Former Treasury Secretary Henry Paulson gave yesterday in an interview with Bloomberg before he was scheduled giving his remarks at the Chicago Council on Global Affairs his points of view on the ongoing trade spat with China that, at least in my view, are worth taking note of.

He said: “A trade war with China carries “dangerous” long-term risks because companies and nations may pull back from doing business with the U.S. The question really is: Is China going to start looking for new markets for which they’re going to buy soybeans? Are they going to be concerned that they need to protect themselves if there’s another tariff war and they need other suppliers? (For example, in Brazil or Africa). Companies and countries want to do business with the United States because we’ve got reliable, stable economic policies. Are they going to want the U.S. to be a supplier if they think the United States is going to come in and break up the supply chain? Is a foreign investor going to want to come in and build a plant in the United States if they’re afraid they’re going to be in the middle of a tariff war? This trade war obviously doesn’t benefit anyone, and the tariff impasse is a serious thing.”

Italian Budget Causes Concerns

The Italians have come up with proposals for a budget with the budget deficit projected at 2.4 percent of GDP. This has prompted cries of alarm in the financial media in spite of the fact that the deficit number is almost certainly going to be wrong. The GDP number is almost certainly is going to wrong and two wrongs do not cause a debt crisis.

Nevertheless, it remains a fact that the country’s populists won their battle to fund costly campaign promises.

What the budget proposals do show is that the crowd-pleasing policies of the Italian anti-party government do perhaps have a little more impact than investors had initially hoped for as markets reacted negatively on the news.

Italy’s FTSE MIB Index sank 2.9 percent on the largest tumble in 20 months. Italian bonds plunged the most in almost 4 months while core European bonds gained. The euro also weakened and is currently trading at around $1.16 per euro.

The European Commission is also likely to be upset. The Teutonic or German cry of “We must have discipline” is likely to be heard very frequently in the coming days.

Now, the reason why all this matters for investors, for example, from a foreign exchange perspective is that the moves seen in the euro’s value against the dollar from April onwards appear to have had more to do with Italian politics than anything else.

In recent weeks it had been noticeable that the move higher in the euro came as pressures in the Italian market abated somewhat.

Maybe it’s only coincidence but it’s surely worth noting that over the past 30 years at least two major periods of unrest in the Italian markets have first emerged around May:

1. The European Exchange Rate Mechanism (or ERM) crisis in 1992
2. The eurozone crisis in 2011                     

In both cases pressures began to build over the summer months ahead of a ‘major blowout in the autumn’, therefore the question now could be, will this pattern reassert itself again this year.

Investors could do well keeping in mind that political troubles in Italy are a negative for the euro and a positive for the dollar.

While it’s certainly not yet time to go all-out bearish on the euro, Europe’s political disquiet and persisting monetary-policy divergence versus the U.S. suggest the common currency may have seen a short-term top.

Euro Area Inflation

The Euro area annual inflation rate is expected to be 2.1 percent in September 2018, up from 2.0 percent in August 2018, according to a flash estimate from Eurostat, the statistical office of the European Union.

The core measure of inflation, which strips out food and energy, fell to 0.9 percent from 1 percent.

That’s a blow to European Central Bank President Mario Draghi, who just this week cited faster wage growth and a “relatively vigorous” pick-up in underlying price pressures.

ECB President Draghi always made a great deal of fuss telling everyone that it was the headline inflation rate that mattered. Of course, that was back then in the days when the headline rate was lower than the core rate, but what was right then, presumably could be right now.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.