Forex Outlook

May 13, 2017 (Commerzbank AG) – Brexit negotiations – The EU, the wannabe giant

The EU’s position in the Brexit negotiations is not as strong as it currently seems. Indeed, in the event of no deal on Brexit, it also has a lot at stake. For instance, Germany exported more to the UK than to China in 2016. Moreover, if no deal is concluded the EU would struggle to collect the huge outstanding claims to which it believes it is entitled, and many EU countries fear the prospect of an intensification of tax competition from the UK. In the end, the two parties are likely to strike a free-trade deal. Until then, however, the pound looks set to come under sustained pressure.

Further topics:

OPEC does not learn from its mistakes

Although implemented in disciplined fashion, the effect of OPEC production cuts has evaporated due to the rapid recovery in US oil production. Although OPEC obviously only has limited influence on prices the production curbs are likely to be extended, which may temporarily prices but is unlikely to be successful in the longer-term.

Outlook for the week of 15 to 19 May 2017

  • Economic data: After the US economy barely grew in the first quarter, April data are likely to inspire hope that the economy may regain traction in the second quarter. The German ZEW index is likely to keep moving sideways in no man’s land.
  • Bond market:Forthcoming weeks will be crucial for the European bond market, with various markets trading close to critical levels following France-driven repricing. Bunds look set to remain under selling pressure. Further upside in French bonds seems exhausted.
  • FX market: EUR-CHF is trading at its highest since October raising the question of whether the SNB will be able to stop intervening to weaken its own currency? Near-term, downside risks seem to have declined but this may prove deceptive in the medium-term.
  • Equity market: US implicit volatility has fallen to a 24-year low. This kind of ‘complacent’ investor sentiment is typical of an ageing bull market. But it is not an immediate sell signal since bear markets are usually prompted by restrictive monetary policies adding to investor complacency. This combination is not yet evident.
  • Commodity market:The price of Brent oil should hover around USD 50 next week. Although US oil production is recovering quickly, there are also first signs of a reduction in inventories.


USA 

May 6, 2017 (Commerzbank AG) – Emerging markets lose their growth advantage

It has become accepted as the norm today that low-income countries (“emerging markets”) grow more rapidly than high-income countries (“developed markets”). But whilst this has been the case over the past 17 years due to the impetus from globalisation, this factor has ground to a halt, leaving emerging markets without a natural growth advantage. Thus, in the absence of cyclical factors such as rising commodity prices which could provide a tailwind (currently not the case), EM growth is unlikely to substantially outstrip that of developed markets.

Further topics:

France: Macron will win the run-off

On Sunday, the French electorate will likely vote for Emmanuel Macron as their president. Although his reform plans will be made more difficult by an absence of a parliamentary majority following the June elections, he should still have considerable influence.

Forecast meeting: Fed – Why we are not following the market

We continue to believe the Fed will raise rates five more times by the end of next year. For one thing, weak US Q1 growth should prove an outlier, and a tight labour market points to faster wage growth. But unlike the Fed, the ECB will raise key rates later than the market expects.

Outlook for the week of 8 to 12 May 2017

  • Economic data: German Q1 GDP growth looks set to have been strong at 0.7% and should remain healthy in Q2. US retail sales look set to have inched up visibly in April.
  • Bond market: Investors are likely soon to refocus on economic data, central bank issues and supply. We look for 10y Bund yields to hold towards the upper end of their current sideways range for now.
  • FX market: A tail risk that Marine Le Pen will win the French presidential election remains priced into the options market and weighs on the euro for now. Sterling has come under pressure as markets realise that Brexit negotiations will not be easy.
  • Equity market: The promising dividend backdrop is a cornerstone of our expectation that the current eight-year DAX bull market will continue into 2018 or even 2019.
  • Commodity market: The price of Brent oil should stabilise at around 50 USD, even though the EIA is likely to lift its forecast for US oil production.

Apr. 29, 2017 (Commerzbank AG) – 100 days of Trump – and the next 1361?

President Trump has not done too well in his first hundred days. Market enthusiasm in the first few weeks is therefore slowly turning to disillusionment. That said, it is too soon to write off his presidency already. A substantial tax cut will come, but later and on a smaller scale than expected. The trade war feared by some will not happen, but protectionism will remain on the agenda and could especially affect Germany.

Further topics:

Fed to shrug off Q1 and remain on course

After raising rates in March, the Fed will remain on hold at its meeting next week, leaving the target range for the federal funds rate at 0.75%-1.00%. It will probably dismiss both the slowdown in growth in Q1 and the surprisingly low inflation in March as statistical outliers. The US central bank remains on course for monetary policy normalisation and will likely raise rates twice more in 2017.

Outlook for the week of 1 to 5 May 2017

  • Economic data: In the US, the surge of sentiment indicators is probably over, but they still seem to be at relatively high levels. The April employment report should turn out much better than the March figures. In the euro zone, the economy probably grew in Q1 by 0.5% versus the previous quarter.
  • Bond market: With electoral risks in France subsiding, the Fed’s policy upcoming decisions will be in markets’ focus. Even though the next funds rate move is not expected in May, the FOMC will re-iterate its hawkish stance. Bund yields should trade in a well-established 0.20-0.50% range.
  • FX market: Next week’s FOMC meeting is unlikely to provide much impetus for the dollar.
  • Equity market: Stretched equity valuations suggest that selective stock picking is becoming ever more important. We retain a preference for companies willing to restructure, with a high US market share and earnings showing a positive reaction to a stronger US dollar.
  • Commodity market: Oil prices look set to recover in the week ahead. Solid sentiment indicators ought to point to robust oil demand, whilst declining US oil inventories look set to signal that supply is tightening.

Apr. 21, 2017 (Commerzbank AG) – France – Macron is no saviour

On Sunday, the French will decide which two candidates to send into the presidential election run-off on 7 May. If Emmanuel Macron turns out to be the new French president, we are likely to hear a big sigh of relief from the markets and many European capitals. But Mr. Macron is not a deep-rooted reformer. He will not tackle the decisive obstacles to higher employment. And at a European level, the debate over the appropriate response to the euro zone crisis will continue even if he wins.

Further topics:

ECB Council meeting: Steady hand until June, at least

As doubts should continue within the ECB Council that inflation will rise towards 2% in a sustained manner, the central bank ought to stick to its steady-hand policy for now and point to its projections in June. Moreover, the ECB looks set to adhere to its forward guidance.

Outlook for the week of 24 to 28 April 2017

  • Economic data: The fact that the Easter holidays fell in April this year rather than in March, will result in a roller-coaster ride for the euro zone core inflation rate. After declining to 0.7% in March, it will likely rise to 1.0% in April, only to fall back to 0.9% in May. In the US, the economy probably got off to another poor start to the year.
  • Bond market: Going forward to next week, rates trends in the wake of French presidential elections may prove bumpy after the first round, especially if Le Pen were to do better than suggested by current polls.
  • FX market: The elections in France are likely to dominate movements in EUR exchange rates. Against this backdrop, the ECB meeting is likely to take a back seat. At the same time, the recent weakness of the economy and inflation in the US are weighing on the US-dollar.
  • Equity market: The uncertain outlook for auto stocks remains a key headwind for the DAX. If auto stocks traded at their P/Es of April 2015 the DAX would already be at 12,900.
  • Commodity market: First OPEC production estimates for April should indicate that discipline in adhering to the agreed production cuts is still high which ought to support the oil price.

Apr. 16, 2017 (Commerzbank AG) – Euro area – Sentiment still upbeat, but what does this mean?

Due to the Easter holidays, the current edition of Week in Focus is a shortened version. The next regular edition will be published on Friday, April 21.

We wish all our readers happy Easter!

Preview – The week of 17 to 21 April 2017

The purchasing managers‘ indices (PMIs) ought to have maintained their high levels in April. So far, however, upbeat business sentiment has not been confirmed by a corresponding increase in “hard” data.

We nonetheless stick to our view that a “sentiment bubble” is unlikely and therefore believe that production will rise in the months ahead.

In China, the economy should again have expanded by 6.8% in the first quarter.

Apr. 9, 2017 (Commerzbank AG) – Why wages are rising so slowly

In the US and in Germany we are almost at full employment but wage growth still remains low. We examine the possible causes of this unusual situation. Key factors include the weaker negotiating position of employees against a backdrop of globalisation; the disappointing productivity trend and low inflation expectations. These forces which act as a brake on wages will at best diminish very gradually. This is especially true for the euro zone where the ECB will not hike rates any time soon.

Further topics:

Forecast meeting: Brief euro high

Stronger leading indicators will make it easier for the ECB to sell a “tapering” of bond purchases. But modest core inflation and ECB rates on hold suggest that although EUR/USD could rise to 1.12 by autumn, this is unlikely to be sustained and EUR/USD would then fall back again.

Outlook for the week of 10 to 14 April 2017

  • Economic data: While US consumers are in high spirits, they probably showed some buying restraint in March. In the euro zone, industrial production in February will reveal whether the economy actually moved up a gear at the beginning of the year.
  • Bond market: Amid a short trading week, Bund yields and EGB spreads are running into a liquidity drought though markets could be rattled by a whopping (net) supply at mid-week. EGB spreads should retain their erratic pattern through the week.
  • FX market: In the short term, the dollar will probably gain some ground against the euro amid positive US labour market data and concerns about possible US protectionist measures. However, the euro should maintain the upper hand in the coming months.
  • Equity market: A number of factors suggest that we could be set for a favourable Q1 reporting season. As a result, analysts ought to be more optimistic about the earnings expectations of many companies within the DAX and MDAX.
  • Commodity market: Brent should be able to hang on to its latest gains, as both IEA and OPEC are expected to confirm that the burden of production cuts is more evenly distributed. The IEA is also expected to indicate that the OECD countries have not yet cut inventories, but that this is merely a question of time.

Apr. 1, 2017 (Commerzbank AG) – Euro zone – boost from the East

Corporate sentiment in the euro zone has improved massively in recent months, probably due mainly to demand from Asia picking up again. The main thrust seems to be coming from China. Despite that country’s continuing structural problems, the boost from the East should continue for the time being, and thus prevent a marked drop in sentiment indicators. However, since high private-sector debt levels are still weighing on domestic demand in the euro zone, there is probably only limited upward scope for Ifo and other indicators.

Further topics:

Turkey: Stable lira is a sham

The Turkish lira has stabilized since the beginning of the year, but there is no reason to sound the all-clear for the lira. It has benefited from improved sentiment against emerging markets currencies of late which has driven other EM currencies markedly up.

Outlook for the week of 3 to 7 April 2017

  • Economic data: Yet again, March will probably have seen no change in the US in the gap between the upbeat mood throughout the economy and no more than average hard data. The employment report should continue to trace a positive though not overwhelming development.
  • Bond market: With speculation on early ECB rate hikes subsiding, Bunds look well underpinned going into next week.
  • FX market: The sharp rise in EUR-USD should be over for now. Not only sentiment but hard data as well are arguing for downside potential.
  • Equity market: US monetary indicators such as the strong M1 money growth and the relatively steep US$ yield curve indicate that the S&P 500 bull might run further.
  • Commodity market: The price of Brent is unlikely to change much in the week ahead, distinctly above the 50 USD mark.

Mar. 25, 2017 (Tempus Inc.) – ECB – Will they, or won’t they?

There are signs in the euro zone that monetary policy may soon be changing course. Even the doves on the ECB Council are talking of possibly raising rates more rapidly than previously envisaged once bond purchases come to an end. This could happen if the economy and inflation fare better than the ECB is currently predicting. However, there are strong counter arguments against this optimistic scenario. Inflation, for example, will probably fall more rapidly over the coming months than the ECB is assuming.

Outlook for the week of 27 to 31 March 2017

  • Economic data: The core inflation rate in the euro zone is likely to have fallen from 0.9% to 0.7% in March, though a (temporary) surge to 1.0% is likely in April. This is all down to the timing of the Easter holidays, which fall in April this year against March in 2016.
  • Bond market: Government bond yields are edging lower again as markets put reflation expectations from Trump’s stimulus plans to the test. Ten year Bund yields look likely to push the floor of the recent trading range lower. Elsewhere, the Corporate Schuldschein segment should continue its growth.
  • FX market: US and euro zone politics recently provided tailwinds to EUR-USD. However, amid ongoing political risks in the euro zone, the further euro upside should be limited. As the UK announces its Brexit intentions, GBP should also come under renewed pressure.
  • Equity market: Amid the still-very positive overall conditions, German companies should make further acquisitions this year. This will push goodwill on DAX company balance sheets still higher. Under gloomier general economic conditions, write-downs might become necessary, which could painfully reduce the equity capital of some companies.
  • Commodity market: Brent is likely to fluctuate around USD 50 per barrel next week. While we are likely to see signs that OPEC also cut production in March as agreed, the likely further rise in US inventories will show that supply remains ample, arguing against a price recovery.

Mar. 18, 2017 (Commerzbank AG) – Le Pen – What if?

According to the polls, Marine Le Pen has little chance of becoming the next French president. But uncertainty is high and many investors want to know what would happen if Le Pen were to win. Might she call an EU referendum? Would there be a flight of capital? Would Draghi and Merkel rush to help? Would EMU survive in the long term without France? In the short term, a Le Pen victory could, to say the least, produce chaos.

Further topics:

Brexit: The way is (un)clear

The legislation necessary to give the prime minister the authority to trigger Article 50 has now cleared parliament. But formal notification may only be delivered in the week of 27 March following the threat of another Scottish independence referendum and serious Brexit negotiations may not take place until June.

Outlook for the week of 20 to 24 March 2017

  • Economic data: Sentiment in the euro zone economy is running far ahead of the hard data and the longer this situation lasts, the more intensely the markets may discuss an exit from the ECB’s ultra-expansionary monetary policy.
  • Bond market: With the Dutch election and the latest Fed policy rates now behind us, investors’ focus will be on macro data releases, EGB supply and what Fed policymakers have to say through the week.
  • FX market: Currency markets look set to be in for a quiet week and the market will therefore likely focus on the fallout of the ECB and Fed policy. Political concern is likely to rise up the agenda, implying that the euro should lose ground against the USD.
  • Equity market: With 23 DAX companies announcing a rise in dividends last year, total payouts are likely to have risen by 8.8% y/y to a new all-time high of €31.8bn. A dividend yield of 2.6% is still relatively attractive compared to fixed income yields, which remains a key supporting factor for DAX investors.
  • Commodity market: The first exports and stocks data for non-OECD countries since the OPEC production cut are being eagerly awaited although oil prices should trend sideways until the next release of production data.

March 11, 2017 (Commerzbank AG) – How much will the Fed tighten the reins?

The Fed is expected to hike interest rates next week – something virtually no-one envisaged at the start of the year, even though the central bank did hint in December at three moves in 2017. Since, in contrast with earlier years, the US economy seems set to proceed largely as the Fed expects this year, we expect the bank to stick to its timetable. Consequently, we envisage three rate hikes each in 2017 and 2018, somewhat more than the market is currently expecting.

Further topics:

Netherlands: no nail-biting affair for the euro

Next Wednesday, the Dutch electorate goes to the polls. Whilst the PVV of eurosceptic Geert Wilders should do better than in autumn 2012, it is unlikely to become part of the government.

Outlook for the week of 13 March to 17 March 2017

  • Economic data: The “hard” US economic data due out next week will once again probably not be able to keep pace with the recent strong rise in survey-based indicators.
  • Bond market: Despite a number of favourable trends, 10-yerar Bund yields are likely to trade fairly soft in the week ahead.
  • FX market: The FX market is in for a busy week: Besides a number of central bank decisions, the parliamentary elections in the Netherlands and the meeting of G20 finance ministers are on the agenda.
  • Equity market: Eight years ago the current DAX bull market started, and we look for continued gains into a ninth year, if not quite at the same pace as of late.
  • Commodity market: We do not expect the recent weakness of oil prices to portend a sharper decline, although we look for weakness to persist in the medium-term.