French Elections: Uncertainties endure
(Yann Quelenn, market analyst)
It goes without saying that the French elections could have monumental repercussions for Europe, with a victory for Marine Le Pen paving the way for a Frexit Referendum. Over the weekend, the National Front President visited Vladimir Putin with many politicians, such as Jean-Luc Mélenchon strongly condemning the move. Rumours are now circulating that Russian banks are helping Le Pen to finance her campaign, a claim she vehemently rejects. Yet, in terms of international sanctions, the National Front leader continues to fight Russia’s corner.
Yes, a Le Pen election does bear all the potential of being the proverbial nail in the coffin for the single currency. However, if Brexit has taught us anything it’s that we cannot say for sure that a French exit from the EU would be a nightmare. There is a cost to exiting the union, but there is also a cost to remain.
However, for now, euro valuation and financial markets are pricing in a victory for Emmanuel Macron against Le Pen. We think it’s still too early to call a two-horse race, especially as François Fillon’s candidacy is far from over.
Article 50 this week
(Peter Rosenstreich, head of market strategy)
The wait might finally be over, with politics taking center stage in Europe. On Thursday, 29th March, Prime Minister May is likely to trigger Article 50. Once the Brexit clause is enacted, there is no way back - the UK and EU will have to begin what is likely to become a two-year (possible longer) dragged out negotiation. The immediate question is “how will the GBP react”? Outside of a natural GBP risk aversion pullback, we suspect that the GBP will continue to rally against the USD and EUR. The massive GBP devaluation on the Brexit vote and shortest G10 position in IMM data will protect the sterling from a deeper correction, while the resilient economic data and surprisingly hawkish MPC minutes will have markets increasingly pricing in a BoE rate hike. The unexpectedly hawkish tone will provide a solid backstop for selling and initiate a rebound in GBP. GBPUSD bullish recovery of 1.2110 support should continue targeting 200d MA at 1.2755.
Is it time to run?
(Arnaud Masset, market analyst)
Donald Trump certainly was much quieter in the run-up to his and his administration's first major battle: repealing Obamacare. Proceedings got off to a bad start last week with the vote being delayed from Thursday to Friday as the Republican Party faced division within its own ranks. Market suspicion hit fever pitch as we headed into the weekend with equities trading sideways and the dollar and US treasury yields going nowhere. Today, as Trump licks his wounds, investors are left wondering whether this is just a temporary setback or the shape of things to come.
Looking at the equity markets this morning, investors have started to unwind Trump's reflation trade on growing doubts about the government’s ability to deliver what has been promised. The Nikkei was off 1.44% and the Hang Seng slid 0.68%. US futures have also dipped into negative territory with contracts on the S&P falling 0.85%. In Europe, the Euro Stoxx 600 have fallen 0.80% as the German DAX tumbled 0.82%.
In the coming weeks, US political uncertainty will remain the primary driver and weigh on the dollar and equities as investors lower their expectations for policy action. The failure to pass the healthcare reform has seriously damaged Trump’s authority and ability to pass other reforms as it will be more difficult to reach a balanced budget, especially when all the other proposed reforms are projected to increase expenditure.