Trumps Spooks the Markets

On May 17, US markets reacted sharply after news reports that a special counsel has been appointed by the US Justice Department to investigate President Donald Trump, and that Trump had asked the former head of the FBI, James Comey, to scuttle an investigation into his former national security adviser, Michael Flynn. The reports raised questions about Trump’s ability to push through his economic agenda and added to nervousness about political stability in the US. I recently participated in a Q&A session with my colleagues in Boston, to share some insights on the risk of an impeachment process and possible market implications. The summary that follows includes comments from Paresh Upadhyaya, Director of Currency Strategy, US, Michael Temple, Director of Credit Research, US and myself. Continue reading

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3 Things the European Investment Grade Fixed Income Team Talked About Last Week

1. ECB April Meeting– A Tin of Roses

Minutes of the ECB meetings are a bit like a tin of Cadbury’s Roses sweets – there’s something for everyone inside. At first glance, there was nothing terribly exciting about the minutes of the ECB’s April 2017 meeting, released last week. But we know that it’s often the nuances of a phrase or the way something is reported that gives the biggest hints as to how the debate evolved or how Governing Council (GC) members are thinking. So a phrase like “due consideration would need to be given to adjusting the present formulation of the GC’s forward guidance” is really just saying that the ECB is likely to remove the easing bias in their language at the June 2017 meeting. Pretty much all of the discussion during the meeting was about the growth and inflation outlook. A key passage in the minutes noted that the ECB staff forecast are expecting a “relatively steep” increase in wage growth in order for the staff forecasts for inflation to be realised. We would read that phrase as being the equivalent of the ECB raising a sceptical eyebrow about the staff forecasts for wages, particularly as another report in the ECB Bulletin referenced potentially greater slack in the labour force than shown in the official numbers (and which we wrote about in last week’s blog). A failure of wage growth to increase was seen as a downside risk to the ECB’s inflation forecast. Indeed, the minutes even mentioned the possibility that “a downward revision to the inflation outlook in June cannot be ruled out”. Remember ECB President Mario Draghi has pointed to four conditions that must be met to consider a sustained pick-up in inflation, and we are not, in our opinion, close to those four conditions being met. Also of interest is a difference in opinion between Council members Peter Praet and Benoit Coeure – the latter warning that “too much gradualism in monetary policy bears the risk of larger market adjustments when the decision is eventually taken”, whilst the former is arguing that extreme caution is needed given the lack of clear evidence that wage inflation is re-accelerating. We continue to expect that small language changes will be made in June, but perhaps we might have to wait a bit longer for tapering to occur.

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3 Things the European Investment Grade Fixed Income Team Talked About Last Week

1. Euro-area Unemployment – Smoke & Mirrors

One of the pleasing signs of the Euro-area’s recovery in recent years has been the drop in the level of unemployment. Having peaked in March 2013 at a level of 12.1%, the unemployment rate has steadily fallen to its current level of 9.5%. But of course, that number hides some large differences from country to country. Spain, for instance, still has an unemployment rate of just below 19%, even if this is down from its highs of 26.9% in March 2013. The Italian unemployment rate never reached such high levels, peaking at 13% in November 2014, but it hasn’t fallen as much either, currently sitting at 11.7%. However, a recent ECB study took some of the gloss off the improvement in unemployment by suggesting that the Eurozone’s labour market is in much worse shape than the official figures suggest. Contained within the ECB’s Economic bulletin, the study noted that despite significant increases in employment, Euro-area wage growth remains subdued. It suggests that there may still be a high degree of labour market slack over and above the level suggested by the unemployment rate. The Euro-area headline unemployment rate is based on the International Labour Organisation’s definition of unemployment. A job seeker is considered unemployed if they are (1) without work; (2) available to start work within two weeks and (3) actively seeking work. But as many of us know, there are at least two categories of people: those who do not meet the last two criteria, or people who work part-time but would like to work more hours. The study suggests that about 3.5% of the Euro-area working population fall into the first category, and another 3% of the population who would like to work longer. Taking other factors into account, the study suggests that labour market slack currently affects around 18% of the Euro-area extended labour force. On this evidence, it’s not surprising that we haven’t seen any recovery in wage growth in Europe.

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Value Rally to Take Hold Again?

European Value Rally Take 2?
After a decade in the doghouse, Value Equities in Europe saw a resurgence of interest last Summer, as bond yields moved higher and investors looked for ways to play the reflationary trade. Given the high correlation between European Value and U.S. 10-year treasury yields, this lead to a 6-month value rally versus growth. Then, just as investor interest was peaking – the value rally paused in January. Year to date, the Value index in Europe has delivered just half of the broad market index (MSCI Europe). Continue reading

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Macron’s Win: Implications for Global Politics and Financial Markets

Paresh Upadhyaya is Director of Currencies, US.

The French elections are now over and did not turn out to be a key risk event that was widely feared for global financial markets. Emmanuel Macron handily won the election with 66.1% of the vote, versus 33.9% for his opponent, Marine Le Pen. The next key election event will be the French Assembly elections that will be held in June. Current polls indicate Macron’s fledgling party, En Marche, will be close to a majority, which will enhance his effectiveness in office. In this summary, I will highlight implications from the French election, the current market reaction and the overall macro/financial market implications. Continue reading

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