The bond market is judge, jury and (sometimes) executioner

Markets Explained

The episode examines the intersection of global political instability and its impact on financial markets, specifically focusing on how the

Key takeaways

The bond market serves as 'judge, jury and sometimes, executioner' to enforce sound economic policies during periods of political instability.
In Germany, recent local elections demonstrate a polarized electorate with shifts toward the AFD in some states and toward the left in Berlin.

Main topics

Bond market as a political disciplinarian
German political polarization

Notable quotes

The bond market acts as judge, jury and sometimes, us list trusts, executioner.

Conclusion

Investors should look past political headlines to understand the under

Transcript preview

Speaker 2 (0:03) Hi, I'm Karen Ward. And Speaker 1 (0:05) I'm Hugh Gimber. Welcome to JPMorgan Asset Management's Markets Explained. Speaker 2 (0:09) Your weekly briefing, where we cut through the noise and focus on what matters most for investors, setting you up for the week ahead. Speaker 1 (0:19) Okay, welcome back, everybody. Welcome back, Karen. It's a busy week in the rearview mirror, but another one ahead. Today, we're going to be spending some time on politics and the intersection between some of the political challenges that we see around the world and what's happening in the bond market. We're back on another Monday with oil prices above $100 a barrel. So we'll check in on the latest news there. and then round up what was a very busy week for the central banks. Last week, we had the Fed, the Bank of England and the Bank of Japan all meeting. So we'll break down, I guess, the extent to which these are minor interest rate adjustments or perhaps the start of something major. So Karen, why don't you kick us off? In Germany, we've just been catching up with our colleague Tillman this morning, who's been filling us in on some of the pressure that we're seeing on Chancellor Merz after a bad couple of local election results. How do you see things there? Speaker 2 (1:10) Yeah, absolutely. And, you know, the whole purpose of this podcast is to abstract from the detail and really think about what the signals are for investors. So I'll point to a few things. I mean, the first is a point we've been making for some time, which is that this political difficulties, challenges, whatever the word you want to choose, is pretty deep rooted in our electorates around the West. So one of the things we've been saying. is we're going to have to find strategies and structures in order to be able to make investment decisions, because quite honestly, the politics of the West isn't going to get better. And I think what happened in Germany is a good example of how the electorate is discontent, where they're discontent. and how that's affecting the political climate. Because we've seen in these state and local elections, which, you know, let's be honest, often they are a slight protest vote on the incumbent. They're never particularly comfortable for the incumbent and certainly haven't been for Merz. But we've seen this polarisation. So in certain states, there's been a shift to the right, and AFD has done very well in certain state elections. That's caught a number of headlines. But then actually... In Berlin, the swing was to the left. And I think it comes down to, again, this deep-rooted discontent. We've termed it, did a huge body of work on this last year, that you've got the economically discontent, where they feel the economy is not working for them, life's just getting harder. And then you've got the socially discontent, where perhaps they're not happy with how things are progressing culturally, what their communities look like. But that's pretty deep seated and they are then very enticed by perhaps more extreme political offerings. So that's the headline news flow. Now, what does that mean for actual politics and what does that mean for policies? Well, I think it's clear that it's really hard to be a centrist politician these days. You know, the centrist offering just doesn't have the appeal when you've got this. deep-rooted discontent and these more extreme parties willing to offer an alternative way. So that probably means we are in this world of coalitions being difficult to not only form but maintain, of constant questions of leadership change. Can we put another centrist politician in who can have the leadership skills or the pizzazz to pull in those discontent? But actually, in terms of the policies that come out, this is where actually we need to slightly discount the headlines and think about pretty minor changes on the policy spectrum, because actually fractious politics and unstable coalitions, they tend to actually deliver not massive. policy changes. Now, sometimes that's not a good thing. You know, if you need to do major reform and you really want to get stuff through and Germany's trying to get through a significant pension reform, then yes, there's the possibility that will be slightly watered down. But it also reminds us that when we hear, particularly from very extreme politicians, their ability to actually follow through on their agenda. is pretty limited. So I think it's just another demonstration of how the politics on the headline level looks pretty worrisome. But when you start to break it down into what it means for the economy, it perhaps is less so. I think for markets, where it becomes really important is the absolutely pivotal role of the bond market. Because when the political setup isn't ideal, The bond market acts as judge, jury and sometimes, us list trusts, executioner. The bond market will be that adjudicate on the political system to say, no, I don't like what you're doing here. No, you're not allowed more money to go and spend on this policy. No, you are going to have to do that pension reform