Month: October 2018

Authored by Tom Luongo,

The pieces have been moving into place for months now.  German Chancellor Angela Merkel has seen her power within German political circles wane for more than a year.  Italy’s opposition to the European Union’s budget rules is stiffening.

Bond yields are beginning to not just rise, but blow out uncontrollably.

The Fed keeps raising rates to arrest inflation not supported by increased wages.

Brexit talks are at a standstill.

Last week Merkel suffered what could easily be her most important political defeat over the past two years.  She lost a parliamentary vote for her candidate in an internal vote of her Christian Democratic Union (CDU) party.

As pointed out by Alex Mercouris at The Duran, this is the first time in more than forty years a German Chancellor lost an internal party vote of this magnitude.  And it speaks to the growing frustration among not only party members but the German electorate in general.

I saw a recent poll from Die Welt which has Alternative for Germany (AfD) creep past Merkel’s Grand Coalition partner, the Social Democrats (SPD), and challenge the CDU itself.

Because when you back out the Christian Social Union’s (CSU) total which runs between 8% and 9% AfD is now in a position to become the party with the highest backing in Germany.  And this is happening on the eve of Bavarian State elections this month.

So, CDU party members are in an absolute panic over these numbers.  They are reaching levels which can see a major party become a minor one very quickly.  Don’t believe me?

Ask the Democrats in Italy.

What Alternatives for Germany?

I’ve talked about AfD’s chances to achieve this result in the past in terms of them crossing the 16% Chasm.  And it appears, that slowly, they are doing so.

German politics, from what I understand, is not used to this kind of upheaval and certainly not these kinds of leadership challenges.  Earlier this year Merkel barely survived a challenge by former CSU Leader Horst Seehofer over immigration.

So, where to things go from here?

As Mercouris points out, Merkel has very skillfully gutted the landscape of the CDU to keep potential leaders from emerging within the party.  The SPD is falling off a cliff having lost more than half of its support since the 2014 elections. And the CSU is primarily a Bavarian party so they don’t have the support of the entirety of Germany.

This landscape is why we’ve seen the Greens rise to 15% as well as AfD’s rise.  And that cannot be ignored.  The hard left of German politics is now split and ineffectual.  But, no party has emerged in this chaos to take the reins of power.

This is reminding me of Italy’s situation at the end of 2017 with no less than five parties polling in double digits.  It’s a messy situation and it makes more sense in Germany that big shifts in voter preference would occur at a slower rate given the stability of German coalition governments since the modern state was founded after World War II.

In other words Germans are loathe to make these kinds of changes.  So, you know the situation must be bad if these numbers are changing this quickly.

So, it shouldn’t be much of a surprise really to see this type of breakdown and the slow rise of AfD past the 16% chasm.  It may be the riots in Chemnitz that finally begin pushing their poll numbers into the 20’s nationally.

My worry is that AfD is a pure protest vote against Merkel and once she is gone support will fade like it did for UKIP after the Brexit vote.  UKIP built its support on Brexit, but once the vote happened many disgruntled Tories went home to have the more experienced party lead the talks.

Fat lot of good it did them, but I can see the logic.  Nigel Farage stepping down didn’t help matters either.

So, the same thing could be occurring here in Germany.  Frustration with Merkel over immigration could end the CDU’s slide if she is deposed and someone else takes over.

Because here’s the rub.

Politics as Unusual

Political volatility in Germany now is about the worst possible scenario for the European Union.  Merkel is the de facto head of the EU. And it is dealing with revolts both internal and external, all of which revolve around fundamental questions of sovereignty of member states.

Internally, it is dealing with an obstinate and confrontational group of Italians over budgets and austerity as well as the challenges from Hungary and Poland over sovereignty, both of whom now face Article 7 censuring.

Brexit talks are breaking down as British Prime Minister Theresa “The Gypsum Lady” May has botched both delivering a Brexit no one except the EU wants and selling it as a Brexit of substance at home.

And then we add in Donald Trump’s attacks on the post-WWII institutional security order, i.e. NATO, and the parameters of international trade things get even dicier.

In my opinion, the only thing propping up Merkel right now is her standing up to Trump on energy and defense issues.

But, that is forcing her to make deals with Russia which run counter to The Davos Crowd’s plans to destroy Russia… and we all know who Merkel takes her marching orders from.

What’s a would-be continent-spanning Empress to do, right?

And this begs the big question that if Merkel were deposed as Chancellor during all of this what effect would that have on investor confidence and the structure of financial markets?

As I said at the open, all the pieces are in place.

It’s the Debt, Stupid

The only thing keeping the European Union together in its current form is Germany’s strong-arming everyone into line along with the IMF and the ECB.  But, any replacement for Merkel will be far more nationalistic, even if it is a member of the CDU, than Merkel.

And that means being far more willing to let Italy walk out of the Union if it doesn’t do what’s in Germany’s best interest.  And to German nationalists, right or wrong, bailing out lazy Italians is not on the agenda.  Part of what fueled AfD’s initial success was the endless bailouts of Southern European countries like Greece and Italy previously.

This just sounds like a complete nightmare from an investing standpoint. No matter how cocked-up things look here in the U.S. we’re not in danger (yet) of the kind of political breakdown which would threaten our financial markets in the same way a messy and disorderly break up of the EU would be over Italy defaulting on its debt.

George Soros can try to monkey with the Supreme Court and mid-term elections, but  the U.S. is still a far stabler political union than the EU is.  Its markets are deeper and more liquid, for now.

I know the actual situation of dealing with Italian bonds is more complicated than them simply walking away.  But, during a banking crisis that threatens everyone’s savings and the solvency of the German banking system, complicated becomes simple really quickly.

Italy issues a new currency and offers to pay its debt back in it or nothing at all.  Germany screeches.  Lawyers go into action.  Arms are twisted.  Governments fall.

Most importantly, capital flees the scene of the chaos.

At the end of the day it’s all paper and that paper isn’t worth the legal fees to untangle who owes what to whom anymore.  So, if Italy holds its ground a Germany Without a Merkel has no chance of avoiding a complete melt-up in bond yields, which will finally begin the chain of events that leads to a new monetary system and global institutional order.

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Those rare moments that WikiLeaks gets invoked at the United Nations are always fun, especially when part of a tense feud between Middle East rivals and involving Hillary Clinton. 

Iranian Ambassador to the UN Gholamali Khoshroo gave a fiery speech during the final days of the UN General Assembly meeting in New York wherein he responded to specific charges of Saudi Arabia that Iran sponsors terrorism and is waging proxy wars on Riyadh throughout the Middle East, saying that global terrorism actually originates with the Saudis.

The Iranian ambassador supported his case by appealing to a specific WikiLeaks email: “Everybody knows that Saudi Arabia supports terrorism in a very blatant and widespread manner,” he said. In a shock statement before his UN audience, he added, “in the framework of WikiLeaks in 2009, Hillary Clinton is said to have stated that Saudi Arabia is the greatest donor to terrorist groups around the world.”

Interestingly Khoshroo delivered his speech in Arabic, instead of his native Farsi, in order “to make sure that our position is rendered clear” to Riyadh.

He was referencing a 2009 intelligence memo released as part of Clinton’s emails which said that “donors in Saudi Arabia constitute the most significant source of funding to Sunni terrorist groups worldwide” — though she herself was not the author. The memo continued with “Saudi Arabia remains a critical financial support base for Al-Qaida, the Taliban… and other terrorist groups.”

The Iranian diplomat may have also been referencing another Wikileaks file which shows that in a private speech Hillary Clinton made in 2013, she said: “The Saudis and others are shipping large amounts of weapons – and pretty indiscriminately – not at all targeted toward the people that we think would be the more moderate, least likely, to cause problems in the future.”

And further, a 2014 WikiLeaks released Hillary Clinton memo spells it out clearer, saying “We need to use our diplomatic and more traditional intelligence assets to bring pressure on the governments of Qatar and Saudi Arabia, which are providing clandestine financial and logistic support to Isis and other radical groups in the region.”

Ambassador Khoshroo used the WikiLeaks evidence to make the case before the UN assembly that the Saudis back both ISIS and Al-Qaeda, using them as proxy forces to conduct attacks on Iran and religious minorities in the region, such as the recent gunning down of 25 at a military parade in Ahvaz in Iran’s southwest. 

His speech also focused heavily on Saudi Arabia’s bloody war in Yemen: “It’s an open secret that the Yemen nation is suffering as a result of the direct machinations and maneuvers of Saudi Arabia,” he added, while holding up photos of Yemeni children who had been killed in an August coalition air strike on a school bus. 

“You say that you’re defending the Arab identity,” the Iranian representative said, addressing the Saudis. “You’re not defending the Arab identity. You’re killing the Arab identity with your dollars. You have no pity for anyone in the Arab World. You have no pity for any Arab people, including those, who are supposedly you allies.”

Saudi Arabia’s ambassador had previously stated before the assembly that the kingdom “supports the new US strategy to counter Iran, including its seriousness to address the nuclear issue and ballistic missile program and support for terrorism.”

Meanwhile it’s not Saudi Arabia that’s come under pressure for terrorism charges and regional threats of late. On Tuesday France announced it has frozen the funds of a large swathe of Iran’s Intelligence Ministry, specifically its interior security section as well as an associated diplomat. 

The French Foreign Ministry’s announcement said that the move was “preventative, targeted and proportionate” and related to counter terror efforts on its own soil. 

However, given the lengthy documentation that’s long existed that makes an even greater case proving Saudi state sponsor of terrorism, perhaps such sanctions should also be directed at Riyadh? 

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After being given “carte blanche” by the White House to interview Brett Kavanaugh’s accusers as well as a smattering of his friends from high school and college, the FBI has wasted no time, with Reuters reporting on Tuesday that they have started questioning Mark Judge, Kavanaugh’s high school friend and alleged witness to the SCOTUS nominee’s sexually aggressive behavior toward Dr. Christine Blasey Ford.

While Judge’s lawyer said that her client’s “interview has not been completed,” the bureau has also reportedly spoken with PJ Smyth, another one of Kavanaugh’s high school contemporaries, who again denied that he witnessed Kavanaugh assaulting Ford.

Judge, author of a book entitled “Wasted: Tales of a Gen X Drunk”, “has been interviewed by the FBI but his interview has not been completed, his lawyer said. We request your patience as the FBI completes its investigation,” his lawyer said.

However, the most salacious story to emerge since the start of the investigation was delivered by Kavanaugh’s former Yale classmate, Chad Ludington, who spoke out on Monday to accuse Kavanaugh of lying to the Senate when he said he’d never “blacked out” from drinking.

Ludington went into more detail in a report that surfaced late Monday evening, when Bloomberg News published Ludington’s account of a barroom brawl involving himself, Kavanaugh and former NBA star Chris Dudley at Demery’s a longtime Yale hangout in New Haven, Connecticut. Ludington claimed that he witnessed an “aggressive and belligerent” Kavanaugh instigate a fight by throwing a beer in another patron’s face after the man brusquely demanded that Kavanaugh and his friends stop staring at him.

The brawl took place after Kavanaugh and his friends were heading back from seeing British band UB40 at a venue in New Haven. While enjoying a few beers at a bar, Kavanaugh and his friends approached a local man whom they mistook for the lead singer of UB40. The man told them to “stop staring” at him, at which point Kavanaugh allegedly became belligerent. After a heated exchange of expletives, a brawl erupted.

“It was sort of a general feature of hanging out with Brett in college,” he said in an interview. “When you’re having beers on a Friday or Saturday night, that was kind of Brett’s shtick. He was aggressive. He was belligerent.”

Bloomberg dug up a police report about the incident that identified the local man as Dom Cozzolino. The then-21 year old victim – and UB40 lead singer lookalike – told police that Kavanaugh “threw ice at him”. But Ludington claimed that Kavanaugh threw a beer in the man’s face, provoking him into taking a swing.

“The next thing you know, Brett throws his beer at the guy,” Ludington said. “The guy swings at Brett.”

But other friends of Kavanaugh say it’s entirely plausible that the judge was being truthful during his testimony. In a statement released Monday, Dudley said he never saw Kavanaugh black out.

Dudley didn’t respond to a voicemail and email left at his office asking about the incident in the bar. But in a statement he released Monday, he said “I will say it again, we drank in college.”

“I was with Brett frequently in college, whether it be in the gym, in class or socializing. I never ever saw Brett blackout. Not one time,” Dudley said. “I would also like to point out that going out never came before working hard and maintaining our focus on our goals.”

Stories about the brawl allegedly became part of campus lore, since Dudley’s involvement – Ludington said Dudley broke a beer bottle over their adversaries head – prompted a warning from the Yale basketball coach. Ludington added that he and Kavanaugh were “pretty buzzed” at the time of the incident, though he couldn’t say for certain that Kavanaugh had blacked out.

Ludington doesn’t recall how much they had been drinking that night. The group was most likely “pretty buzzed,” he said, though not so drunk that he doesn’t have a clear memory of that night.

What the incident illustrates about Kavanaugh “is just the aggressiveness that came along with the alcohol, the hair-trigger machismo, which was pathetic,” he said.

We imagine we’ll be hearing more about this incident once the FBI inevitably reaches out to Ludington. In the meantime, there have been reports (via NBC) that Kavanaugh approached other friends from that era to ask them to corroborate his story. However, other media outlets have been unable to confirm that report.

But rest assured, as soon as there’s something significant to report, it will almost certainly be leaked to the press.

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If Bernie Sanders was trying to get under Amazon CEO Jeff Bezos’ skin, it appears he has succeeded.

With Sanders’ “Stop BEZOS” act threatening to tax companies like Amazon to compensate for the government benefits that their employees collect, the company has instead opted to raise wages for more than 100,000 employees, the Wall Street Journal reported Tuesday.

Amazon.com Inc. on Tuesday said it was raising the minimum wage it pays all U.S. workers to $15 an hour, a move that comes as the company faced increased criticism about pay and benefits for its warehouse workers.

The new minimum wage will kick in Nov. 1, covering more than 250,000 current employees and 100,000 seasonal holiday employees. The company said it also will start lobbying for an increase in the federal minimum wage, currently at $7.25 an hour.

In a statement that obliquely references Sanders and his push to hold corporate chieftains accountable for paying employees less than a livable wage, Bezos said the policy resulted from Amazon “listening to our critics.” Amazon shares traded slightly lower in the pre-market, but were otherwise little impacted by the news.

“We listened to our critics, thought hard about what we wanted to do, and decided we want to lead,” said Jeff Bezos, Amazon’s chief executive, in a statement. “We’re excited about this change and encourage our competitors and other large employers to join us.”

To be sure, Sanders and the left aren’t Amazon’s only critics. President Trump has criticized Amazon for ripping off the postal service and destroying companies and jobs, hinting that his administration could eventually pursue an anti-trust action against the company, which recently became the second US firm (after Apple) to reach $1 trillion market capitalization. Amazon’s decision follows a similar move by Wal-Mart, which raised its minimum wage to $11 earlier this year, up from $9.

Amazon said the new wage floor will take effect next month as the critical US holiday shopping season begins. When that happens, look for average hourly wages for nonfarm employees – which increased at the fastest pace in nine years back in August – to accelerate further.

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World stocks slumped, European assets sold off and the Euro dropped to a three week low on Tuesday after anti-euro comments from an Italian party official sent renewed shockwaves across Europe and the globe, and pushed Italy’s bond yields up to multi-year highs.

Italian asset tumbled for a second day, after the economic head of the ruling League party and head of lower house budget committee – and a well-known euroskeptic – Claudio Borghi said that most of Italy’s problems could be solved by having its own currency: “I am more than convinced that Italy, with its own currency, would be able to resolve its problems,” Borghi said in an interview on Radio Anch’io, adding that the euro as common currency “is not sufficient” for Italy to solve fiscal issues. In kneejerk response, Italian 10Y yield continued their Monday selloff, spiking to 3.438%, the highest level since early 2014.

Borghi also said that like France, Italy shouldn’t be subject to attack from EU officials, adding that if France’s spread started widening, “at a certain point they would raise their hands and say ‘OK let’s intervene’.” He concluded that Italy would have declared a 3.1% budget deficit for 2019 instead of the 2.4% it has set, if it had wanted to go up against the EU, adding that the govt is aiming for a level that’s “enough for our country to feel a bit better.”

Borghi’s comments followed a statement by European Commission President Jean-Claude Juncker who compared Italy with Greece, saying “after the toughest management of the Greece crisis, we have to do everything to avoid a new Greece – this time an Italy – crisis.”

The latest comments shook markets in early trading, pushing Italian 10-year bond yields to a new 4 1/2 year high…

… and shares in Italian banks, which have large sovereign bond holdings, sold off sharply to hit a 19-month low, down 2.8 percent. Italy’s FTSE MIB tumbled as much as 2%, hitting its lowest level in 18 months amid budget concerns, before recouping some of the losses.

Subsequent attempts by Borghi to talk back his comments were unsuccessful, when he told Bloomberg TV that “there is no plan to leave the euro within this government regardless of my personal conviction.” The deficit is “not a revolutionary move” and “we are not mad, we are not Maduro Venezuela or something like this,” Borghi said.

There was little reaction to this subsequent commentary, meanwhile Euro zone banks dropped 1.3% as the comments reignited investors’ anxieties about contagion to euro zone finances from Italy’s higher budget deficit plans, which the government set out on Thursday.

“While our economists do not expect systemic implications for the global economy, contagion risks have risen,” Goldman Sachs analysts warned. “We think European risky assets remain vulnerable and there is potential for negative spillovers to the Euro area given the high trade exposure to Italy.”

In response to Goldman’s caution, the EURUSD continued its selloff for a fifth day, sliding 0.5% and touching its lowest since Aug 21 at $1.1505 and last trading at $1.1517, after hitting 1.18 late last week.

The single currency has been hurt not only by renewed redenomination fears as a result of Borghi’s comments, but also by concerns that a significant increase in the Italian budget will deepen Italy’s debt and deficit problems, and by extension the European Union’s.

“The history of the euro zone tends to be one of great fudges – think of the case of Greece,” said David Keir, manager of the global income and growth fund at Saracen. “But I would caution against any wider systemic spreading. The reality is making kneejerk reactions to big political decisions can very much be the wrong thing to do.”

The Stoxx Europe 600 Index fell for only the second time in six days as equities in Italy declined. Amid the risk-off mood the dollar climbed against almost all its major peers and emerging-market assets dropped. The pound fell as Brexit and the annual conference of the governing Conservative Party continued to dominate headlines.

Meanwhile, as Bloomberg’s Garfield Reynolds observes, Italy’s budget woes once again threaten to blow up EM FX as “the blowout in BTP-bund spreads is hammering the euro and also hurting risk proxies such as AUD and NZD.”

“That threatens to send a fresh wave of contagion across EM assets just as investors were hoping they had got past the aftershocks from the crises in Turkey and Argentina.” Reynolds wrote in a Tuesday note. “A fresh burst of USD strength will be most unwelcome, with the KRW’s late slump a sign of things to come. Each Italian yield eruption makes it that much harder to conclude that this European sovereign debt dilemma won’t end in tears. It also will keep investors cautious and avoiding volatile plays, like EM assets.”

Sure enough, also overnight Indonesia’s rupiah weakened past 15,000 per dollar for the first time in 20 years as sentiment toward emerging-nation assets soured and oil prices jumped. The currency has tumbled almost 10% this year as rising U.S. interest rates have boosted the dollar and Indonesia’s current-account deficit has left the economy exposed to the financial turmoil that afflicted Turkey and Argentina. Crude prices have almost tripled since February 2016, ratcheting up the cost of imports. The currency plunge is taking place even as the central bank has raised interest rates five times since May to shield the currency from the emerging-market rout.

“Given the rise in U.S. interest rates, higher oil prices which may see a wider trade deficit, and a stronger dollar in recent days, it was proving difficult for Bank Indonesia to hold the line at 15,000,” said Khoon Goh, head of research at Australia and New Zealand Banking Group Ltd. in Singapore. “If sentiment doesn’t improve, we risk further weakness towards the 15,200 region.”

Earlier in Asia stocks in Hong Kong underperformed as traders returned from a long weekend, and equities also fell in Australia and South Korea. Japan was a bright spot as the Nikkei 225 Stock Average ticked up a day after closing at its highest since 1991. China’s financial markets remain closed for the week of Oct. 1-5 for national holidays, but China’s weaker manufacturing PMI surveys over the weekend also hit Hong Kong stocks.

As Bloomberg notes, “while a deal between the U.S. and Canada to revamp the Nafta trade deal with Mexico gave global risk appetite a boost at the start of the week, investor sentiment remains fragile amid a laundry list of threats to markets.”

Also overnight, Sino-American tensions were back in focus after the Chinese navy came within 45 years of a US Misile Destroyer from waters near South China Sea islands, in Beijing’s account of the incident. Meanwhile, political drama in Washington still swirls around President Donald Trump’s Supreme Court nominee, which may feed through to November congressional elections and affect the outlook for the administration’s agenda.

As a result of the renewed Italian jitters and the last minute renewal of the NAFTA 2 deal, the dollar traded at a three-week high, weighing on emerging markets stocks which suffered their biggest one-day losses in a month. The greenback drew support from an uptick in U.S. Treasury yields as Wall Street gains curbed demand for safe-haven debt, although so far the 3.11% level has proven insurmountable for 10Y yields, which were down 3bps on Tuesday morning.

Elsewhere, oil prices recoiled slightly, having hit nearly four-year highs in the previous session. Crude contracts surged nearly 3% to $75.77 a barrel on Monday, the highest since November 2014, as the deal to salvage NAFTA stoked economic growth expectations, with impending U.S. sanctions on Iran seen raising prices. Brent crude edged down 0.2 percent to just under the $85 a barrel level, after rallying 2.7 percent the previous day to a $85.45, highest since November 2014.

Expected data include Wards total vehicle sales. Lamb Weston, Paychex, and PepsiCo are among companies reporting earnings.

Market Snapshot

• S&P 500 futures down 0.4% to 2,921.50
• STOXX Europe 600 down 0.7% to 381.39
• MXAP down 0.7% to 163.74
• MXAPJ down 1.6% to 516.20
• Nikkei up 0.1% to 24,270.62
• Topix up 0.3% to 1,824.03
• Hang Seng Index down 2.4% to 27,126.38
• Shanghai Composite up 1.1% to 2,821.35
• Sensex up 0.8% to 36,526.14
• Australia S&P/ASX 200 down 0.8% to 6,126.21
• Kospi down 1.3% to 2,309.57
• German 10Y yield fell 4.4 bps to 0.427%
• Euro down 0.5% to $1.1526
• Italian 10Y yield rose 14.9 bps to 2.93%
• Spanish 10Y yield rose 1.1 bps to 1.541%
• Brent futures down 0.4% to $84.61/bbl
• Gold spot up 0.4% to $1,193.94
• U.S. Dollar Index up 0.3% to 95.61

Top Overnight News

• Italian Finance Minister Giovanni Tria’s effort to promote his government’s new fiscal strategy ended in failure on Monday, with the head of the European Commission warning of a Greek- style crisis and the nation’s bonds dropping to their weakest level in more than four years. The euro slipped alongside Italy’s bonds on Borghi’s earlier comments
• President Donald Trump looks to be preparing for a potentially protracted economic war with China. He’s recently struck a last-minute deal with Canada and Mexico, signed a trade agreement with South Korea and convinced Japan to begin bilateral economic negotiations. The North American accord also includes provisions seemingly aimed at keeping Chinese products out of the region.
• Former foreign secretary Boris Johnson will arrive at the Conservative Party’s annual conference on Tuesday to make a speech that shows whether he still has a chance — or the will — to gun for the top job in British politics and be prime minister of a party at war with itself.
• Randal Quarles, the Fed’s vice chairman for supervision, is vying with the head of the Dutch central bank, Klaas Knot, to lead a watchdog panel for the global financial system — Basel- based Financial Stability Board — after Mark Carney steps down on Dec. 1.
• Indonesia’s rupiah weakened past 15,000 per dollar for the first time in 20 years amid a souring of sentiment toward emerging-nation assets and as oil prices jumped.

Asian stocks traded mostly lower as the upbeat sentiment from the USMCA deal seen on Wall St. faded away and trade concerns re-emerged after White House Economic Advisor Kudlow said a trade deal between US and China is not “imminent”.ASX 200 (-0.8%) was dragged lower by the financial sector as Australia’s big four traded with losses in excess of a percent after the ACCC said they will examine the banks, while Nikkei 225 (+0.1%) was cushioned on the back of currency effect. Elsewhere, Hang Seng (-2.4%) underperformed as participants come back from the long weekend to downbeat trade comments from the US, meanwhile KOSPI (-1.2%) was also weighed by the sour sentiment as the index shrugged off optimistic industrial production data. China’s narrowing interest rate spread with the US and declining current account surplus have led to some concerns regarding capital outflow. BoJ’s September Tankan Corporate Price Expectation Survey stated Japanese firms sees Y/Y inflation at 0.8% (Prev. 0.9%); 3yr and 5yr expectations unchanged at 1.1%.

Top Asian News

• Rupiah Weakens Past 15,000 per Dollar for First Time Since 1998
• China Gas Distributors Sink as Connection Fee Cuts Seen Planned
• ASM Pacific Jumps as TCL Is Said Weigh Bid for $1 Billion Stake

European equities have started the day in the red. This comes after suggestions from Italian Lawmaker Borghi hinting that the country would be better off leaving the Euro. Despite an intention to leave the Euro later denied by the Deputy PM, Italian assets are seeing significant losses, with Italian Bank stocks down over 2%, and the FTSE MIB once again at the bottom of the index pile. The financial sector is lagging its peers due to the weakness in Italian banks, with the energy sector outperforming off the back of oil prices hitting 4 year highs. The FTSE is the outperforming bourse off the back of a Brexit-hit GBP, but is trading in negative territory. The index is being pressured by a collapse in Royal Mail shares after a guidance cut in Monday’s trade, with the co. extending losses in the European morning. The stock is now at the foot of the Stoxx 600 and has hit the lowest level in its lifetime.

Top European News

• Akzo to Hand Out $6.4 Billion More to Investors After Split
• Cinven Is Said to Plan Raising 8 Billion Euros for New Fund
• Church Pedophilia Film Sets Box Office Record in Catholic Poland
• Russian Oil Output Rises to Record as OPEC Cuts Rolled Back

In FX, the EUR is not the biggest G10 loser vs a generally firm USD, as the DXY rebounds to just over 95.700 amidst broad Dollar gains vs rivals, bar the safer-havens, but has been centre stage since Tuesday’s EU ‘open’ following more  Italian budget headlines underlying a defiant stance on the 2019 deficit. Indeed, members of the coalition insist that the proposed 2.4% target is fixed ahead of another budget meeting and presentation to parliament on Wednesday, while the League party’s Borghi contends that the Government would have set the bar even higher at 3.1% if it really wanted to take on the EU, adding that the country’s fiscal problems could be solved if it was not in the Eur club. GBP was another major  underperformer amidst a raft of Brexit commentary from the Tory conference, but accelerating to the downside once stops were tripped on a break of 1.3012 in Cable and that pairing failed to keep hold of the 1.3000 handle. However, the Pound was also undermined by a weaker than forecast headline UK construction PMI and is currently eyeing bids ahead of 1.2950. CAD: The Greenback’s resurgence has eroded more USMCA-inspired Loonie (and Peso) gains, with Usd/Cad rebounding a bit further above 1.2800 having held above key/strong technical support yesterday. EM – Losses across the board vs the Usd as recent recovery momentum stalls and reverses on largely negative external factors rather than anything new detrimental in the region. Indeed, even the Rub is weaker around 65.5000 and not deriving any support/impetus from the latest spike in oil prices

In the oil market, WTI is hanging around the USD 75.40/BBL level and unchanged for the day after the benchmark hit four-year highs in early European trade. Production figures were released from Russia for September, who said this stood at 11.36mln BPD vs. 11.21mln BPD in August. In the metals sector, gold is marginally in the green as the yellow metal has caught a safe-haven bid in the Italy driven risk-off tone. Copper prices have fallen for the second straight session after slowing growth in the Chinese manufacturing sector has continued to stoke concerns over demand for the construction material.

The day ahead is a fairly sparse one for data releases. In the US, the only release of note is September vehicle sales data. It is however a busy day for central bank speak. Over at the BoE both Carney and Haskel are due to chair panels at a conference in London this morning while the ECB’s Villeroy de Galhau is due to make a speech this afternoon at an OECD event. Meanwhile the Fed’s Quarles is due to testify before the Senate banking committee this afternoon after which Fed Chair Powell speaks at a NABE meeting discussing the outlook for the labour market and inflation. Dallas Fed President Kaplan is also due to speak in the evening at a separate event.

US Event Calendar

• Wards Total Vehicle Sales, est. 16.8m, prior 16.6m
• 10am: Fed’s Quarles Testifies to Senate Banking Committee
• 12:45pm: Fed’s Chairman Powell Speaks at NABE Conference in Boston
• 2pm: Fed’s Kaplan Speaks in El Paso

DB’s Jim Reid concludes the overnight wrap

Morning from the US. I’m en route to our annual Leverage Finance conference in Phoenix. It’s one of the largest if not the largest in the industry and a major gathering for investors and issuers each year. If you’re attending Wednesday and want to say hi please let me know. I landed in NY yesterday and after 23 years and 50 plus business trips here I finally tried the subway as a way of getting from JFK to downtown Manhattan to avoid chronic car sickness. Apart from getting lost, missing the express train connection to Penn St, changing trains 3 times and taking nearly 2 hours, it was a journey where my stomach remained becalmed. I love NY but the combination of bumpy roads, taxi drivers’ lack of finesse and the stop start traffic (mostly a jerky stop) makes this journey my most feared anywhere around the world. The subway it is from now on.

Staying in the US, NAFTA – or should we say USMCA – politics won out over Italy and Brexit politics yesterday in what ended up being a mixed start to the week. The S&P 500 and DOW ended +0.36% and +0.73% respectively last night, while the NASDAQ and Russell 2000 of small cap stocks underperformed, closing -0.11% and -1.39% respectively. It was the sharpest day of small cap underperformance in seven years. The STOXX 600 had earlier closed +0.20% in Europe, with energy stocks leading gains as Brent crude oil eclipsed $85 and to a new four-year high. The Canadian Dollar (+0.73%) strengthened versus the Greenback while bond markets ended up flat to slightly higher in yield, as markets priced in another 10 basis points of Bank of Canada rate hikes through end-2019. The Mexican Peso retraced gains of +1.14% to close flat, while the Argentine Peso had its second-best day of the year, gaining +4.63% as the central bank recommitted to tightening policy. Last night 10y Treasuries finished +2.2bps higher and Bunds ended flat while the rest of Europe was broadly 2 to 3bps higher. Sterling – which ended broadly unchanged at the close last night – had a fairly roundabout session meanwhile trading as high as +0.80% from the day’s lows following headlines suggesting that PM May was preparing to compromise on the Irish border situation. More on that shortly.

Elsewhere, it wasn’t quite the underperformance of Friday but Italian assets were again struggling to keep up. The FTSE MIB finished -0.49% while 2y and 10y BTP yields rose 29.4bps and 15.2bps respectively following a bit of a late session sell-off. Italian Banks (-3.05%) fell again meaning the 2-day move of -10.09% is the biggest since Aug-16 (-10.62%). This all came after criticism at a meeting of finance ministers in Luxembourg. France’s Le Maire said that budget restrictions for all EU member states must be respected by everyone while European Commissioner Moscovici said that Italy’s budget is a “very, very significant deviation from its previous projections and almost certainly violated the rules”. Dutch Finance Minister Hoekstra added that “the signals we’ve been getting so far aren’t very reassuring” while in the evening EC President Juncker warned of needing to do everything to “avoid a new Greece crisis”. Markets have been waiting for comments from the Eurozone and it’s unlikely that this is the last we hear but the next material event for markets is the approach itself from the Europeans – i.e. how quick and harsh the response is.

Back to the US, where President Trump announced a new trade deal with Canada and Mexico, which he called “the most important trade deal we’ve ever made, by far.” The agreement adjusts the existing NAFTA framework with marginal changes, and the impact should be relatively limited, though the removal of a key source of uncertainty should be beneficial to businesses in all three countries. With access to US markets secured, further trade conflict between the US and China could end up benefiting Canada and Mexico, as their exporters may be able to seize market share. Such an escalation looks likely, with Trump reiterating his preference for using tariffs, saying that they were the key catalyst that brought Canada and Mexico to the negotiating table.

The positive Brexit news yesterday was that Prime Minister May was said to be considering allowing regulatory checks on goods to take place between Northern Ireland and the UK mainland. Previously, May had rejected any barriers within the UK. In return for this concession, media outlets reported that May will aim for the whole of the UK to remain within the EU’s customs union as the backstop agreement. It’s not clear if this will be acceptable to May’s coalition partners in the DUP or to the more zealous Brexiteers, and the pound retraced it’s 0.80% intraday moves relatively quickly.

Overnight it’s been another fairly quiet session in Asia with performance across bourses also mixed. The Nikkei (+0.18%) has built on its 27-year high however the Kospi (-0.69%) and ASX (-0.73%) are both lower. The Hang Seng (-1.61%) has also reopened with a sharp decline. As a reminder bourses in China are closed this week. Elsewhere futures in the US are down slightly while currencies in Asia are generally lower led by the Indonesian Rupiah (-0.66%) and South Korean Won (-0.48%).

In other news, the final September manufacturing PMI revisions that were out around the globe yesterday didn’t reveal any great surprises. The Eurozone reading was confirmed at 53.2 which was a very modest downward revision from the 53.3 flash print. Germany and France were unrevised at 53.7 and 52.5 respectively while Italy came in slightly below expectations at  50.0 (vs. 50.2 expected) and the lowest since August 2016. Spain printed at 51.4 and also soft relative to expectations for 52.6. Meanwhile the UK surprised to the upside (53.8 vs. 52.5 expected) although the report did sound a little bit more downbeat about medium term expectations for the sector pointing to both supply constraints and Brexit uncertainty. Later in the day the US PMI was unrevised at 55.6. Shortly after that, we got the September ISM manufacturing report in the US. The 59.8 reading was a shade below expectations for 60.0 but still the third highest reading this year and above the six-month moving average of 59.2. Interestingly, the prices paid component was much softer (66.9 vs. 71.4 expected) however the employment component (58.8 vs. 58.5 expected) was still strong and indicative of a solid read-through to the employment report this Friday. So still a robust growth outlook, though ISM respondents said they were “overwhelmingly concerned” about the latest tariffs on imports from China.

That generally solid set of data at least appeared to overshadow any negative read through from comments by the IMF’s Christine Lagarde yesterday. Lagarde said that risks the IMF had highlighted six months’ ago “have begun to materialize” and suggested that global growth forecasts are likely to be cut when the fund updates its World Economic Outlook on October 9th, warning also of trade wars and tighter credit. Currently, the IMF’s 2019 global growth forecast is for 3.9%, marginally higher than our economists’ forecast for 3.7%.

Finally, the day ahead is a fairly sparse one for data releases. This morning in Europe we’ll get September house prices data in the UK followed by the August PPI report for the euro area. In the US, the only release of note is September vehicle sales data. It is however a busy day for central bank speak. Over at the BoE both Carney and Haskel are due to chair panels at a conference in London this morning while the ECB’s Villeroy de Galhau is due to make a speech this afternoon at an OECD event. Meanwhile the Fed’s Quarles is due to testify before the Senate banking committee this afternoon after which Fed Chair Powell speaks at a NABE meeting discussing the outlook for the labour market and inflation. Dallas Fed President Kaplan is also due to speak in the evening at a separate event.

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Authored by Lord Keith Maginnis of Drumglass, op-ed via The Daily Caller,

This is the reality: 

A career diplomat crossing European borders in a rented car while carrying a professionally-made bomb, which bears a design favored by jihadists.

In Luxembourg, he hands over the bomb to two would-be terrorists, long-standing residents of Europe who just look like any ordinary young married couple.

They accept it with a clear mission in mind: to bomb a political rally in the largest convention center in France, located in the suburbs of Paris.

If the plot is successful, it will kill many among the tens of thousands of people in attendance, among who were hundreds of dignitaries and parliamentarians from the United States, Europe and the Middle East.

The couple put the bomb in the trunk of their Mercedes and the woman hides the detonator in her make-up bag. They head off toward the rally.

This may sound like the opening sequence of the latest James Bond film, but the chilling reality is that this really occurred in June.

The explosives expert who doubled as a career diplomat is a real person called Assadollah Assadi – he is presently detained in Germany while the recipients of his bomb and one other operative are in jail in Belgium.

With the prospective bombers having been stopped by Belgian authorities at the French border and the bomb being harmlessly detonated by special army units, this incident had a fortunately happy ending, but…

Assadi himself narrowly failed to escape back to Austria, where he enjoys diplomatic immunity in line with his multiple years of work in the Iranian embassy. Consequently, it appears likely that he may face justice for his attempts to facilitate the mass killing of Iranian expatriates and their Western supporters.

But as with any fictional spy thriller, the given scene is only the prologue. It surely defines a larger challenge involving similar terrorist threats at the heart of Europe. Will it, however, be a fight that is resolved through political and diplomatic channels with appropriate press intervention or will Europe casually succumb to a saga of Manchester-type terrorist outrages.

In the aftermath of the arrests, a spokesperson for the Belgian judiciary remarked that nearly every Iranian diplomat in Europe is, in fact, like Assadi, is an operative of the Iranian secret services, working and residing in Europe as a sort of sleeper cell.

The National Council of Resistance of Iran (NCRI) — the organisation behind the rally that Assadi’s terrorists were targeting — was quick to echo this sentiment and to recommend that the nations of Europe prosecute the arrestees to the fullest extent of the law and then proceed to investigate and expel other potential terrorist diplomats throughout Europe.

The U.K. set a potential precedent with Russian terrorism in Salisbury but has, almost dismissively, sought to ignore this Iranian-backed conspiracy… the press has been unstirred by the lack of blood on the carpet!

Overall, the European response to the foiled terror plot has been muted so far, even though the incident on the French border was neither the first nor, potentially, the last of its kind.

In March, authorities in Albania arrested two Iranian operatives who were planning a terror attack on the residence of more than 2,000 members of the People’s Mojahedin Organisation of Iran (PMOI/MEK), the main constituent group in the NCRI coalition.

The prospective targets had been relocated to Albania in 2016 after the Iranian regime and its regional proxies failed to destroy the PMOI community in Iraq before it was relocated under UN supervision to safer territory.

The arrival of PMOI leaders in Albania spurred a dramatic expansion in the number of diplomatic personnel at the Iranian embassy. Surely this leaves little doubt about the role of such embassies as part of the regime’s terrorist infrastructure.

As such, it underscores the need to address that persistent threat, and to at least, listen to the advice of the PMOI and the NCRI in pushing Iranian “diplomats” out of Europe altogether.

But it bears noting that this course of action would not exactly eliminate the Iranian terror threat. In August, two other Iranian operatives were indicted in the United States for spying on individuals and groups associated with the NCRI.

The indictment against them suggests that the defined purpose of this intelligence gathering was to carry out attacks against dissidents inside the United States, a country that has not had diplomatic relations with Iran since the immediate aftermath of the Islamic revolution.

Combating the Iranian terrorist threat begins with a broader severance of diplomatic ties, but it ends with coordinated, multilateral pressure by all the peaceful, democratic nations of the world, involving economic sanctions, international criminal proceedings, and more.

The United States called on the international community to adopt relevant strategy to counter Iran’s terrorist activities at a meeting of the United Nations Security Council and at the U.N. General Assembly last week.

Although European nations may be disinclined to listen to the American sales pitch on this topic, they would do well to think back on recent close calls involving Iranian terrorism on European soil. With this in mind, it would surely be criminally negligent to disregard the appeal for adequately co-ordinated pressure on the Islamic Republic. There is simply too much at stake.

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Germany’s right-wing Alternative for Germany (AfD) party has surged in popularity to become the country’s second most popular party behind Merkel’s Bloc. 

While one recent poll commissioned by Germany’s Bild am Sonntag newspaper has the party at 18% support, a Monday INSA Poll has the party at 18.5% – an all time high. 

Germany: Right-wing to far-right AfD (EFDD) reaches all-time record high: 18.5% (INSA poll). #btw21

— Europe Elects (@EuropeElects) October 1, 2018

Coming in third is the Social Democratic Party of Germany (SPD) at 16% popularity.  

AfD’s popularity is the latest sign that the populist wave sweeping Europe continues to pick up steam, as Europeans steadily reject open-border globalism and other progressive policies. Critics on the left suggest that the party is simply catering to public fears and frustrations over migrants. 

AfD politicians are regularly accused of extremism and don’t shy from the type of nationalist rhetoric that mainstream German politicians largely have shunned since World War II. After launching in 2013, Alternative for Germany has grown powerful by focusing especially on the public’s fears and frustrations over the country taking in record numbers of migrants and refugees in recent years. –NPR

AfD’s supporters disagree – while the party believes it is in touch with German society. “On the crucial issues of our time, the views of the majority of the population coincide with ours. That drives these people to us,” AfD spokesman Jörg Meuthen told NPR, adding that accusations that the party’s members are dangerous right-wing radicals are “an expression of political helplessness.” 

Meuthen – a German member of European Parliament and an economist, says that the party’s leaders “completely reject any form of right-wing radicalism.” 

That said, members of AfD were seen marching in solidarity with anti-migrant group PEGIDA as well as neo-Nazi activists who were seen performing Nazi salutes – which are illegal in Germany, while shouting “foreigners out!” 

Liberals are scratching their heads over the rise of AfD – suggesting that it’s a product of insecurity. 

So, how has the AfD managed to garner so much support for its “alternative” for the country?

According to Werner Weidenfeld, a political scientist at the University of Munich, the party appeals to a variety of sectors. “The AfD supporters are not all right-wing radicals,” he says. There is a range of backers, including “disappointed middle-class” citizens and “some right-wing extremists.“

He thinks the AfD’s success reflects people’s longing for simple solutions to complex issues, like security and artificial intelligence. “We live in an age of complexity,” he says, “while at the same time nobody explains the complex connections. So there is confusion, and people become incredibly insecure. They are frustrated, afraid and want a simple answer.” –NPR

Over 1 million asylum-seekers came to Europe beginning in 2015, mostly from Syria, Afghanistan and Iraq, after Angela Merkel opened the country’s borders. German conservatives have have levied heavy criticism over the policy, and locals have grown frustrated at spiking crime rates blamed on migrants.

“So there is a valve for the frustration and anger over the prevailing political style,” says media scientist Jo Grobel, adding that as long as the party continues to focus on migration, it can harness Germans’ “shared anger.”

And while Europe’s establishment parties are still in control, winning elections – they have given up a lot of ground as populist parties make considerable gains. 

“There is no singular explanation for the strengthening of the extreme right — it is a worldwide phenomenon,” says German parliamentarian Konstantin von Notz from the liberal Green Party. “The far right and autocrats have an international network and see themselves as a movement. This threatens the Western-type democracies massively, whose freedoms we have taken for granted for decades.” 

Liberal German also blame social media for the rise in right wing populism – particularly Facebook. 

“It consequently built its party structures along the network and uses it better than any other party,” says Political consultant Martin Fuchs. “both in terms of connecting [supporters] to the party, as well as the implementation [of its political agenda] with emotional content, escalating scandals, focusing on one topic and managing its community.”

The government is aware it needs to improve its appeal to citizens. “The public perception of the government needs a lot of improvement,” says Johannes Kahrs, a member of parliament for the Social Democrats, a partner in the ruling coalition. “Trust calms, a lack of trust gives a boost to the extremists.”

He says to combat the appeal of the AfD, traditional parties “need [to offer] guidance and we need to solve problems.” But he insists politicians should not adopt far-right positions: “There should be no attempt to overtake the far right on the right.” There has to be a clear limit to what is acceptable in German politics and society, Kahrs says. –NPR

 In other words, the left can’t meme. 

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Just days after Europe unveiled a “special purpose vehicle” meant to circumvent SWIFT and US monopoly on global dollar-denominated monetary transfers – and potentially jeopardizing the reserve status of the dollar – Iran said it was finalizing mechanisms for the oil trade to bypass US sanctions against the country, said Iranian Deputy Foreign Minister Abbas Araghchi.

According to RT, Araghchi said that Tehran is not ruling out the possibility of setting up an alternative to the international payments provider SWIFT to circumvent sanctions imposed by Washington.

“As we know, Europeans are also trying to see how SWIFT can continue working with Iran, or if a parallel [financial] messaging system is necessary… This is something that we are still working on,” Araghchi said.

According to the Iranian diplomat, the independent equivalent of the SWIFT system that was earlier suggested by the EU to protect European firms working in Iran from US sanctions will be available for third countries.

“This is the important element in SPV (Special Purpose Vehicle) that it is not only for Europeans but other countries can also use this. We hope that before the re-imposition of the second part of the US sanctions [from November 4], these mechanisms can be in place and be functional,” said the official.

One can see why: the Iranian economy has been hit hard in recent days, and the Rial has plunged to all time lows, amid fears that the sanctions will cripple Iran’s most valuable export resulting in a shortage of hard currency, eventually leading to a replica of Venezuela’s economic collapse.

Separately, Iran’s Foreign Ministry spokesman Bahram Qassemi said that “after much negotiation over a clear mechanism with Europe, we have neared certain understandings; and for sure, US sabotage in that regard will fail.”

On September 24, Iran and its five partners released a joint statement announcing the setting up of a “Special Purpose Vehicle” to facilitate continued trade with Iran, bypass the US’s financial system, and avoid any impact of America’s secondary sanctions. That statement did not provide details. And EU foreign policy chief Federica Mogherini said technical talks would ensue.

Qassemi said details would remain undisclosed to protect national interests and to preempt potential attempts to undermine  Iran’s work with its partners. But he did say “the mechanism for cooperation” was being finalized.

The Iranian spokesperson also said Iran would ultimately decide whether its demands have been met in practice.

“If, ultimately, and for whatever reason, the European Union and [our] other partners fail to provide the necessary guarantees to us, that can influence Iran’s decision, and the Islamic Republic will follow the path that is expedient for the country,” he said.

Meanwhile, while throwing a wrench in the works, the Trump administration has been quietly testing out Iran with requests for new negotiations. Tehran has ruled out any talks with the Trump White House because of its unlawful exit from the nuclear deal — which was turned into effective international law via United Nations Resolution 2231 back in 2015 — and has said Washington must return to the deal before any talk of negotiations.

Last week, EU Foreign Affairs Chief Federica Mogherini confirmed that the EU signatories remain committed to the nuclear deal with Iran and are working to create special payment channels to do business with the Islamic Republic.

While Brussels stands by the pact signed in 2015 between Tehran and the world powers, the EU had to enforce the ‘Blocking Statute’ in order to safeguard European businesses operating in Iran from US sanctions against the country. However, the measure failed to keep European majors like Total, Maersk, Mercedes in Iran, as they cannot function independently of the US-dominated international banking system and international financial markets.

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Addressing his parliament on Monday, Turkish President Recep Tayyip Erdogan lashed out at the United States over sanctions against Turkey and Iran, which have served to squeeze both countries and resulted in massive inflation. Crucially, he remained defiant over the case of evangelical pastor Andrew Brunson, which have plunged ties with Washington to their lowest, saying the preacher of has “dark ties with terror”.

“The US has embarked on a false path of solving political problems not through negotiations, but through the language of blackmail and threats,” Erdogan said in a speech. Though the public Ankara-Washington back and forth over the 2-year detained Brunson’s fate throughout the summer appeared to have cooled down over the past month, Erdogan directed his ire at the Trump White House, which he said “lost its credibility engaging in a trade war with the world” in reference to recent sanctions hitting Russia, China, Iran, and Turkey. 

Erdogan vowed that Turkey will fight within legal and diplomatic frameworks, saying it will not back down on Brunson matter, but that it will persevere through “this crooked understanding, which imposes sanctions using the excuse of a pastor who is tried due to his dark ties with terror organizations.”

However he still held out hope that “the US leadership will sooner or later change its wrong attitude towards our country” and that bilateral relations will normalize in the future. 

He also particularly highlighted Washington’s “unfair” pulling out of the 2015 Iran nuclear deal last May: “It’s absolutely wrong to use sanctions when all the issues can be easily solved through monitoring, carried out by the international organizations,” he said. He further explained the domino effect this has set off for all neighbors in the region. 

“It’s paramount for us that Iran isn’t isolated from political decisions that shape the future of the region,” Erdogan said, and added that the Turkish economy “is strong enough and will not to succumb to threats and attacks” by the Americans.

Of course, no Erdogan speech could possibly leave out the Kurdish issue either: the Turkish president charged Washington on this front with “continuing to cooperate with terrorist organizations.” He reiterated the longstanding goal of completely eradicating PKK-linked groups from Iraq and Syria — the bulk of which the US is directly aligned with. 

Perhaps seeking to cool or at least pause tensions last week while attending the United Nations General Assembly, Erdogan had noted that Pastor Brunson’s fate is a judicial matter, distancing himself from the contentious issue which effectively led to a summer long diplomatic war with Washington, resulting in the Turkish lira losing more than 45 percent of its value this year.

In comments made last Wednesday, he said “As the president, I don’t have the right to order his release. Our judiciary is independent. Let’s wait and see what the court will decide.” Erdogan also claimed the severely ailing economy had nothing to do with the diplomatic feud with the US: “The Brunson case is not even closely related to Turkey’s economy. The current economic challenges have been exaggerated more than necessary and Turkey will overcome these challenges with its own resources,” he claimed. 

But Monday’s speech before parliament is likely an attempt to save face domestically while simultaneously negotiating with Washington. 

According to a recent report detailing the status of Pastor Brunson’s case in Middle East Eye:

But the shrill tone and tit-for-tat tariff slapping has lulled lately.

The calm, according to a Turkish diplomat, comes after Ankara, under pressure to stem the country’s economic freefall, told Washington that the conflict could only be resolved if the public squabbling stopped.

The Turkish diplomat cited in the report said further, “We knew we had to solve the problem and normalize our relations with the US for the sake of Turkey’s economy, but it was not possible to do that amid challenging statements.” He continued, “So we both decided to prevent any more escalation and solve the problem quietly.”

Brunson is due in court October 12 and has recently been placed under house arrest pending trial — a concession made by Turkey after Congress voted to halt sale of Lockheed Martin produced F-35 stealth fighter jets — which proves Turkey is willing to bend. 

Likely, Erdogan’s bark as presented before his own parliament is much worse that his bite in dealing with US officials. 

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