February 11 2017

Feb. 11, 2017 (Commerzbank AG) – Euro zone – Le Pen knocking at the gates

If Marine le Pen had her way, France would follow the UK example and leave the EU which would probably mean the end of monetary union. Even though the latest polls suggest that she is unlikely to become the next French President, investors are growing increasingly nervous. Moreover, political developments elsewhere could seriously unsettle the euro zone. Together with weak core inflation, this will means that the ECB will be unable to abandon its ultra-expansionary policy for some time yet. Page 2.

Outlook for the week of 12 to 17 February 2017

  • Economic data: “Hard” US economic data up for release in the week ahead are unlikely to reflect the upsurge in survey-based indicators. In Germany, the economy looks set to have expanded strongly in the fourth quarter of 2016.
  • Bond market: French sovereign bonds (OATs) are showing an idiosyncratic spread pattern as Le Pen factor looms large on the horizon. In Bunds, the current risk-off sentiment is pushing short to mid-dated swap spreads to multi-year highs but we do not envisage any sustained correction.
  • FX market: Speculation that France may exit EMU is weighing on the euro and has raised implied EUR volatility. At the same time, the market is underestimating the risk to sterling, though it could appreciate further near-term on the back of rate hike speculation.
  • Equity market: Experience suggests that it would have been a mistake for equity investors to react to political risk events over the last two years. We stick to our view that investors should only become bullish during periods with a VDAX at 25 and a VIX at 20.
  • Commodity market: Brent oil should remain quite close to 55 USD per barrel next week. Higher shale oil production is probably already priced in and OPEC members are expected to (still) hold to the agreed production cuts.

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USA 

Feb. 10, 2017 (Tempus, Inc.) – The U.S. Dollar is trading in mixed direction as it has throughout the week with statements and political developments driving fluctuation in the absence of major data. The Bloomberg Dollar Spot Index shows a relatively flat USD since the start of February, a quiet time as foreseen in our monthly outlook.

President Trump is trying to improve his diplomatic approach by writing a letter to China and will meet with Japan’s Prime Minister Shinzo Abe tomorrow to discuss trade as well as military capabilities. His administration also seems more focused on domestic policy and continues to deal with the legal havoc of the travel ban, an item on the agenda that many global leaders have criticized.

Equity markets and commodities are on the rise, boosting CAD and “Aussie” slightly. In terms of Jobless Claims in the U.S., they continue to be around the lowest levels in four decades with this week’s reading 12,000 points lower. We expect the greenback to stay in familiar ranges as we close the week with Consumer Sentiment and Trade figures.

 

JPY

The Japanese Yen fell overnight along with its domestic stock index, the NIKKEI, while other global exchanges improved by 0.5% on average. The Yen hit the brakes, but it’s up by 1.25% thus far in February, primarily improving on uncertainty regarding Europe’s potential for further division. Tomorrow will mark a very important meeting between Prime Minister Abe and President Trump in which trade and exchange rates will be discussed.

Since his inauguration, Trump has freely accused many countries, including Japan, of devaluing their currency for benefits to their exporters. On the other hand, Japanese officials have reiterated commitment to manufacture Japanese-brand vehicles in the U.S. and explained that they never deliberately intervened in the FX market, but rather focused on creating price stability. We’ll see if their commentary moves markets right away, but it will definitely have an impact moving forward.

 

GBP

The Pound appreciated after the lower House of Commons approved Prime Minister Theresa May’s ability to invoke Article 50 of the Lisbon treaty that officially starts separation from the UK. The thumbs up on the Brexit process will now fall in the hands of the unelected House of Lords. The political drama may not necessarily be over as the Prime Minister faces pressure from her Conservative party members to have an early vote on the final agreement and some in the opposition who would like to reject it.

This is all unchartered territory, but it seems the government is determined to have a deal that parliament will finally approve. There are still many doubts on how to work on tariffs and other trade issues between the EU and the UK once the divorce is official. With fundamentals still consistent, GBP may stay in current ranges, but any delay to Brexit or companies fleeing could bring it down swiftly. Pound is up by 3.3% thus far in 2017.