Originally posted at MarctoMarket.com.
The assassination of Jo Cox has broken the powerful momentum in the markets. Investors recognize that the tragedy potentially injects a new element into consideration for the outcome of next week's referendum. The campaigns will resume over the weekend, and new polls will become available. Investors will place more weight on polls conducted after the assassination.
The UK referendum is the big event next week. However, there is another threat to Europe a couple of days before the June 23 referendum that does not appear to be on many calendars. The German Constitutional Court will deliver its ruling on the ECB's Outright Markets Transaction program. No country has triggered the program, but some including Bundesbank President Weidmann object the referendum on grounds that it violates the ECB's mandate.
The case, reportedly, has been initiated by something on the magnitude of 35,000 academics and politicians. In 2014 the Court seemed to favor the plaintiffs. However, it deferred to the European Court of Justice to decide if the program violated EU law or the ECB's mandate. The European Court of Justice's decision ruled in favor of the ECB.
On June 21, the German court will rule if there is a violation of German law. If the Constitutional Court finds that the German law is in violation, there would be far-reaching ramifications. The law would undermine the European Court of Justice. The offense would put Germany in a difficult bind by pitting national law against European law. Such a ruling would likely weigh on the euro and raise concerns about the future of the EMU.
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Taking a balanced view, we expect the German Constitutional Court to respect the ECJ judgment that OMT does not violate the EU laws or the ECB's mandate. EU law and the ECB's mandate is not for the German Court to judge. However, it can warn against violations of the German Constitution while stopping short of saying OMT violates it.
On a separate note, reports indicate that a new lawsuit suggests Bundesbank participated in the ECB's corporate bond buying program. Here, too, it seems as if ECB's actions are not unique to central banks, and the German court lacks jurisdiction. Also, we note that some non-sovereign bonds cite inclusion in the initial bond buying program, like KfW for example.
If the German Constitutional Court rules against the plaintiffs, the persistent legal challenges will reveal that a sizable faction in Germany chafes under unorthodox measures that the ECB has taken. All the ECB decisions including for the corporate bond buying program and the new TLTROS, which begin at the end of next week, overwhelm majorities at the ECB.
The threat underscores the seriousness of our advice that medium and long-term investors need to start contemplating a post-Draghi ECB (2019). Also, given the way things play out in Europe, it would clearly be Germany's turn to head up the central bank. Weber was in line too, but his resignation over these kind of issues led to Draghi's appointment. Weidmann would seem to be on the shortlist of successors, but if not him, someone with similar views could usher in a new era for the ECB.
