The Week in Focus: Feb. 13 – 17 Outlook

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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