The premium investors are demanding to hold French over German 10-year debt has hit a fresh post-eurozone crisis high today – exceeding 0.81 percentage points for the first time since August 2012.
The yield gap has swollen to its highest in over four years this month, reflecting investor jitters about France’s upcoming and unpredictable presidential elections in three months’ time.
France’s 10-year bond yield – which reflects the government’s borrowing costs – leapt 7 basis points today to 1.1 per cent after latest polls show the far-right Marine Le Pen is on course to emerge as a clear winner in the first round vote held in late April.
Ms Le Pen, who has promised to hold a referendum on France’s eurozone membership, is polling at 27 per cent in the first round vote, with her two main rivals, Francois Fillon and Emmanuel Macron tied at 20 per cent, according to latest collated polls from Opinionlab.
The prospect of a Le Pen presidency has spooked French bond investors with markets warily eyeing the apparent demise of her biggest rival, the right-wing Mr Fillon.
Marine Le Pen’s French election victory odds reached their highest level of the campaign overnight and it appears global investors are starting to panic-bid protection against the consequences for French stocks…
Oddschecker indicates Le Pen’s incessant rise in popularity…
A payout of more than 100 million euros ($106 million) may be beckoning for options investors if the German 10-year yield drops to zero in the aftermath of France’s elections.
German 10-year bunds currently yield about 0.30 percent, so a decline to zero would represent a significant increase in demand for haven assets. That would mirror moves seen after the U.K.’s Brexit vote.
As Le Pen’s odds of victory in the French elections rises, so the spread between ‘risky’ France and ‘safe-haven’ Germany has soared…
Back in September, Tad Rivelle, Chief Investment Officer for fixed income at LA-based TCW, said in a note that “the time has come to leave the dance floor”, noting that “corporate leverage, which has exceeded levels reached before the 2008 financial crisis, is a sign that investors should start preparing for the end of the credit cycle.” Ominously, he added that “we’ve lived this story before.” Five months later, the FT reports that TCW, which is also the US asset manager that runs the world’s largest actively managed bond fund, has put its money where its bearish mouth is, and has eliminated its exposure to eurozone bank debt over fears these lenders are “excessively risky.”
In an interview with the FT, Rivelle said the company began to reduce its exposure to debt issued by eurozone lenders following the UK’s vote to leave the EU last June. In the first half of last year TCW, which oversees $160bn in fixed income strategies, had around $2bn invested in European bank debt. This has fallen to less than $500m since the Brexit vote, most of it in UK banks.
Rivelle, who previously was a bond fund manager at PIMCO, said his biggest concern was the number of toxic loans held by eurozone lenders, which amount to more than €1 trilion. Last month Andrea Enria, chairman of the European Banking Authority, said the scale of the region’s bad-debt problem had become “urgent and actionable”, and called for the creation of a “bad bank” to help lenders deal with the issue. Rivelle said: “The [eurozone] banking system [has] a bad combination of negative rates, slow growth and lots of problem non-performing loans. It is inherently prone to a potential crisis should global economic conditions, or European economic conditions, worsen. [These are] the preconditions of a potential banking crisis.”
Continuing his bearish bent, Rivelle added that there is a 50% likelihood of another global recession within the next two years, removing any incentive to invest in the eurozone banking sector within that timeframe. The forthcoming French presidential elections in April, which could see Eurosceptic candidate Marine Le Pen come to power, and the problems facing the Italian banking system, are additional risks for eurozone banks this year.
There is never as much detail or conviction in the Minutes as market-watchers hope for. This is the closest thing there is to guidance:
“At this meeting, members continued to expect that, with gradual adjustments in the stance of monetary policy, inflation would rise to the Committee’s 2 percent objective over the medium term as the transitory effects of past declines in energy prices and non-energy import prices dissipated and the labor market strengthened further. This view was reinforced by the rise in inflation in recent months and by recent increases in inflation compensation. Against this backdrop and in light of the current shortfall in inflation from 2 percent, members agreed that they would continue to closely monitor actual and expected progress toward the Committee’s inflation goal.”
The knee-jerk reaction in the FX market was disappointment and the US dollar fell 30 pips but it quickly rebounded back to unchanged.
On Wednesday night, controversial filmmaker Michael Moore made yet another mind-numbing prediction: He strongly suggested to late-night talk show host Seth Meyers that the Electoral College would deny President-elect Donald Trump a victory prior to his January 20th, 2017 inauguration. Moore previously stunned everyone by predicting Trump’s victory at a time when the analytics — and the political-media establishment — all favored Hillary Clinton.
There is a mechanism for what Moore is suggesting, however unlikely, and it exists within the Electoral College itself in the form of a decentralized, existential bunch of wonks. And, historically speaking, they have never actually asserted their power and changed a presidential election. They’re called ‘faithless electors,’ people nominated to represent the will of the people but who may, constitutionally speaking, revoke their duties. So far, there are seven ‘faithless electors’ who have defected from voting for Trump in the Electoral College. Count ‘em, seven — out of 270. That’s not a lot, obviously, but the mind balks at how quickly momentum could swing against a candidate that garnered over 2.5 million fewer votes than his challenger in the popular vote.
Here are three reasons why I believe Trump could, incredibly, still lose this election:
Trump has revealed himself to be fully in support of the establishment.
With his selections for pretty much the full gamut of cabinet positions, Trump has revealed himself to be an establishmentfigure, which is exactly the perception he ran against. Will his voters turn against him? Mostly no (or, at least, not yet). Will the other 74.5 percent of Americans who did not support him reject his victory? Possibly. Will this alone cause Trump to end up losing the vaunted Electoral College? No. Of course not! That’s why there are two more reasons.
Hillary won the popular vote by over 2.5 million.
This is fact. The number is actually growing. It’s historic; it’s actually disgusting if one is prone to be disgusted by electoral politics. Will this alone — or in conjunction with reason one — cause Trump to lose? No. Of course not! That’s why there’s one more, important, reason.
In case Italian voters approve constitutional changes in a referendum, it will stimulate the European integration process as a “yes” vote will boost positions of Prime Minister Matteo Renzi’s center-left government in Europe against the Italian populists and right-wing parties, Alessandro Maran, a lawmaker from Renzi’s Democratic Party (PD), told Sputnik on Saturday.
On Sunday, Italy is due to hold the referendum on constitutional changes primarily aimed at eliminating equal powers of two parliament’s chambers and thus avoiding political instability and frequent fall of governments. As far as Renzi staked his future on the outcome of the referendum, the opposition tried to use a vote on reforms as a tool to express overall dissatisfaction with PD policies and the prime minister’s record in office. “If, as I hope, the Yes camp prevails, Renzi’s government and PD will play a vital role in Europe. It would be a great opportunity for our country and could bring the European integration process back on track,” Maran, the Senate’s Constitutional Affairs Committee member, said. Polls cannot be published in the last two weeks of campaigning, but most polls before this time limit predicted that Renzi-lobbied reforms were unlikely to pass. A poll conducted by Ixe for Agora-Rai3 TV station showed that 42 percent of voters did not want constitutional changes, 37 percent are in favor of them, and over 20 percent of respondents remained undecided.
Around the middle of the year, St. Louis Federal Reserve President James Bullard revealed his new economic approach. He argued that during economic phases, or paradigms, economic relationships wee fairly stable, such as unemployment and inflation.
We cannot predict when a new paradigm emerges. Economic forecasts must assume the continuation of whatever is the current paradigm. Bullard accepts the need for one more interest rate, perhaps next month to bring the Fed funds to a neutral target within the existing set of economic relationships.
Investors see two trends which could very well portend a changing paradigm. First is reflation. It was clear that whichever candidate won the US presidential election, fiscal policy was set to turn more accommodative. Trump promised a large stimulus package, which included tax cuts as well as spending increases. The size of the package he talked about during the campaign, and his economic advisers are maintaining after the election, is on par with the February 2009 measures when the economy was in the throes of the credit-crisis-induced recession.
The limits of monetary policy were gradually becoming recognized and emphasized by economists and policymakers. A few countries, such as Canada, led by a new Liberal government, provided modest fiscal support. The UK is also widely expected to increase government spending. Investors anticipate that Hammond, the UK Chancellor the Exchequer, will outline an increase in infrastructure investment (rail and roads) in the Autumn Statement on November 23. Trump’s campaign rhetoric stands out for its size and the fact that it is for a US economy that is already growing near trend, which the Federal Reserve estimates near 1.8%. The inflationary implications of provided significant stimulus under such pre-existing conditions are not lost on investors.