Daily Commentary

MarketMinder’s View: Please note MarketMinder is nonpartisan, assessing Germany’s political developments solely for their potential economic or market effects. The Social Democratic Party’s (SPD) Bärbel Bas resigned as co-party leader and Labor Minister on Monday. The SPD’s coalition partner, Chancellor Friedrich Merz’s Christian Democratic Union (CDU), had called for Bas’s resignation for months. An inability to enact pension reform appeared to lead to Bas’s political downfall, which the article details. The upshot for investors: Germany’s government isn’t united, decreasing the likelihood major change arrives any time soon. “For months, the CDU and SPD have been grappling with low poll numbers, disappointing election results, and disputes over key reform projects. Plans for changes to the electricity tax, the introduction of a sugar tax, the pension and the labor market reform — hardly any initiative has been able to proceed without public controversy.” This is a recipe for gridlock—frustrating for constituents and reform proponents but positive for stocks, as it lowers the likelihood of big change creating winners and losers. Any significant change will struggle to become law. Moreover, the molasses-paced process gives businesses time to prepare, further dampening the market effect. Merz's reforms aren’t economic game changers, but they don’t need to be. German growth is more resilient than many appreciate.

MarketMinder’s View: Last Friday, the US Treasury suspended sanctions on Russian diesel exports—an attempt to dampen today’s red-hot prices. This piece scales the projected effect, noting it “involves 300,000 tonnes of diesel released immediately ‘to the American and global marketplace’ followed by 500,000 tonnes in November and a further 1 [million] tonnes after that.” How much America receives isn’t clear. But we doubt it will cool prices much. According to the US Energy Information Administration, America consumes about 400,000 tons of diesel per day—so this move isn’t big. As another expert notes, Ukrainian drone strikes have knocked Russian refining output, further limiting the deal’s effects. Similar reserve releases this year haven’t eased prices much, so we doubt these will. The politics are noisy (a reminder that MarketMinder is nonpartisan), but the economic effects are likely tiny. Take this for what it probably is: Pre-midterm politicking over high energy prices, a major voter concern.

MarketMinder’s View: Friendly reminder: Trade deals aren’t always free-trade deals. Sometimes they are bilateral protectionism. That is how we classify today’s pact between the EU and China. For years, EU leaders bemoaned a flood of cheap, subsidized Chinese electric and hybrid cars. EU residents love them for their affordability. Governments hate them because they undercut local manufacturers, which politicians blame for hollowing out German and European heavy industry. So EU leaders spent months threatening tariffs and import bans. China threatened retaliation. They got together with China in a last-ditch effort to avoid a trade war, and apparently it worked. “The deal ‘opens the prospect of cutting China’s export [of hybrids] by more than a half,’ [Trade Commissioner Maroš Šefčovič said, adding that this would translate into a reduction in exports of plug-in and battery-powered hybrid cars by ‘several millions’ over the next four years, said Šefčovič at a press conference in Beijing on Friday.” Negotiations on other items, including rare earths and EU access to China’s food and drink market, will continue. And here is a wrinkle: “China said both sides would adhere to ‘procedures concerning company price undertakings’ for hybrid cars suggesting one method of curbing sales would be to set higher minimum price tags for Chinese cars sold in Europe.” Friends, China has a little secret. Its government doesn’t enjoy dumping cheap exports abroad. Doing so whacks profit margins and extends a capacity glut officials have spent years trying in vain to address. This deal looks like cover to solve some of its long-running gripes with local companies and governments. So despite the embedded protectionism, it looks like a two-pronged positive. It avoids a trade war (yay). And it potentially helps China toward its long-sought transition to an economy that runs on domestic services, not goods exports.