Bavaria goes to the polls next on Sunday (October 14th). Regional elections don’t usually matter much, but this one is significant. The incumbent CSU has fallen from grace, the start of a broad realignment in German politics. This highlights a deeper malaise in Europe. Since the crises, support for Europe’s established political centre has collapsed. Orthodoxy is being challenged by populists on both right and left. The problem is most acute in Italy. We are short Italian BTPs and out of the euro.

Stability in markets is often self-reinforcing but as the cycle tops out we start to see divergences. We seem to be entering this phase. Not only is the breadth of global growth narrowing but we’re also seeing financial markets take opposing paths. Some emerging markets might appear to have fallen too far, but few of their idiosyncratic issues have been addressed and most are in the cross-hairs of global protectionism. We move to underweight global equities.

Rising bond yields might have forced the populist Italian government to moderate its tone ahead of next year’s budget, but it remains on the wrong path. We remain short BTPs.