to change their policy. This contradicts their interests, and in addition they passed through negative selection, and it means that the features of their intelligence simply don’t allow them to realise the danger threatening Europe.

The replacement of globalists with nationalists at the level of the national states picks up speed in Europe. Even the globalist Macron was forced to implement the ideas of conservative nationalists. But it isn’t clear yet if the replacement of the elite will have the time to take place and whether or not new politicians will manage to change the course of the European ship before it will be definitively broken on the rocks.

A lot of things will depend on European Parliament elections in 2019. If nationalists are able to receive a majority in the European Parliament and then force globalists out from the leading heights of the European Commission and other leading structures of the EU, then the European Union will have a chance. If the current state of affairs will remain unchanged, then most likely we will be forced to forget about a united Europe for a long time and start building a system of unions with certain states – in particular, with Germany.

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Distressed Deutsche Bank plans on cutting the company’s bonus pool by about 10% this year as the bank struggles to stay afloat, while at the same time trying to retain employees, according to a new Bloomberg report.

Bonuses are going to be paid more selectively in an attempt to keep the people that earn the most for the bank, according to the report. The bank awarded about €2.2 billion in bonuses ($2.5B USD) for 2017, meaning that the company could still be spending ~€2 billion on bonuses this year, even after the targeted 10% cut. The bank’s CEO, Christian Sewing, is said to be trying to “keep a lid” on costs.

Tim Zuehlke, managing partner at Frankfurt-based executive search firm FRED, stated: 

“Deutsche Bank has a severe talent loss problem and this bonus cut will exacerbate the problem. Focusing on top performers is not new and not the solution.”

The bank’s stock has been slaughtered over the last year and the share price is currently less than half of where it needs to be for retention awards that have already been issued to employees to vest. This is causing some top performers at the bank to consider leaving, while frustrating others.

Since Sewing has taken over, top talent like Tadhg Flood, co-head of Deutsche Bank’s global team of bankers advising financial-services clients and Charlie Dupree, its top M&A dealmaker in the Americas, have already left the company.

The bank’s revenue for 2018 is slated to be the lowest since the 2008 financial crisis and the article notes that the bank’s fourth quarter was “negatively affected by police raids on the lender’s headquarters in November”. Meanwhile, the bank’s CFO, James von Moltke, used the all-to-vague and perfunctory “weak market environment” excuse for the decline in revenues. 

The bank’s new CEO has already announced his intention to cut 7,000 employees by the end of this year and the bank said it has already cut 1,000 front office jobs in the second and third quarter of 2018.

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Authored by Nick Cunningham via Oilprice.com,

The Nord Stream 2 pipeline is running into some trouble amid opposition from the Trump administration.

Support for the Nord Stream 2 pipeline in Germany is slipping, according to a report from Bloomberg. Some politicians in Chancellor Angela Merkel’s coalition are moving against the pipeline for geopolitical reasons, citing fears that the project would allow Russia a freer hand in Ukraine.

As it stands, Russia still needs to ship large volumes of gas to Europe via Ukraine. Nord Stream 2 would allow Russian gas to bypass Ukraine, giving Russia more leverage to meddle in Ukraine while still reliably delivering gas to Europe.

Merkel has been supportive of the project, not least because several major western European companies have stakes in the pipeline, including Royal Dutch Shell, as well as major German companies Wintershall and BASF. Last year, Merkel, under intense pressure from the Trump administration and some countries in Eastern Europe, acknowledged that the Nord Stream 2 had geopolitical ramifications and suggested that the project could face roadblocks if the end result was harm to Ukraine. Still, she seemed to want to push the project forward.

However, those efforts are starting to run into trouble. The recent seizure of Ukrainian sailors by Russia is starting to increase unrest within Merkel’s coalition, Bloomberg reports. A growing block of German politicians view the project is a geopolitical liability.   

The timing is not great for Nord Stream 2. The Trump administration has aggressively opposed the project for quite some time.

“There is not only Russian gas coming through the pipeline, but also Russian influence,” Richard Grenell, the U.S. ambassador to Germany, said in a statement to Bloomberg News.

“Now is not the time to reward Moscow.”

In December, the U.S. House of Representatives approved a non-binding resolution opposing Nord Stream 2. The resolution passed with bipartisan support, calling the pipeline a “drastic step backwards for European energy security and United States interests.” The resolution also called upon President Trump to “use all available means to support European energy security through a policy of diversification to lessen reliance” on Russia.

The U.S. suggested several times last year that it could hit the project with sanctions, and Bloomberg says that such measures could be “imminent.” The U.S. Congress has at times vociferously opposed some of President Trump’s foreign policy goals, but if his administration moves forward with sanctions on Nord Stream 2, it is unlikely there will be a constituency in Washington to defend the project.

While American motivations for derailing Nord Stream 2 are influenced by fears of Russian influence in Europe, the U.S. administration is also undoubtedly trying to force American gas into the European market to benefit American companies. American politicians like to cite European energy security when campaigning against Nord Stream 2, but from the European vantage point, the U.S. government is blocking a reliable source of gas in order to benefit its own companies. To some, that doesn’t sound very much like enhancing energy security.

Last July, President Trump leaned very heavily on European allies at the NATO summit, essentially threatening them with a trade war unless they bought more American gas. European Commission President Jean-Claude Juncker agreed to take in more LNG, although his statements were sufficiently vague so as not to commit the EU to anything binding. “The European Union is ready to facilitate more imports of liquefied natural gas from the U.S. and this is already the case as we speak. The growing exports of U.S. liquefied natural gas, if priced competitively, could play an increasing and strategic role in EU gas supply,” Juncker said in a statement last summer.

Russia still supplies about 40 percent of the European Union’s natural gas needs. To be sure, U.S. LNG shipments to Europe have been rising, but despite its recent growth, American gas is still a rounding error in Europe. In the short run, the possibility of severe cold sweeping over Europe could bolster the economics of important LNG from the United States.

Gas demand in Europe is flat, and has been for quite some time. But an array of policies aimed at shutting down nuclear and coal-fired power plants will serve to increase gas consumption in Europe. And with European gas supply not able to keep up, more imports are likely.

That’s exactly why the developers of Nord Stream 2, and its proponents, say a new pipeline is needed. But the Trump administration is hoping to block that project in order to bolster the case for U.S. LNG.

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As an increasingly overbearing European Union tries to force its agenda and values on member states that have embraced a more conservative, populist or anti-immigration tact – be it through Article 7 threats against Hungary, a rule-of-law investigation into Poland’s ruling party or its threats of an excessive debt proceeding against Italy – leaders of these states are finally banding together to try and push back against Brussels.

According to Reuters, Italy’s far-right Deputy Prime Minister Matteo Salvini is planning to meet with the leader of Poland’s ruling party, Jaroslaw Kaczynski, on Wednesday to discuss the possibility of creating a “eurosceptic alliance” that will participate in the European Parliamentary elections in May.

Matteo Salvini

The meeting is part of a broader plan by eurosceptic governments that Reuters said could “fundamentally shift the direction of the European Union after the elections.” Salvini’s visit to Warsaw was organized by Polish Interior Minister Joachim Brudzinski.

“(The election) will show whether the eurosceptic voices within Europe are on the rise or if the rise has been curtailed for the moment,” said Michal Baranowski, the head of the German Marshall Fund’s Warsaw office.

Salvini, the leader of Italy’s anti-immigrant League Party and one of two men who are effectively running the country (along with M5S leader Luigi Di Maio), has repeatedly criticized the EU and warned that the May elections are important for creating a “reformist” bloc that he hopes can change Brussels from within. He has even gone as far as to hint that he could be a candidate to lead the European Commission.

“Someone has betrayed the European dream,” Salvini told a League rally in Rome last month. “We will provide the blood for a new European community based on respect, work, growth and equality.”

Kaczynski has said that Poland (which, as Reuters notes, is the biggest beneficiary of EU infrastructure funding) should retain its membership in the bloc, which it joined in 2004. But he wants reforms to bring more power back from Brussels to national capitals.

As Reuters points out, should Poland join forces with a bloc of Eurosceptic parties united by Salvini, it could stand to benefit Poland. To be sure, Poland has recently backed down from some of its more controversial measures, including a law that forced judges into early retirement. That law had ignited widespread indignation across the bloc.

Salvini met other potential allies last year, including Hungary’s Prime Minister Viktor Orban, in an effort to form a cohesive eurosceptic grouping at the EU level.

Salvini could try to unite the Europe of Nations and Freedom bloc, to which his League belongs, with the European Conservatives and Reformists group which includes PiS to create a single, powerful eurosceptic force in the EU Parliament.

A tie-up with Salvini’s grouping could ensure a powerful voice for PiS in the next European Parliament, especially as Britain’s Conservatives will leave the European Conservatives and Reformists grouping after Brexit.

But PiS has also been trying to dilute its eurosceptic reputation ahead of Poland’s own parliamentary election due in the autumn, recently agreeing to reverse a law criticized by the EU that had forced Supreme Court judges into early retirement.

If there is one potential obstacle to closer ties between Italy and Poland, it would be their dramatically different views about Russia. Salvini is one of the most unabashedly pro-Kremlin leaders in Europe, while Poland’s ruling party remains deeply distrustful of Moscow.

Still, if eurosceptics find a way to organize to maximize their leverage in the European Union Parliament following the election, it could open the door to a forced rollback of the unpopular pro-immigration policies and austerity pushed by Brussels that have helped trigger the swell in populist support.

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