Market Crisis of Confidence, Not Referendum, Could Prompt Frexit

Mujtaba Rahman, European Practice Head at Eurasia Group has just published the firm’s latest thoughts on the French Elections following last night’s presidential debate. They haven’t changed their prediction on the chances of Marine Le Pen winning ( Still slightly lower than 40%), but they do point to the fact that Le Pen is facing a field of candidates who are either corrupt and damaged (François Fillon), untested (Emmanuel Macron) or on the political extremes (Benoît Hamon and Jean-Luc Mélenchon), which is truly unprecedented and will boost her chances. In this note they provide some interesting analysis on social media trends and what that indicates on the campaign (Who’s got momentum and who is resonating (they can be two different things), and they make the argument A referendum is not the pathway for France’s Euro exit, but a crisis of confidence in French markets may be, where they discuss the potential for vulnerability of France’s globally systemic banks. If you’d like to view the full note, click below to contact the provider directly.

The Inflationary Battlegrounds

The global inflation story is no longer about oil – indeed oil prices are likely to fall back towards the summer – but about the fundamental tightening in product and labour markets. The return of food price inflation will have a powerful impact on emerging market inflation, not least in China, says Economic Perspectives. In their most recent chart book EP captures this shift in inflation trends. EP takes a multifaceted view of global inflation, rather than a narrow model-based approach. They identify 4 broad inflation narratives – overheating, excessive money creation, supply side and fiscal. Their overriding macro thesis is that the only credible resolution to the global credit crisis is a resurgence of global inflation. ECR’s work can be purchased on ERIC, or alternatively contact the provider directly.

Saying “Whoa to the wrong kind of populism”

Andy Langenkamp, from the Netherlands-based research firm, ECR Research, is the author of Global Political Monitor, a weekly report focused on the political economy, with a focus on Europe. In his most recent edition he provides a very thorough review of the Dutch election results and the new makeup of political landscape where he says there is likely to be an entrepreneur-friendly coalition on the cards when it is formed. There’s been much speculation that due to the fragmented nature of Dutch politics confirmation of a coalition government may be a long drawn out process. Langenkamp is much more sanguine on this. If you would like to read more of Langenkamp’s political analysis, click below to contact the provider directly.

Five Cross-Asset Border Adjustment Tax hedges

Writing within BAML’s Global FX Weekly recently, EM strategist David Hauner writes that BAML’s concerns about BAT make them take a tactical pause from their structural EM bullish stance as they do not believe that any material risk is priced in yet. Within EM local markets, the best risk-reward to position for BAT is in FX rather than in rates as the rates reaction is much less clear due to a potential risk-off rally in US treasuries. Implied volatilities in the FX market have fallen from the peaks in January, although policy uncertainty remains high. At current levels, risks are becoming asymmetric. He identifies 5 key hedges for EM. BAML clients can view the full note on BAML Mercury.

US Real Yields are Set to be Marked Higher

Deutsche Banks’s Binky Chadha argues that the 10-year US real bond yield, at 0.3%, is significantly below the level suggested by GDP growth, at around 2.5%, as a consequence of the currently very easy monetary policy setting. He thinks Fed communications around a June rate hike could lead to a notable re-pricing of the US real bond yield. Deutsche clients can read the full note via the bank’s research portal.

The US Dollar Isn’t Overvalued

The USD has fallen despite two rate hikes since December, and has reversed most of its ‘Trump bump.’  The market appears in a mood to be looking for a reversion to the mean in exchange rates, writes Greg Gibbs of Amplifying Global FX. Another factor maybe that the market is aware that the US administration and the Fed appear to prefer a weaker USD and this may be detracting from its performance, even as USD rates rise.  At some point, the under-performance in the USD relative to its improved yield advantage should end. Gibbs explains how and why. Gibb’s research can be viewed on the SmartKarma platform.

Follow Janet, Not Donald

Standard Chartered’s chief economist Marios Maratheftis writes a regular note entitled ‘’Thinking Out Loud.’’ In this week’s edition he argues that markets are too optimistic, if not complacent, when it comes to the US reflation trade. That’s because there will be no infrastructure boom, just wider deficits. Meanwhile FOMC hikes and a stronger dollar could lead to slower growth in 2018. SC clients can view the full note on the bank’s research portal.

Begin to Re-instate OW

In this tactical equity asset allocation piece Longview chief strategist Chris Watling sets out his ‘final flurry’ thesis which suggests investors err on the side of an OW equities position. This ”final flurry” is often the most euphoric part of a bull market, argues Watling. Longview combine that idea with another thesis they think is central to the way one should view markets at the moment. This is their ”money velocity” thesis, which if they are correct, would see a continued classic asset allocation switch out of bonds and into equities. The piece can be purchased on AlphaExchange. Alternatively contact the provider directly.

How do Eurozone Firms Prioritize Political Risk?

UBS Evidence Lab provides UBS research analysts with rigorous primary research. The team conducts representative surveys of key sector decision-makers, mines the Internet, systematically collects observable data, and pulls information from other innovative sources. In their latest report they reveal the results of a survey they conducted with 600 eurozone corporates (of which 74% have investment in the UK) on how they assess political risk, what importance they attach to individual risk factors, and how they plan to react to the UK’s exit from the EU. The results are intriguing in that it appears UK Brexit risk is more front-of-mind than the French elections. UBS clients can view on UBS Neo.

Goldman Sachs: The State of Immigration and Refugees in Europe

While Goldman Sach’s Alain Durré does not expect populist parties to be in government following the upcoming EU elections, the observable fact is that populist parties (and their anti-immigration rhetoric) have already influenced – and will continue to influence – the position of mainstream parties on refugee and immigration issues. In this note assesses where we now stand on immigration flows into Europe, the short and long-term economic impact of immigration, and the political challenges that stem from refugee inflows. Goldman clients can view the full note on Goldman 360.