Category Archives: Big Picture

Going Dutch and Fed’s next big data hurdle

The outcome of the Dutch general elections would tend to support my view that while nationalist and/or populist parties in Europe are in the ascendancy, there has been a tendency to over-estimate their reach and their ability to dismantle the eurozone and/or EU.

It has also reinforced my expectation for the French presidential election that an above-average voter turnout would at the margin help centre-left candidate Emmanuel Macron and that Front National candidate Marine Le Pen will lose in the second round of voting on 7th May whether she faces Macron or, in a more unlikely event, Fillon.

In the US, the Federal Reserve has kept its options open by broadly sticking to a narrative which pencils in three hikes in 2017, in line with my expectations.

With the Fed seemingly comfortable with the path of inflation and employment, the next big data hurdle is likely to be Q1 2017 GDP data for the US due out on 28 April.

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Fed 25 and 500 Godfathers

Baring calamitous February inflation and retail sales data, I expect the Fed to hike rates 25bp on 15th March for the second time in three months, in line with market pricing and my mid-February forecast.

While underlying US inflation has only edged up slowly and payroll growth remains modest, other US data have been reasonably buoyant. The pool of available labour continues to grind lower and regional indicators, national confidence surveys and housing data pushed higher in January-February.

Moreover, normally dovish FOMC members have not made a strong case for a March pause and, along with Chairperson Yellen, have seemingly for now at least not made the Fed hiking cycle conditional on Trump delivering on his promise to loosen fiscal policy.

The big question is what next for the Fed. Its updated forecasts and dot-chart and Yellen’s question-and-answer session will undoubtedly provide some extra colour.

But it may be a little premature for the 17 FOMC members to materially change their forecast for the appropriate pace of hikes for 2017, which stands at 74bps – broadly in line with current market pricing.

The risk to my turn-of-the-year forecast that the Fed may only deliver two hikes this year is probably to the upside. But if the Fed is going to hike once a quarter, it will want to prepare markets conditioned by years of hikes far more modest than predicated by the Fed.

In France, potential presidential candidates have only a week left to meet the Constitutional requirements to become an official candidate in the first round.

My core scenario remains that Fillon will remain in the presidential race, that the first and second rounds due on 23rd April and 7th May will not be pushed back, that Le Pen and Macron will likely make it to the second round run-off and that Le Pen will lose the second round whether she faces Macron or Fillon.

But one should at least entertain the possibility, even if remote, that Jean-Luc Mélenchon, currently fifth in the polls on 12%, will not meet the requirements to be a candidate in the first round – namely the written support of 500 elected sponsors – which could in turn boost support for Socialist candidate Benoit Hamon.

Moreover, it is still conceivable, albeit unlikely, that Fillon will make it to the second round or conversely pull out of the race with Alain Juppé filling his place. Finally, the possibility of this year’s elections being postponed, while extremely slim, merits discussion.


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The Ultimate Guide to the 2017 French Elections – Part I

The first round of the French Presidential elections is due to be held in 47 days, with the likely second round two weeks later. There has already been much drama in a presidential campaign that has caught the world’s imagination.

The two-round election for the 577 deputies of the lower house of parliament on 11th and 18th June, which has so far received little attention, will complete the political picture in France.

There are currently eighteen presidential candidates spanning the breadth of the political spectrum, from the far-left to the far-right. Political jostling is in full swing with candidates forming alliances in a bid to capture the 46 million or so votes up for grabs in round one.

The National Front’s Marine Le Pen, currently ahead in the polls for the first round on around 27%, is looking to go one step further than her father Jean-Marie Le Pen and become the first ever French female president. She is currently under investigation for misappropriation of EU funds and publication of violent images.

The centre-left candidate Emmanuel Macron, aged 39, is second in the polls on around 25%. He is vying to become the first centrist president since Valéry Giscard d’Estaing in 1974, the first independent candidate to become France’s head of state and the youngest ever President under the Fifth Republic.

Republican candidate François Fillon, who comfortably won the party primaries, is third in the polls on around 20% despite the probability that he will face formal charges on 15th March of misappropriation of parliamentary funds.

President de Gaulle, in a nod to the heterogeneity of the French electorate, famously asked how it was possible to govern a country where 258 varieties of cheese exist[1]. This granular political landscape makes it that much harder to predict with any certainty the successor to incumbent President François Hollande who has opted not to run for a second term.

This in-depth four-part Election Series will examine all core elements of the upcoming presidential and legislative elections and take both a quantitative and qualitative approach.

The material, organised in easy-to-access questions and answers, will ultimately try to answer the key question of who will be President and Prime Minister and how this will impact France, Europe and financial markets. The British decision to leave the EU and US presidential elections have fuelled the notion that anything is possible.

In Part I, I examine the importance of French presidential and legislative elections, their mechanics and timelines and the implications of a potentially high voter turnout. Read more

French elections in focus but US data likely to draw attention

February is ending with a whimper rather than a bang. Market pricing for a Fed hike in March continues to flirt with 5-6bp while in the UK the market seems to be waiting for the government to trigger Article 50. Meanwhile the ECB is likely to stay in a holding pattern until it knows what kind of French president it will be facing come 7th May.

US ISM, income, spending, and inflation data out on 1 March could however potentially move the needle on financial markets.

I continue to expect a 25bp Fed hike in March but acknowledge that this is a low conviction forecast at this stage.

In France, the latest headline-grabber is that veteran centrist politician François Bayrou announced on the evening of 22nd February that he had opted not to run for the presidency. He will instead lend his support to Emmanuel Macron, the independent centrist candidate of the En Marche! Movement.

This should have come as little surprise but markets still reacted positively, with in particular French bond yields sliding lower.

The justification for this admittedly modest market reaction is that Bayrou’s electorate will now transfer its votes to Macron, in turn increasing the probability of Macron coming ahead of François Fillon and making it to a second round run-off against Marine Le Pen.

There is some logic to this argument, as recent polls suggest. Moreover, the relatively inexperienced Macron may benefit from Bayrou’s familiarity with the ins-and-outs of campaigning gained over three previous presidential election bids.

But there is also some evidence that Fillon, the Republican candidate, may benefit from Bayrou’s decision and it is simply too early to predict with confidence whether Macron or Fillon will make it to the second round.

The bottom line is that Bayrou’s decision has increased the odds of Macron and to a lesser extent Fillon making it to the second round and further decreased the odds of Le Pen winning in the second round against either Macron or Fillon.

Meanwhile, time is running out for Socialist Party candidate Benoit Hamon to secure a second round place.
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March Madness

Despite Donald Trump having been inaugurated as the 45th President of the United States only 28 days ago, saying that it has been an event-packed month is the under-statement of the decade.

However, as Randy Bachman sang in his number-one hit in 1974 – incidentally the year President Richard Nixon resigned following the Watergate scandal – “You Ain’t Seen Nothing Yet”.

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Market fatigue in the face of catastrophic success

The relative stability in the Dollar, S&P 500 and US yields is broadly in line with my view that analysts and markets had got ahead of themselves with respect to the path of the US economy and financial markets.

Moreover, Chinese policy makers’ willingness and ability to use central bank FX reserves to support the Renminbi tallies with my expectation that “near-term, the PBoC may continue to see some value in a broadly stable Renminbi.”

Currency, equity and bond markets may also be suffering from “political-fatigue”, with Donald Trump’s “policy-by-tweets” exhibiting diminishing returns.

Expectations that Trump will have to deliver a more cohesive set of policy priorities will likely rise exponentially after his inauguration as President today. If he is unwilling or unable, markets’ good-will may flounder and the Dollar and US equities may correct lower.

In the UK, Theresa May’s speech was an important milestone in the UK’s already tortuous path towards a world outside the EU. But there are still many legal, political and economic hurdles the government must clear, including a number of parliamentary votes.

Given the uncertain path which British executive and legislative bodies will take to reach a difficult-to-predict outcome at a still unidentifiable point in the future, fluctuations in Sterling will likely remain common-place.

I see the risk tilted towards Sterling weakness due to the British government’s acute challenge of negotiating favourable trade deals with EU and non-EU countries and the UK economy’s reliance on faltering household consumption growth.
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Paradox of acute uncertainty and strong consensus views

There appears to be a quasi-universal belief that 2017 will be characterised by acute uncertainty, with the list of difficult-to-predict economic and political variables growing exponentially in recent months.

These include the paths which Donald Trump will tread in the US and Theresa May in the UK, the Fed’s reaction function, the future of the eurozone and EU with European elections looming, the perennial question of China’s exchange rate policy and outlook for oil prices.

And yet, there is already it would seem a set of strong consensus views about the direction which economic variables and financial markets will follow in 2017.

US reflationary policies are expected to rule, boosting already decent US economic growth, inflation and US equities, in turn forcing the Fed to adopt a far more hawkish stance than in 2015-2016 and pushing US yields and dollar higher.

At the same time, President-elect Trump’s penchant for protectionism, alongside a strong dollar and higher US yields, are seen as major headwinds for indebted emerging economies reliant on trade and by implication for emerging currencies, bonds and equities. These seemingly include the Mexican Peso and Chinese Renminbi.

Moreover, the consensus forecast is that at the very least EUR/USD will fall below parity, having got close in December.

The perception of acute uncertainty is not totally incompatible with seemingly well-anchored forecasts but they do make uncomfortable bed-fellows.

Some of the uncertainties which have gained prominence can be put to rest, for now at least. At the same time, some of the sure-fire trades currently advocated may struggle to stand the test of time, in my view.

Marine Le Pen is very unlikely to become the next French President, the Italian banking sector will not be allowed to implode and the euro may end the year on a strong note.

Emerging market currencies have showed greater poise in the past few weeks, with a number of central banks showing both the appetite and the room to support their currencies. This should be borne in mind. Read more

Black swans and white doves

In the past week European and global politics, strong US growth data, mixed global macro numbers and eurozone, Chinese and Indian central bank policy have eclipsed Trump-mania.

What is perhaps more remarkable is markets’ reasonably benign, “risk-on” reaction, bar the euro’s sell-off in the wake of today’s ECB policy meeting.

One interpretation is that markets have become complacent to the risks presented by President Trump’s constellation of pseudo-policies, surging nationalism in Europe, the UK’s uncertain economic future and continued capital outflows from China.

I have a somewhat different take, namely that markets are rightly discounting some of the more extreme and perverse scenarios, including:

  1. Protectionist US policies coupled with higher US yields and a strong dollar collapsing tepid emerging market, and eventually global, economic growth;
  1. The “no” vote in the Italian referendum leading to the economic collapse of the European Union’s third largest economy;
  1. Surging European nationalism culminating in the collapse of the eurozone and/or European Union;
  1. The British government opting to sacrifice growth in exchange for a hard version of Brexit and;
  1. Capital outflows from China ultimately forcing policy-makers into accepting a Renminbi collapse and shocking a corporate sector with significant dollar-debt.


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EM currencies, Fed, French elections and UK reflation “lite”

Rising US yields, stronger dollar, FX outflows from emerging markets into US equities, President Trump’s still uncertain policies regarding global trade and country-specific concerns continue to weigh on EM currencies.

But the pace of depreciation in EM currencies has abated, with a number of central banks hiking their policy rate and likely intervening in the FX market. China is manipulating its currency but perhaps not the way that US President Trump thinks.

With the market having almost fully priced in a December Fed hike, it will focus on FOMC members’ likely further downward revision to their forecasts for the appropriate policy rate.

Commentators are making a number of assumptions about next year’s French presidential elections and the potential impact on the euro. Some seem reasonable, others less so.

The first assumption is that Fillon will beat Juppé in the second round run-off of the Republican primaries on 27th November. This is indeed the most likely outcome.

The second assumption, which I agree with, is that no presidential candidate will clear the 50% threshold required in the first round of the elections on 23 April to become President.

The third assumption, now seemingly hard-baked, is that no Socialist candidate stands even a remote chance of making it to the second round of the presidential elections on 7th May 2017. I would argue that it is too early to write off that possibility.

The fourth assumption, which I believe is still far-fetched, is that Front National leader Marine Le Pen could win the second round to become President, which in turn would precipitate France’s exit from the EU and pressure the euro.

UK markets’ mixed reaction to Wednesday’s Autumn budget was in line with my expectations of higher yields and stronger Sterling.

Chancellor Hammond’s modestly stimulative package reflects the realities and uncertainties which the UK economy has faced since the June referendum. This is still the over-riding theme markets will have to deal with in the near and potentially long-term.

Hammond had one hand behind his back and a moving target to hit. He has backloaded spending to 2018-19 and beyond with a focus on infrastructural projects to boost languishing UK productivity. Read more

Nationalism, French presidential elections and the euro

The shock results of US presidential elections and UK referendum are shining the spotlight on the rise of nationalist and populist policies.
The rejection of the political, economic and social status-quo has lead to increasingly vocal predictions that populist and/or nationalist parties will cause major upsets at forthcoming elections in EU member states, including Italy and Austria.
But forecasts that a broad-sweep of nationalist parties will rise to the highest political echelons in EU countries may still be far-fetched.
In most cases these parties still command only modest popular support which can be overstated in polls and difficult to translate into actual political power.
France is such an example. Support for Marine Le Pen, leader and presidential candidate of the far-right Front National (FN) party, has risen in recent years and she will likely make it to the second round of presidential elections in April-May 2017.
But she is unlikely to become President, with opinion polls showing she would lose the head-to-head vote, almost irrespective of the candidate she faces.
Moreover, the FN is likely to remain a minority party following next June’s elections for the French Assembly.
France’s presidential and parliamentary elections will in any case have far more modest repercussions for the global economy and asset markets than the election of Donald Trump in the US.
Even in the very unlikely event of Marine Le Pen becoming president, the impact on the euro could be modest and short-lived as France’s economy accounts for only 21% of the eurozone’s economy.
ECB policy and German elections due in September 2017 are likely to exert greater influence on the euro’s path.
It is also noteworthy that the euro has been one of the most stable major currencies in the past six-and-a-half years, despite the Greek crisis and the shock UK referendum result.
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