The Weekly Update

As we start the week the market is digesting the results of the first round of the French Presidential Election which saw Emmanuel Macron and Marine Le Pen advance to the final round run-off on 7th May.  Macron is expected to win given he has now received the backing of François Fillon the Republican candidate and Benoît Hamon the Socialist candidate.  The euro has been the obvious beneficiary of the result and asset markets generally are trading with more of a risk-on bias during Monday morning trading. The 10-year OAT has rallied and the yield is trading 0.84% (at the time of writing) with the spread over bunds having tightened to ~50 bps. That said the French parliamentary elections will follow shortly in June and neither Macron or Le Pen have well established parties (in terms of number of parliamentary seats) so it remains to be seen whether the next President can win/secure support from enough seats to be able to effectively implement their policy agenda.

The ECB meeting later in the week will be a focus as investors look for signs of stimulus withdrawal from the ECB; monthly asset purchases have been cut back to €60bn from April 2017. The Eurozone April CPI flash estimate is also due on Friday which will be closely monitored: in February the reading ticked up above 2 percent although it retraced to 1.5 percent in March. The BoJ is the other central bank due to meet this week.

France, Spain, the US and UK are also due to release Q1 GDP data later in the week.  Consensus estimates expect the US economy to grow at 1.1 percent in Q1 2017 down from 2.1 percent growth in Q4. This is a big week for US corporate earnings with some of the big names such as Exxon, and Microsoft reporting. President Trump has also been on the news wires talking about some tax announcements being made but it remains to be seen if much in the way of detail is forthcoming. Hence this week is shaping up to be more eventful than last week.

The key event of the last week was Theresa May’s volte face surprising the market with a UK general election on June 8 and stating how the division in Westminster ‘risks our ability to make a success of Brexit’. This gave sterling a nice boost, until a disappointing set of retail sales numbers were announced on Friday. March retail sales ex auto fuel were particularly weak falling 1.5% mom and falling 1.4% over the first quarter which will fuel concerns about the negative impact of Brexit. The ONS noted that retail sales have made a negative contribution to economic growth for the first time since 2010. Ironically, this follows the IMF’s upward revision to its UK growth forecast earlier in the week: it forecasts that the UK economy will grow by 2% in 2017 and noted growth ‘remained solid in the UK, where spending proved resilient in the aftermath of the June 2016 referendum in favour of leaving the European Union’.

Along with the upbeat message on the UK economy the IMF also viewed the global economy with a more bullish look. Now it expects world growth to be 3.5% in 2017 and 3.6% in 2018. However they warned there may be dark clouds on the horizon. As Maurice Obstfeld, the IMF’s economic counsellor observed that ‘The global economy seems to be gaining momentum, we could be at a turning point’ but cautioned ‘even as things look up, the post–world war two system of international economic relations is under severe strain despite the aggregate benefits it has delivered – and precisely because growth and the resulting economic adjustments have too often entailed unequal rewards and costs within countries’, adding that ‘One salient threat is a turn toward protectionism, leading to trade warfare. Mainly in advanced economies, several factors – lower growth since the 2010–’11 recovery from the global financial crisis, even slower growth of median incomes, and structural labour-market disruptions – have generated political support for zero-sum policy approaches that could undermine international trading relationships, along with multilateral cooperation more generally’.

The IMF listed protectionism as one of 6 downside risks to the global economy, with others including an aggressive rolling-back of financial regulation leading to excessive risk-taking and faster than expected interest rate increases in the UK leading to financial market disruption.  However, by far the biggest concern is protectionism, with Obstfeld predicting that ‘Capitulating to those pressures would result in a self-inflicted wound, leading to higher prices for consumers and businesses, lower productivity, and therefore, lower overall real income for households’.