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Out of the Box: The European Union — Caught in the Crossfire!

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There are no bullets, but plenty of verbal projectiles being fired. “More Europe” has dwindled to a pipe-dream shared by Mr. Macron and Ms. Merkel and few others. The notion of a European Parliament having sway over each of the 27 nations in the European Union is about to be dismantled, in my estimation, and it is only a question now of “how” and “how soon.” We close in on “End Game.”

We are but one day out from the start of the European elections. They commence on May 23 and end on May 26. The growth of anti-EU parties in the European Parliament elections in May could “paralyze” the bloc in a range of policy areas, several reports have warned. Nationalist, Eurosceptic, and Populist parties could bring about a “qualitative change” in the European Union after winning a third of seats, according to the European Council on Foreign Relations, a pro-EU think tank. This is as the British newspaper, the Telegraph, now projects the Populists to win a majority of the seats.

Either result would give the Populists, Nationalists, significant influence in the EU and the ability to block some, or all legislation, and redefine the rules for the European Union and the ECB. I point out that while ignored by many, that this is quite serious stuff and could cause the EU to potentially rupture and the Dollar to head to new highs against the Euro, which is what I am expecting. Technically, if we breach the 1.1100 level, we could head down to 1.0800 and then to 1.0500 which would cause some distress in earnings, for some companies.

I went down to the crossroads

Fell down on my knees

I went down to the crossroads

Fell down on my knees

Asked the Lord above for mercy

“Save me if you please”

-Eric Clapton, Crossroads

I am afraid that is may be too late to save the coalition of Germany and France running the European Union, in one fashion or the other. I think they are days away from being “Done,” as both nations loose power over the construct that they helped create. In my view what was, won’t be anymore.

Bloomberg reports that, “Both Aberdeen and JP Morgan are both short the Euro against a basket including the Dollar and Yen. ‘A narrower coalition could emerge among right-wing populists that could, if it were to advance the cause of greater national independence, potentially remind investors of the latent risk that the single currency could one day break apart,’ Paul Meggyesi, head of foreign-exchange strategy at JP Morgan, wrote in a note to clients.”

Then there is a question of “Collateral Damage.” The European equity markets may be none too happy, if power is transferred. Also, a new chief for the ECB must be elected soon and this could resonate with many smaller European nations who would likely call for the ECB to move swiftly to cut rates even further, to shore up their social systems and their banks. Our current $10.4 trillion of negatively yielding bonds could increase by as much as 50%, if this were to take place, while the FED would likely have to cut rates as well.

There is almost no focus on these events by many, as the EU Press does not want to speculate on any possible change of government. The reality is that the current holders of power are, in fact, holding their breath, and praying and hoping, which is never a good strategy for winning at the Great Game. Yet, that is what is happening as Nationalism is sweeping across Europe from Britain, to Austria, to Poland to Hungary, to the Netherlands and all across the Continent, by many recent accounts. We are in the “Danger Zone.”

Highway to the danger zone

I’m gonna take you

Right into the danger zone

Highway to the danger zone

Ride into the danger zone

-Kenny Loggins

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities.

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