Looking Ahead (23 April)

w/c Monday, 21 April – Labour-Conservative talks set to continue, as Farage rises in European election polls

As we noted in our 17 April report, Brexit talks between the Conservatives and the Labour party have so far achieved little of substance.

At the start of last week Labour’s John McDonnell had identified the Easter weekend as a chance to take stock of progress made. This notion has been set aside, with talks to continue this week.

For both parties, but particularly the Conservatives, the major incentive to reach a deal soon is that it will preclude British involvement in the European Elections. Opinion polling has shown Nigel Farage’s Brexit party surging into first place, taking votes from both major parties – but predominantly the Conservatives – as well as swallowing up much of the UKIP vote.

While talks continue, the mounting pressure on the Tory party will lead to an intensification of backbench and grassroots efforts to oust Theresa May. A number of media reports have suggested that 1922 Committee Chair Graham Brady will use a meeting with May this week to push for her early resignation. While we do not expect May’s situation to deteriorate that quickly, continued deadlock in talks with Labour will leave her further exposed to challenges from within the Conservatives.

w/c Tuesday, 23 April, Wirecard’s shares trading again for first time since February as market opens following short selling bank expiration

On 15 February, Bafin imposed a ban on the short selling of Wirecard’s stock – the first time a short selling ban had been implemented in Germany since the financial crisis in 2008. The ban expired at midnight on 18 April, with IHS Markit data noting that 14% of Wirecard’s traded shares are being shorted – a proportion seven times higher than the DAX average of 2%. However, with markets having been closed for Easter the effects of the lifting of the short selling ban are being felt only today, with shares down 2.87% at the time of writing.

Last Tuesday, Bafin announced that it had filed a complaint with the Munich Public Prosecutor’s Office alleging market manipulation in the shares of Wirecard. $10 billion was wiped off the share price after a series of reports, run by the FT, citing a whistleblower’s claims of fraud and creative accounting at its Singapore office.

Bafin is unusually protective of this fintech company. The short selling ban is unprecedented outside of a financial crisis and has led to speculation amongst market participants of an unhealthy relationship between Bafin and one of the companies it is responsible for regulating. A more straightforward explanation may be that Wirecard’s inclusion on the DAX, replacing Commerzbank, brought additional responsibilities for Wirecard, most notably the inclusion of its shares in DAX ETFs. BAFIN’s decision may have been motivated by fears of boomeranging prices causing wider market problems. Nevertheless Bafin’s push to prosecute two Financial Times journalists is highly unusual and will likely serve to heighten speculation around the nature of its relationship with Wirecard.

Thursday, 25 April – Turkish Central Bank to consider rates, as Lira remains weak following elections

Analyst expectations are that the Turkish Central Bank will keep its one week repo rate at 24%, keeping them at the level they have been since last September – when the bank moved to avert a full blown rush on the Lira.

The expected lack of action from the Central Bank will come despite continuing weakness in the Lira, which has crept steadily upwards in the face of political uncertainty and poor economic data.

The economic problems in Turkey are already having a greater than expected effect in Europe. Figures published on 11 April showed that, year on year, Turkey was the trading partner contributing the most to German GDP declines through Q1 2019 – with a decrease of 0.22% - almost four times that of the 0.06% accounted for by Chinese weakness, often cited as the primary factor in the slowdown.

Thursday, 25 April – Swedbank to post Q1 results following money laundering scandal

Swedbank’s Q1 numbers are set to be subjected to greater than usual scrutiny due to the Swedish lender’s embroilment in the Baltic money laundering scandal.

At the end of March it was alleged that some €135 billion was moved through non-resident accounts in Swedbank’s Estonian branch between 2010 and 2016. This followed February allegations of some exposure to the Danske Bank scandal.

Sunday, 28 April – Spanish general election

Opinion polling for the Spanish general election continues to point to a hung parliament in which Pedro Sanchez’s PSOE will be the largest party. This is likely to result in a lengthy period of negotiations on various potential coalitions.

Looking at how recent polling translates into seat numbers, with a majority in the Congress of Deputies standing at 176, the best case for a left wing tie up of PSOE-Podemos is about 168 seats, with a worst case scenario of about 145.

If PSOE and Podemos get anywhere upwards of 150 seats they could attempt to cobble together a similar arrangement to that which Sanchez oversaw for the last year. The broad ‘constitutionalist’ grouping of PP, Ciudadanos and Vox is already cooperating together in Andalusia. The bulk of recent polls suggests that the grouping will fall somewhat short of a majority.

In a scenario where the constitutionalists fall short, it is possible that one of the parties will investigate the possibility of coalition with the PSOE.

It should be noted that the prospects for a left leaning coalition are largely based on strong PSOE polling numbers since the election campaign began, with the party attracting over 30% of the vote in numerous surveys. If this vote fails to transpire, and the PSOE vote is in line with some weaker polls of around 27%, then the left-wing coalition would become much more difficult to form.