Economic Outlook

Markets Update, Feb 7

 

 

  • Political Risks weight on Euro
  • Dollar strengthened 
  • Gold fell, also demand for havens 
  • Asian Stocks lower
  • Japan stocks hit 2-week low in thin trade
  • Greek borrowing costs rise as bailout worries grow

 

Euro Weakens Further On Political Uncertainty
The euro fell 0.7% against the US dollar to $1.067 on Tuesday weighed by political uncertainty ahead of the French elections.

Weakness in Euro is slightly helping the greenback to regain footing. ECB president Mario Draghi faced the European Parliament’s committee on economic affairs late yesterday. He noted that the central bank would not react to temporary spike in inflation. He emphasized that “our monetary policy strategy prescribes that we should not react to individual data points and short-lived increases in inflation”. And, underlying inflation pressures “remain very subdued” reflecting “largely weak domestic cost pressures.

There were speculations that ECB could start tapering as headline inflation, recorded at 1.8% in January, would exceed 2% target soon. And Draghi’s comments tamed such speculations.

Meanwhile, Draghi also responded straightly to accusations by US president Donald Trump’s trade advisor to Germany regarding Euro. Draghi bluntly said that “first and foremost: we are not currency manipulators.” And, “second, our monetary policies reflect the diverse state of the (economic) cycle of the euro zone and the United States.”

The euro could fall by about 10 percent to about 0.98 versus dollar over a few weeks on a Marine Le Pen victory in France, more than the 6 percent drop experienced with the 2012 Greek elections, as the market prices in the possibility of an Economic and Monetary Union exit, JPMorgan strategists write in note to clients. The obvious issue for the euro is the French economy is more than 10 times larger than Greece’s, as is its government bond market. The EUR/USD carries no risk premium for an adverse outcome in France, as evidenced by short-term fair value models, the JPMorgan strategists said.

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Euro drops below $ 1.07 : political worries in Europe

 

French Bonds Show Le Pen Risk, Not Expectation

The yield difference between French 10-year bonds and their German equivalents is about 64 basis points, and the gap with Spain’s is the smallest since 2010. However, other measures show fewer signs of stress. The yield is still just nine basis points above its Belgian counterpart

 

 

Greek borrowing costs rise as bailout worries grow. The country’s benchmark borrowing costs have spiked to their highest level of this year.

The yield, or interest rate, on Greek 10-year bonds has jumped to 8% this morning – after the IMF revealed its board is split over how much austerity the country should swallow.

That’s the highest level since last October, and puts Greek debt firmly in the ‘danger zone’.

greece-government-bond-yield

 

The Greek government has now weighed in on the ongoing row over its bailout.

Spokesman Dimitris Tzanakopoulos said the government hopes for a ‘positive conclusion’ to the long-running (and bogged down) review of the programme.

He also insisted that Athens will not swallow additional austerity measures, and still hopes to be included in the eurozone’s stimulus programme soon.

Tzanakopoulos says: 

“The government is aspiring for a deal that will lead to the country’s inclusion in the (ECB’s) quantitative easing programme.

The government’s position is clear and it has been expressed categorically … our aim is to not yield to illogical demands by the International Monetary Fund, which insists on legislating precautionary (austerity) measures after the programme ends.”

 

What’s coming up in the markets:

  • Central banks in India, New Zealand, Philippines and Thailand have meetings on monetary policy this week.
  • Trump’s administration returns to court today to defend the immigration ban, arguing the executive has broad authority to head off threats to the country
  • The U.S. Commerce Department is likely to say Tuesday that deficit in trade was little changed at $45 billion in December. The shortfall has been marked by weaker overseas sales of U.S.-made goods and stronger domestic demand for imported merchandise amid the dollar’s strong rally in the second half of 2016.
  • In the U.K., a report due Friday may show industrial activity moderated.
  • Scotland is taking its protest against Brexit to the next level with lawmakers in Edinburgh voting on whether to trigger the mechanism to leave the European Union. But the vote on Tuesday can’t stop Britain or even Scotland leaving the EU.

Stocks

  • The Stoxx Europe 600 Index climbed 0.4 percent, led by a 1.3 percent gain in the property sector.
  • Banking shares retreated for a second day after BNP Paribas SA posted fourth-quarter profit that missed estimates.
  • Futures on the S&P 500 climbed 0.1 percent after the underlying benchmark slid 0.2 percent on Monday.

Bonds

  • Yields on 10-year Treasuries were little changed at 2.41 percent after the biggest drop in more than two weeks in the previous session.
  • Greece’s two-year note yields neared 10 percent as a quarrel between the nation’s creditors over its fiscal targets boosted concern it is running out of time to complete yet another review of its bailout program.

Commodities

  • Oil slipped 0.1 percent to $52.86 a barrel after falling 1.5 percent on Monday before U.S. government data forecast to show U.S. crude stockpiles expanded for a fifth week.
  • Gold slipped 0.4 percent to $1,230.90 after advancing for three straight days to the highest level since November.
  • Nickel dropped from highest in more than three weeks amid uncertainty about Philippine supply. Industrial metals come under pressure in London from a stronger dollar.

 

 

 

 

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