The Weekly Update

We enter the week with the markets calm after the win in France for Macron with a lead of over 20%, more than expected. Market reaction is limited with the Euro up slightly and French government bonds stable as movement over the last couple of weeks had already priced in the result. Elsewhere news that Russia will extend output cuts in agreement with OPEC has supported oil and a third monthly rise in China’s reserves up to $3.0295 trillion helped calm Asian forex markets.

This week the US data, a typical post Non-Farm Payrolls week, is skewed to the end of the week with PPI on Thursday and CPI and Retail sales on Friday, but we do have a number of Fed speakers throughout the week to catch the headlines as well as Mr Trump and his twitter account to contend with.

Europe has a little more action with German factory orders just announced up 1% with calls of 0.7%. Tomorrow we get German IP and Trade data as well as Italian Retail sales followed Wednesday by French and Italian IP. Thursday is the UK’s turn with the BOE announcement, expect sharply unchanged, IP, Trade and construction output. We also have the EC Commission’s Economic Forecasts but these are hardly ever mentioned let alone have an impact. Which brings us to Friday once more and German GDP and CPI, EC IP, Spanish CPI and French Non-Farm Payrolls, which may get a mention in Paris but markets hardly take notice of.

In Asia, as mentioned above, China’s reserves are up again as the trade surplus came in at $38.05 billion almost $3 billion higher than the calls while in Australia Building Approvals came in a disastrous -13.4% m-o-m but the NAB business confidence remained stable. Tuesday we have Aussie retail sales to add to the picture but the rest of the week is about Japan with official reserves and the leading index Wednesday and Trade on Thursday although we do have Singapore’s Retail sales on Friday for those who care.

Latam dominant data starts with Chilean CPI and Trade later today followed by Mexican CPI tomorrow and IP on Friday. In the middle we have Brazilian retail sales on Thursday to observe. We still don’t hold Brazilian bonds as they continue to trade rather expensive given the credit rating, but we do have sizeable positions in Mexico through the quasi sovereign Pemex and indeed the Government bonds, all denominated in US dollars. These assets have performed very well this year so far. By way of as an example the Pemex 5.5% maturing June 2044 is up in price 5.5 points since year end and at a spread of 344bp remains a long way over the fair value spread of 160bp for this Baa1 rated credit. In fact if this bond moved to fair value it would rally a further 26 points in price.

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