Italy is staying in the Eurozone. But the new Italian government takes a cavalier view as to the spending programs it can afford. This spells trouble for bonds. Italian government bonds are unattractive, but Italian equities seem reasonably valued.

The attempt to install a functioning government in Italy has collapsed. The result of recent Italian elections reflects a chronically sluggish economy, excessive regulation and taxation as well as political exhaustion, especially within the established parties.

Unfortunately, a “mini trade war“ is the price the rest of the world must pay as Republicans campaign to hang on to the votes of globalization’s losers in the upcoming mid-term elections. But US protectionist pressures go beyond mere populist rhetoric. The US wants to inhibit China’s attempts to grab US intellectual property, especially when it comes to the defense industries.

Investors feel themselves confronted with many geopolitical risks. The most disturbing would be an escalation of trade hostilities and protectionism. We still believe a serious trade war can be avoided. 2018 is likely to go down in the history books as the “peak liquidity“ year. It’s too early to re-enter the markets.

The CDU, CSU and Mrs. Merkel are the losers in recent “horse-trading” in Berlin. The winners are the SPD and those wanting further rounds of European integration. We analyze the emerging Grand Coalition (now discussed in German-speaking circles under the acronym GROKO) and its likely consequences. European “integrationists“ have reasons to rejoice. Those who believe in the free operation of markets and worry about public sector financial excess should be very nervous. Germany’s period of economic outperformance is drawing to a close.

The U.S. is moving toward becoming a tax haven, putting pressure on the EU and other countries. 2018 is likely to be the year of "maximum monetary stimulus." The economic recovery is the third longest in U.S. history. An increase in volatility is imminent. We still have a neutral weighting on equities, favoring European equities at the expense of very expensive US equities.