The German government’s recent decision to reintroduce border controls with its neighbors Poland, the Czech Republic, Austria and Switzerland marks a significant departure from the Schengen principles. This populist measure comes after substantial electoral losses for Germany’s governing coalition and aims to restrict access for both asylum seekers and illegal, undocumented immigrants.

This action is particularly concerning as it undermines the integrity of the Schengen Agreement, which facilitates free movement among European Union countries, as well as Iceland, Liechtenstein, Norway and Switzerland. The Schengen system is designed to eliminate internal border checks, create economic efficiency and greatly reinforce the perception of unity and cooperation among European nations.

The migration crisis has been haunting Europe for years. Brussels and some individual member states introduced misguided rules, practices and immigration quotas under the guise of “solidarity” among the whole EU. This created tensions, not only with Central European countries that refused to go along with the new measures, and as a result have been inappropriately labeled as mean-spirited and unhelpful. 

Reaching for migration solutions

Earlier this spring, the EU announced a pact aimed at managing the migration issue in a controlled manner. However, this pact appears to be more of a technocratic response than a genuine political solution, failing to address the ongoing migratory pressures. For instance, in just the first half of this year, approximately 19,000 people from Western Africa, primarily Mauritania, landed by boat on Spain’s Canary Islands. 

This decision reflects a measure of desperation rather than a comprehensive strategy.

When Italy’s government agreed with Albania to establish processing centers for migrants undergoing lengthy asylum procedures, it sparked disapproval across Europe. In early October, Poland canceled the use of the EU asylum procedures in response to Belarus weaponizing migration to destabilize Europe by simply refusing people entrance. Minsk, supported by Moscow, has orchestrated a system to entice migrants from distant countries and push them across Poland’s eastern border.

Last week, EU leaders convened to address the ongoing migration crisis. The concept of “outplacing” migrants, proposed by Italy (and previously in Europe by the United Kingdom), has at long last gained acceptance and is being hailed by some as an innovative solution. However, the idea reflects desperation rather than a comprehensive strategy. The first challenge emerged already, as a court in Rome stopped the outplacement.

The problem is not solved, but instead kicked like a can further down the road. European governments consistently struggle to reach meaningful consensus, yet enhancing the protection of the EU’s external borders has become increasingly necessary. Additionally, the implications for welfare systems across member states cannot be overlooked.

Migrants should learn that reaching Europe will not necessarily mean receiving welfare benefits. Milton Friedman, a Nobel laureate in economics, famously stated, “You cannot simultaneously have free immigration and a welfare state.” Furthermore, immigrants who commit crimes need to be deported immediately without lengthy appeal processes.

The dead end

Economic development in countries of origin is crucial to solving the migration crisis. However, aside from significant waste in development aid, Europe’s engagement in Africa has achieved little by way of supporting local businesses, attracting investment and facilitating trade. European protectionism, often disguised as “consumer protection,” makes it difficult for African enterprises to access the EU market.

The introduction of the EU’s supply chain legislation has been particularly onerous. While its measures may offer European progressives a sense of moral satisfaction, albeit somewhat hypocritically, the law imposes standards and controls so stringent that it becomes practically impossible for European businesses to trade with, operate in, or invest in African and other developing countries. But this is what these countries need.

As there appears to be no real solution at the Union level, member states may start to chart their own paths. The mishandling of the migration issue could initiate an unfortunate dynamic that jeopardizes EU cohesion, posing a genuine threat to the very essence of European integration.

Source: GIS

What to watch in the coming week

Worldwide manufacturing PMI releases

Americas: US Q3 GDP, labour market report, ISM manufacturing PMI, core PCE, JOLTs job openings, personal income and spending data

EMEA: Eurozone GDP, inflation, Germany GfK Consumer Confidence, UK mortgage lending, nationwide housing prices

APAC: BOJ meeting, China PMI, Australia CPI, Japan unemployment, industrial production, consumer confidence, Taiwan, Hong Kong SAR GDP

Near-term global financial risks are contained, but monetary policy easing could fuel asset price bubbles and markets might be underestimating risks posed by military conflicts and impending elections, the International Monetary Fund said.

In its semi-annual Global Financial Stability Report, the IMF warned that a "widening disconnect" between escalated geopolitical uncertainty and low market volatility increases the chance of a market shock similar to the gyrations seen in August when a Bank of Japan interest rate hike sparked massive de-leveraging.

Buoyant credit and equity markets also seem undeterred by a slowdown in earnings growth and the continued deterioration in more fragile segments of the corporate and commercial real estate sectors, the Washington-based multilateral lender said.

It also flagged that while monetary easing by most other major central banks was creating "accommodative" financial conditions, interest rate cuts could stoke lofty asset valuations, a global rise in private and government debt, and non-bank leverage.

"These mounting vulnerabilities could amplify adverse shocks, which have become more probable due to elevated economic and geopolitical uncertainty amid ongoing military conflicts and the uncertain future policies of newly elected governments," it wrote.

The report was released as global finance chiefs gather in Washington for the IMF and World Bank annual meetings during one of the most geopolitically and economically uncertain periods for the world in decades.

In addition to the war in Ukraine and an escalating conflict in the Middle East, half the world's population has elected or will elect new governments in 2024, including the US, the IMF noted. In many cases those new leaders' policy plans are unclear, but will carry significant economic consequences.

In particular, economists and Wall Street executives have raised concerns that Republican presidential candidate Donald Trump's planned import tariff hikes could reignite inflation, while his promised tax cuts could widen the US deficit.

The IMF urged central banks to communicate clearly and cut rates gradually, and said regulators should closely monitor corporate debt and commercial real estate, and ensure robust bank supervision. It also said regulators should enhance reporting requirements for non-bank financial institutions like hedge funds and private equity firms, which are playing a bigger role in financial markets. Regulators, however, generally have less visibility on such firms' activities and leverage levels compared with traditional lenders, the report said.

The rise of artificial intelligence also featured in the report. The IMF noted that increased adoption of AI by financial firms could boost speed and efficiency, but also volatility.

Furthermore, increased reliance on a handful of AI service providers poses other operational risk, and could create a challenge for regulators trying to police what is generally seen as a more opaque technology, the report said.

Source: The edge markets

Benchmark Treasury yields may soon hit a key level on the back of rising inflation expectations and concerns over US fiscal spending, according to T Rowe Price.

“The 10-year Treasury yield will test the 5% threshold in the next six months, steepening the yield curve,” according to Arif Husain, chief investment officer of fixed-income, who helps oversee about US$180 billion (RM774.43 billion) of assets at the firm. The fastest path to 5% “would be in the scenario that features shallow Fed rate cuts,” he wrote in a note.

The call stands out against market expectations of lower yields, after the Federal Reserve cut rates for the first time in four years last month. It also underscores the increasing debate in the world’s biggest bond market, following strong economic data that has raised questions about the likely pace of cuts.

Yields on 10-year Treasuries most recently traded at 5% last October, hitting their highest level since 2007 as fears of a prolonged period of high interest rates gripped markets. Turbulent repricing could be on the cards if Husain’s prediction proves accurate, with strategists currently expecting yields to fall to an average 3.67% in the second quarter. 

Husain, a near three-decade market veteran, said ongoing issuance by the Treasury to fund the government deficit is “flooding the market” with new supply. At the same time, the Federal Reserve’s policy of quantitative tightening — an attempt to reduce its balance sheet following years of bond-buying — has removed a key source of demand for government debt.

The yield curve is likely to steepen further because any rises in the yields of short-maturity Treasury bills will be limited by rate cuts, said Husain, who is also T Rowe Price’s head of fixed income.

Deutsche Bank’s private banking arm said last month that 10-year Treasury yields would touch 4.05% by next September, a prediction that took only around a month to prove correct. Blackrock Investment Institute, meanwhile, issued a report last week telling investors to expect yields on longer-term US debt to swing in both directions as new economic data is released.

Cracks are already appearing in the US’s fiscal position, lending credence to Husain’s views. The country’s debt interest-cost burden climbed to its highest level since the 1990s in the financial year that ended in September, but neither former president Donald Trump nor Vice President Kamala Harris has touted reducing the deficit as a key element of their campaign. That has left US government debt a key risk for market participants. 

The most likely scenario for the Federal Reserve is a period of small rate cuts, comparable to its reductions between 1995 and 1998, said Husain. In this scenario, China would inject more stimulus to help its own economy, boosting global growth and creating a clearer outlook for Fed officials.

There are also prospects of a normal easing cycle where the Fed cuts to nearer to the neutral rate, which Husain said is probably around 3%. He also considered a scenario in which the US went into recession, which would spur aggressive cuts. 

“Investors sharing my view that a near-term recession is unlikely should consider positioning for higher long-term Treasury yields,” Husain wrote. 

Source: The edge markets