Wed, 26th April 2017

Anirudh Sethi Report


Archives of “germany” Tag

French election results soothe investor fears

Investors breathed a sigh of relief following the first-place showing of centrist and pro-European Union candidate Emmanuel Macron in the first round of France’s presidential elections Sunday, sending the Euro to a five-month high relative to the dollar. Populist Marine Le Pen ranked second in the voting.

Why it matters: The results make it more likely that Macron will be France’s next president, keeping France in the EU. That should have a positive impact on both French stocks and the U.S. economy.

 Paris rising: High Frequency Economics’ Carl Weinberg predicts that French stocks will rally in trading Monday, and that interest rates on French government debt will fall. France isn’t out of the woods, however. Weinberg writes that Macron will have a tough time corralling a divided Parliament to implement pro-growth reforms.

Domestic affairs: A Blackrock Investment Institute note to clients calls Macron a “business friendly” candidate that will not get in the way of Europe’s improving economy. The U.S. economy has seen the benefits of faster growth in Europe—political stability across the Atlantic is good for business here.

Caveat: David Zahn of Franklin Templeton Investments warns that “it’s not a done deal yet,” and that the push and pull of a high profile election will cause “markets to remain volatile in the run-up to the final round of voting on May 7 and potentially even beyond.”

Draghi says risks of deflation have largely disappeared

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.

Le Pen to Hold Referendum on French EU Exit in First Half of 2018 if Elected

Image result for Le PenThe first round of the French presidential elections is scheduled for this Sunday, while the run-off is set for May 7.

“Marine Le Pen said that she wanted an exit of the European Union organized with our European partners and that this departure would be sanctioned by a referendum. [Which will be held] undoubtedly in the first half of 2018,” David Rachline said.

According to Le Pen’s campaign manager, she also wants to “drastically change economic policy, while putting an end to increasing financialization and globalization of the economy.”

“We were warned of a catastrophe with the Brexit vote, the facts, however, disagree with those merchants of fear who in reality do not want us to touch this system, which grants them numerous advantages!” Rachline pointed out.

The United Kingdom’s decision to leave the European Union and the victory of Donald Trump in the US presidential election in 2016 were seen as big victories for the anti-establishment and anti-globalist movement. Le Pen’s approach seems in sync with the growing anti-globalism trend.

S&P warns EU’s rating could be hit of Brexit goes badly

S&P warns EU’s rating could be hit of Brexit goes badly
  • Standard & Poor’s on the European Union

If Brexit negotiations go badly, the EU’s AA-rating could come under pressure, S&P warns.

They say the current EU rating assumes the UK will meet its financial obligations to the EU. The problem is that those commitments aren’t legally enforceable if May decides to get really tough.

What’s the chance of that? Very close to zero but the EU rating should be under pressure in any case with the political climate in Europe and the hole Britain is about to punch in its budget.

Swiss reserves swell again to new record

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.

European Indices closes the quarter with gains today

Gains for the quarter as well

The European preliminary closing levels point to gains:
  • Eurostoxx 600 index is up 0.3% .  Third straight quarter of gains
  • France’s CAC was up 0.5%
  • German Dax was up 0.4%
  • Spains Ibex was up 0.4%
Bucking the trend today was the UK FTSE which was down -0.4%. Nevertheless it ended the quarter with gains.  That represents the 4th straight quarter of gains.
Other accolades:
  • Eurostoxx index rose by 5.5% for the 1Q which represents the best quarterly gain in 2 year.
Gains for other indices on the quarter:
  • UK FTSE +2.84%
  • France CAC +5.15%
  • German Dax +7.25%
  • Italy MIB +6.47%
  • Spain’s Ibex +11.66%

Asian companies muddle through Brexit uncertainty

Nine months after it voted in a referendum to leave the European Union, the U.K. on Wednesday formally notified the EU that it is breaking away from the single market. Next up … at least two years of negotiations toward the exit.

A chief concern for Asian financial institutions is whether the U.K. can keep its “passporting” rights, which allow lenders, insurers and other providers to sell financial services across the EU.

 A vocal presence in this respect has been HSBC, headquartered in London and jointly listed on the Hong Kong stock exchange. Chairman Douglas Flint in January told British lawmakers that his bank has a contingency to move thousands of jobs to France from London should those rights be revoked.

In a sign of the erosion of confidence in London as a European financial center, HSBC is aiming to boost its presence in Asia, which contributed 48.6% to the group’s 2016 revenue and hosts 53% of its workforce. While the bank is slashing as many as 25,000 jobs worldwide to achieve its cost savings target of $6 billion by the end of 2017, it is planning to add 1,000 employees at its Chinese retail and wealth management arm.

“We aim to grow our business in China’s Pearl River Delta and the ASEAN region, and we continue to strengthen our leadership position in the internationalization of China’s renminbi currency,” the bank said in its annual report.

KB Kookmin Bank, the flagship banking unit of South Korea’s KB Financial Group, is moving to downgrade its U.K. operations. The Seoul-based lender says there is little reason to keep its British outpost now that the U.K. is about to kick off Brexit negotiations. It has filed papers with the U.K. financial regulator to change the status of its business in the country and is awaiting a response.

WSJ: Investors in Asia turned cautious Friday ahead of a G20

Huh, the Wall Street Journal got that right …

A quiet one … I shoulda let them write the Wrap
Meeting of finance chiefs from the Group of 20
Traders are monitoring how China and Japan will react to pressure from Mr. Mnuchin to strengthen their currencies against the U.S. dollar, said Khoon Goh, head of research for Asia at ANZ. “There is a lot of interest if there will be any material changes out of the G-20,” he said.
US Treasury Sec. Mnuchin is expected to urge China, Japan, Germany and other G-20 members to keep their promise to not use their exchange rates for competitive gains
Link to the Journal, may be gated, but you get the gist.

Upcoming Events for this week

The European Central Bank was just a teaser! Plenty more central banker action this week, amongst other things:

TUESDAY 14 March 2017:
  • February industrial production, fixed-asset investment growth & retail sales
  • Inflation and retail sales data for February
  • Oh yeah … and its Federal Reserve FOMC decision day! :-D. A hike is very widely expected. And don’t miss the statement & press conference
THURSDAY 16 March:
  • BOJ announcement, likely no change (Kuroda presser to follow later)

Merkel to lay out tax retaliation plans when she meets Trump

Trump and Merkel to meet  on Tuesday

Angela Merkel will lay out her government’s response to a proposed US border adjustment tax when she meets with Trump this week.

Der Spiegel said the German government is reviewing its response including a complaint to the WTO.

Responses could include higher duties on imports from the US and allowing German companies to make their US import tax deductible, according to the report.