by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EST] Financial markets are a bit weaker this morning—equities are signaling a softer open, while Treasuries have slightly rebounded.  This morning we are focused on the following issues.

Grand coalition in Germany? In order to form a government, the CDU has agreed to pursue a grand coalition with the Social Democrats (SDP).  Speculation that Angela Merkel would rather hold new elections than form a minority government is believed to have brought the SDP to the negotiating table.  As mentioned in our prior reports, minority governments are typically ineffective and tend to place a lot of pressure on the head of state, in this case Chancellor Merkel.  As a result, any instability throughout Germany or the Eurozone could lead to a challenge to Merkel’s leadership.  At the moment it is unclear whether a deal is imminent, but the euro has strengthened on the news.

Tax bill: Later this week, the Senate is expected to vote on its version of the tax bill, which is currently undergoing changes to satisfy several hold-outs.  The expected changes to the bill will be aimed at making it more palatable to senators who believe the bill does not lower taxes enough for middle-class households and may add to the deficit.  Last night, the CBO released a report stating that the bill will add up to $1.4 trillion to the deficit over the next decade and will primarily benefit Americans making more than $100,000 a year.[1]  Currently, it appears the Senate does not have enough votes to meet President Trump’s Christmas deadline.  We will continue to monitor the situation.

Catalan elections: Recent polls suggest the separatists will fail to form a majority in Catalonia following forthcoming regional elections on December 21, while constitutionalist parties have grown in popularity.  According to the Spanish publication El Pais, separatists are expected to pick up 67 seats, which is one short of the majority and five fewer than the previous election.  The Citizen’s Party, a constitutionalist party, is expected to see the largest jump in seats with 10.[2]  A separatist majority in the Catalan parliament would be bearish for the euro as it would signal more instability in Spain.

NATO in the Middle East?  Over the weekend, an attack on a mosque in the Sinai region of Egypt left 305 people dead; ISIS has since claimed responsibility.  In response to the attack, Saudi Arabian Crown Prince Mohammad bin Salman has pledged to pursue a military coalition with other Sunni states to counter the ISIS threat in the Middle East.  Many are speculating that Saudi Arabia will use the alliance to further isolate its arch-rival Iran, similar to how the U.S. used NATO to isolate the Soviet Union during the Cold War.  Earlier this year, Saudi Arabia, along with other Sunni states, imposed sanctions on Qatar in order to force it to sever ties with Iran, among other things, although it justified the sanctions by accusing Qatar of sponsoring terrorism.

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[1] https://www.washingtonpost.com/news/wonk/wp/2017/11/26/senate-gop-tax-bill-hurts-the-poor-more-than-originally-thought-cbo-finds/?hpid=hp_hp-top-table-main_cbo-tax-915pm%3Ahomepage%2Fstory&utm_term=.3f5ee0f0a134

[2] https://elpais.com/elpais/2017/11/26/media/1511719941_954557.html