A further slowing in growth
After just over 24 hours since Macron’s French presidential election win, the Euro and European equities are feeling a bit hangover following a solid run in the previous two weeks.
In one of those moments of weakness I thought it was a good idea to teach my daughter the numbers to unblock my phone, learning how to play Spotify was just a few touches away and then a week later the repeat button was discovered. Charlie XCX “After the After party” is a very, very catchy song and if you don’t know it don’t look it up, otherwise you will find yourself singing the song in your head on your way to a meeting or when you are speaking to your boss.
After just over 24 hours since Macron’s French presidential election win, the Euro and European equities are feeling a bit hangover following a solid run in the previous two weeks. Early on Monday the Euro traded to a high of 1.1023, but since then it has been on steady decline and now it trades at 1.0929, 0.68% lower. Investors have also sold European equities with the CAC 40 (-0.91%) leading the way (Stoxx Europe -0.41%). Buying the rumour and selling the fact appears to have been a greater force than the elimination of a tail risk. Macron’s challenge to form a government and the National Assembly elections in June could also be a factor weighing on sentiment. All that said, however, after Austria and the Netherlands, Macron’s win means that the EU and the Euro have yet again avoided a potential challenge to their existence. Hence we think that at least near term the obstacle of EU political risk has been removed and should allow the ECB to shift its language away from ultra-dovish tone. On this score we note that overnight ECB executive board member Mersch commented that risks to growth are almost back in balance and that the ECB could review the interaction of its policy tools. Note that ECB Draghi speaks tomorrow night and another comment along these lines would most likely give the Euro a boost.
Meanwhile the after party in the US appears to have just started given what appears to be a delayed reaction to Friday’s employment report. Pricing expectations for a June hike are just under 80% and another hike before year end is now more than 60% priced ( last weeks these probabilities were 60% and 35% respectively). US Treasury yields are about 2-3 bps higher with the 10y note currently trading at 2.385%. The rise in yield has boosted the USD which has outperformed all G10 and most EM currencies over the past 24hrs. The Euro and European currencies are at the bottom of the G10 leader board, down between 0.70% and 1.10% . The AUD and JPY are in the middle of the pack, down 0.50%.
While JPY’s underperformance can be largely attributed to the move higher in UST yields, the AUD underperformance is also due to another soft night for key AU commodities. Iron ore fell another 2.6% and is just above the US$60 mark, steam coal is down 4.9%, aluminium is -1.2% and metallurgical coal is -0.5%. Gold is essentially unchanged and oil prices are a little bit higher supported by overnight comments from Saudi Arabia’s energy minister saying that he expected the OPEC led production cut deal to be extended until at least the end of this year.
Although the S&P500 made a new intraday high, it has closed the day flat while the Dow and NASDAQ have ended at 0.03%. Meanwhile the VIX closed at 9.77, its lowest level since late 1993 and it has yet again spark the debate on whether the outlook is really that positive or whether the low VIX reading is just a sign of market . Time will tell.
We have a busy day of domestic data releases starting with the weekly consumer confidence reading followed by retail sales at 11:30 Sydney time and then of course the Federal Budget tonight. Offshore highlights include Germany’s trade and industrial production (Mar) and later tonight the US gets April NFIB small business sentiment reading along with JOLTS job openings and wholesale inventories ( both for March).
Our economists have pencilled in a 0.3% rise in retail Sales in March which is in line with the market. Note too that this data release includes the inflation adjusted reading which is a key component for the consumption reading in the Q1 GDP calculation.
As for the budget, Ivan Colhoun, our Chief Economist (Markets) has suggested 4 yardsticks by which to judge the Government on tonight’s budget, namely: (i) the credibility of the short-term macro and budget forecasts; (ii) the appropriateness of the medium-term fiscal settings; (iii) the policy measures in the budget; and (iv) the fairness of the budget. Ivan also notes that the Government is likely to forecast a return to balance/small surplus by 2020-21 on an underlying cash balance basis and likely a year earlier on the new favoured Net Operating Balance (NOB) of the budget. This should be sufficient to maintain Australia’s AAA rating, albeit with a continued negative outlook from S&P (for full details please refer to our Australian Markets Weekly publication – do send me an email if you would like a copy).
In the US the NFIB small business is expected to drop to 104 from 104.7 largely due to the inability of the Trump administration to repeal Obamacare ( a big cost for small businesses) as the survey data was collected after the negotiations took place and before the bill was eventually passed by the house.
On global stock markets, the S&P 500 was +0.00%. Bond markets saw US 10-years +3.81bp to 2.39%. In commodities, Brent crude oil +0.69% to $49.44, gold-0.1% to $1,226, iron ore -2.6% to $60.15, steam coal -4.9% to $74.20, met.coal +0.3% to $175.00. AUD is at 0.7385 and the range since yesterday 5pm Sydney time is 0.7378 to 0.7425.
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