French Elections: Macron clear favourite in race for French presidency
(Yann Quelenn, market analyst)
Both in polls and the financial markets, Macron seems to be the clear favourite for the Élysée Palace with markets currently pricing a probability in excess of 67%. However, for now, the euro still remains weak against the dollar with further possibility for upside. Drawing comparisons with the US elections, we would do well to recall that Clinton had an estimated win of over 80%. However, we are extremely sceptical of these polls and believe that the Le Pen vote should not be underestimated, especially when we factor in the clear bias regarding this candidate.
Zooming in on markets, the 10-year French yield has risen above 0.90%, yet rates are still holding around a one-month low, while the 10-year spread France vs Germany is back above 60 basis points.
Markets are demonstrably confident that Macron will win and French rates are clearly trending lower. This is partly due to the nature of the elections. Many socialists from the government (including former Prime Minister, Manuel Valls) are now supporting Macron. This is why we believe that what is called the “Republican Front” i.e. an alliance of all forces against the National Front represents the best possible strategy for French leftists. Macron is now racing towards the presidency and the markets are reflecting this. Of course, this perception could create epic turmoil in the event of a Le Pen victory. Yet, as we have seen in the past, political turmoil can be very temporary and central banks would quickly return to being the main drivers of asset pricing.
Markets to refocus on hard data and monetary policy
(Arnaud Masset, market analyst)
It has been a quiet week so far as volatility in the FX market remains desperately low, despite lingering political uncertainty. Over the last few days, the USD has been particularly resilient, especially after Trump's health-care reform setback. The single currency completely erased last week’s gains dipping below the 1.07 threshold amid building political pressure in Europe, mostly due to Brexit and the upcoming French elections. However, we have the feeling that the Trump trade is coming to an end and the market now needs a new driver. Equity gains have begun to stall recently, while the greenback has been unable to reach higher ground. We believe that the market will slowly start focusing again on monetary policy and economic data.
US price data is due for release later today. The Fed’s favourite measure of inflation, the core PCE, is expected to have held steady at 1.7%y/y in February, while the headline measure, which includes the most volatile components, is expected to have risen from 1.9% to 2.1%. Personal income and spending are also anticipated to have stabilised at 0.4%m/m and 0.2%m/m respectively. Next week will be a busy one in the US as a fresh batch of key data is due for publication, with notably the March job report, FOMC minutes, factory and durable goods orders and ISM. The market is still positioned for two rate hikes from the Fed this year, suggesting that risk is mostly on the downside as we are approach the release of the FOMC minutes.
Japan shows signs of steady improvement
(Peter Rosenstreich, head of market strategy)
Economic data released for Japan continues to support steady improvements. Japan's CPI for February posted a 0.3% y/y gain as expected, while industrial product surged 2.0% m/m - well above the expected figure of 1.2%. However, housing starts fell 2.6% y/y following a 12.8% rise prior, posting the first decline in eight months. Next week will bring the BoJ Tankan report into focus. Weaker JPY and strong global trade growth should allow sentiment, specifically in manufacturing to improve. Given the inflation backdrop, we anticipate further strengthening in corporate inflation expectations which should influence the BoJ's monetary policy strategy. Despite BoJ commitment to ultra-extreme accommodating measures, improvement in the economics suggests tightening in 2018. Given the lack of responsiveness from US yields, we remain short USDJPY heading into next week. USDJPY 21d MA at 112.83 should provide resistance for a corrective decline to 108.80. Watch EURJPY for a deeper bearish move towards 118.55.