After yesterday’s violent gap up in stocks across the globe in response to the “expected” outcome from the French election, today the risk on sentiment has continued if to a lesser extent, with stocks in Europe, Asia all rising while S&P futures point to a higher open. Yen, gold decline, while the euro traded as high as 1.09 this morning before fading some gains; oil is up modestly.
While today’s surge may have been more muted, world stocks hit a new record high on Tuesday, with investors still cheering Macron’s victory in the first round of the French presidential election, supported by speculation about U.S. tax reform and the overnight report that Trump has conceded on the border wall, eliminating a government shutdown as a potential risk. As shown below, the MSCI All World Index has jumped to a new all time high, boosted by strong Asian markets.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.6%, hovering near its highest level since June 2015 hit earlier in the session, on its fourth straight day of gains. Japan’s Nikkei rose more than 1 percent to a three-week high aided by a weaker yen. South Korea’s also advanced 0.7 percent to its highest level since April 2015. China equities climbed from a three-month low on speculation that a selloff over concerns of a regulatory crackdown were overdone. Australia and New Zealand were closed for Anzac Day.
European stocks hovered near a 20-month high, with the Dax flirting with all time highs. The Stoxx Europe 600 index edged 0.2% higher after jumpin 2.1% on Monday to the highest since August 2015, with property and technology shares helping to underpin a global rally. French shares pulled back 0.1 percent, having risen 4.1 percent on Monday in their biggest daily gain since August 2012. Futures on the S&P 500 added 0.1 percent. The index climbed 1.1% Monday to within 1% of its all-time closing high.
These gains helped push MSCI’s world stocks index to a fresh all-time high after chalking up its biggest rise since shortly after Britain’s vote last June to leave the European Union.
Draghi statement to IMFC
- Growth in the Eurozone is firming and broadening
- There are sign of a somewhat brighter global recovery and increasing global trade
- Cannot yet have confidence that a sustained rise in inflation will materialize in a sustainable manner
- Underlying inflation has not shown a convincing upward trend
You could say he’s cautiously optimistic.
Earlier in the year, the market read the optimism as a sign of potential action to tighten but officials have fought back against that idea, and that’s what helped to cap the euro at 1.09.
“As underlying inflation remains subdued and the path of inflation crucially dependent on the prevailing very favourable financing conditions, we cannot yet have sufficient confidence that a sustained adjustment in inflation will materialize in a durable manner,” he wrote.
It’s a similar line to what he said after the March 9 ECB meeting. The next ECB meeting is April 27.
With the reliability of a finely-tuned watch, the latest release of foreign-currency reserves held at the Swiss National Bank has shown yet another record, in a sign the central bank continues to swim against the tide.
Reserves swelled to SFr683.2bn ($SFr679.3bn) in March, up by nearly SFr15bn on the previous month.
The euro now trades at SFr1.07. Deutsche Bank thinks the Swiss currency will climb much further from here, taking that rate to parity.
Among the reasons, it says the Swiss authorities may feel some pressure from the US:
The US Treasury looms large, as it is due to release its latest report on the FX policies of US trading partners sometime this month. As argued elsewhere, Switzerland is already closest to meeting all three criteria of currency manipulation. Its current account surplus runs well above 3% of GDP, and the SNB has intervened well in excess of 2% over the past year. In the past, the Treasury acknowledged the constraints on domestic asset purchases given the limits of the Swiss bond market; but such subtleties could fall by the wayside under the Trump administration. Free trade with the US is too important for Switzerland to be risked by continued FX intervention.
In addition, inflation is picking up, and the German bank disputes the idea that the franc is overvalued.
Just as everyone was finally accepting the idea of deflation and negative interest rates, inflation decides to pay a return visit. In the past week, articles with the following headlines appeared in major publications around the world:
What happened? Well, towards the end of 2015 most of the world’s major governments apparently got spooked by deflation and decided to ramp up their borrowing and money creation. China, for instance, generated the following stats in 2016:
- New loans totaling 12.65 trillion yuan, or $1.8 trillion.
- M2 money supply growth of 11%.
- Debt-to-GDP ratio jump from 254% to 277%.
In Europe, the European Central Bank ramped up its bond buying program, pumping about a trillion newly-created euros into the Continental economy:
The euro climbed to its strongest level against the dollar since mid-February as the markets reassessed the odds of a December rate rise by the European Central Bank.
A day after mildly hawkish comments from European Central Bank president Mario Draghi helped send the single currency higher, the euro tacked on another 0.9 per cent to hit a three week high of $1.0673 following a report that the ECB had discussed whether rates could rise before it ends its bond buying programme.
However, two people familiar with the discussions denied there had been any meaningful debate over the issue. One person said some members are keen for the council to consider raising the deposit rate, now at minus 0.4 per cent, before it ends its quantitative easing programme.
Against the pound, the euro was up 1 per cent at €1.1393 – a level last seen in mid-January. The currency also firmed more than 1 per cent against the Japanese yen at 122.83.
The European Central Bank meet Thursday, some really quick preview action from a few banks
- Main financing rate currently at 0%, expected to be left unchanged
- Marginal lending facility rate currently at 0.25%, expected unchanged
- Deposit facility rate currently at -0.4% and expected 9go on, have a guess) to be left unchanged
- The truce between hawks & doves will be reflected in a dovish Draghi
- Draghi will use extended QE as intended
- Expect that policy likely to be unchanged
- Watching for any sign forward guidance on rates could be dampened
- Despite likely much higher 2017 HICP they see no change to rates, nor to the size of QE, nor to forward guidance
- Perhaps the balance of risks changes to neutral
- European Central Bank is in a holding mode, assessing incoming data
- Will be no change to policy or statement
- September will bring tapering announcement
In a recent report, experts of the Amsterdam-based Transnational Institute think-tank revealed that in 2008-2015, European Union member states spent €747 billion ($792 billion) on different bailout packages for banks.
Moreover, as for October 2016, some €213 billion ($226 billion) of taxpayers’ money — “equivalent to the GDP of Finland and Luxembourg” — was lost as a result of such rescue packages.
The authors of the reports also pointed out that the Big Four audit companies (EY, Deloitte, KPMG and PWC) engaged in designing the most important bailout packages were responsible for losses.
“In cases where the bailout consultants gave poor or inaccurate advice on the allocation of state aid there have been few consequences, even when state losses actually increased as a result. Bailout consultants have often been rewarded with new contracts despite their repeated failures,” the report read.
“The firms responsible for assuring investors and regulators that EU banks were stable, the Big Four audit firms, maintain their market dominance despite grave failures in their assessment of the EU banking sector’s lending risks,” it added. Read More
A novel dilemma for the European Central Bank to contend with: above target inflation.
Prices in the single currency area have climbed by 2 per cent on the year for the first time in over four years, posing a fresh headache for the ECB’s dovish policymakers who will mark their two-year quantitative easing anniversary next week.
At the ECB’s latest meeting next Thursday, president Mario Draghi will face the task of convincing his more hawkish colleagues that the current leap in annual prices – from 1.8 per cent in January – is unlikely to be sustained having been driven by volatile energy costs. The central bank, which has been battling with more than three years of low prices, targets inflation of just under 2 per cent.
Despite the recent upsurge in inflation driven by higher oil prices Pete Vanden Houte at ING thinks inflation will begin to stabilise over the coming months. If anything, he says the ECB will opt to let inflation run above target to compensate for years of weak prices:
There is little doubt that the ECB will continue to be criticized for its loose monetary policy, especially in the core countries. But the bank will no doubt recall that the inflation target has to be reached over the medium term and for the whole of the Eurozone. If anything the ECB is more likely to err on the side of inflation, to compensate for the fact that consumer price increases have significantly undershot the ECB’s target for now 4 years in a row.
We therefore don’t see any change in monetary policy this year. However, in the third quarter, the ECB might announce its exit strategy, which in our view will probably entail a new extension of the QE program until mid-2018, but with some tapering included.
Here we go again.
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.
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.