Geopolitical issues will continue to bubble below the surface for the capital markets. The fallout from the re-imposition of US sanctions on Iran has apparently helped lift oil prices in the face of the rising dollar, which often acts as a drag. In the coming days, the US will take the symbolic step of moving its embassy to Jerusalem. The conflict between Israel and Iranian forces in Syria is escalating. Meanwhile, US reportedly is offering North Korea economic assistance in exchange for giving up its nuclear weapons, which seems very much like the deal with Iran from which it is withdrawing.  

Trade issues are also near the surface. As we have noted, the US legislative process after a NAFTA agreement is reached is quite protracted. For the current Congress to fulfill its obligations, a final agreement is needed by May 17. The failure to reach an agreement by the end of the week could see renewed threats of leaving NAFTA, which would have some bipartisan domestic support.  

High-level talks with China resume in Washington this week. On Tuesday, China's Vice Premier, and top economic adviser to President Xi, Liu He, will lead the delegation. It is his second trip in three months. China does not seem opposed in principle to some quantitative bilateral trade target.What is being negotiated is the size and the price.  

These geopolitical developments often have little perceptible impact on broad market forces. Instead, it has been the reemergence of divergence, or rather the continued divergence is blunting other considerations and is becoming too expensive to ignore. The cost here is measured in terms of money–interest rate differentials.  

The US premium has never been greater over Germany. The two-year differential of 3.10% is more than the yield of a 10-year US Treasury. The 10-year differential is about 2.40%. Medium and long-term investors appreciate that the differential has averaged a little more than 85 bp over the past decade.