It was supposed to be Risk Macr-ON after Emmanuel Macron's avalanche victory in Sunday's French presidential elections; instead as some banks cautioned and as we showed early in the overnight session, the market reaction has been the opposite with the victory fully priced in (and more) and especially in the European currencies and stocks, as well as S&P futures, we have seen a modest episode of Risk Macr-Off. Treasury yields are falling 1-1.5bps in flattening fashion with the 10y at 2.33%. WTI crude oil has largely traded sideways and was modestly lower in early morning trade despite another monster jawboning session from the Saudi energy minister as well as Russia, both signaling they could extend production cuts into 2018, indicating that what little credibility OPEC may have had is virtually gone.
After climbing for five of the past six days in the buildup to the election of Emmanuel Macron, overnight the euro succumbed to "selling the news" and after climbing above the "psychological" 1.10 level after Macron’s victory investors booked profits. While the common currency rose to $1.1023 during early Asia trading, further filling the gap following the U.S. elections in November, with that move taking it more than 2.7% higher since the first round of the French elections, subsequent fast-money names unwound part of their longs. That saw the currency fall as much as 0.6 percent to $1.0936 in the European morning.
Discussing the Euro move, SocGen's Kit Juckes said that "the Euro went up a bit, down a bit and ended pretty much where it was last week. It faces two short-term challenges. The first is that the FX market has moved a good way further in recent days than the bond market, with the Treasury/Yield spread not very different from where it was when EUR/USSD was under 1.08. Bunds need to catch up with the currency. The second hurdle is positioning. CFTC data show the smallest speculative Euro short in 3 years. That’s still a short position, of course, so much more of a short-term hurdle than a reason for a deep correction to lighten positions. A period of choppy trading is likely for now."
While the Euro's reaction was perhaps predictable, Macron’s decisive triumph over Marine Le Pen will strengthen the EU, according to Bloomberg,
and deal a blow to the populist wave that has roiled western
democracies for the past year. But the scope for a relief rally was
limited after market gains in the buildup to Sunday’s vote. Global
stocks are trading at the highest ever, and U.S. equities also closed at
a record last week after better-than-forecast data on American jobs.
The unwind in the Euro prompted concerns about broader risk assets, and as a result the initial kneejerk reaction in European stocks and US equity futures, has faded entirely and while Asian stocks rose, European equities and S&P futures fell with investors having more than fully priced the result in.
With the political risks that have dominated European markets in a year packed with elections seen receding, the European Central Bank is expected to have more room to tighten policy as the euro zone economic recovery gathers pace. Poor Chinese trade data released overnight hurt risk sentiment.
Following a strong start in Asia, European equities began on the front-foot, before slipping into negative territory in a 'buy the rumour, sell the fact' fashion with the CAC 40 trading lower by 0.5%. In terms of broader performance across the continent, material names underpefrom in the wake of disappointing Chinese trade data which saw imports and exports fall short of expectations (Copper imports - 22.9% Y/Y).
- Exports (CNY)(Apr) 14.3% vs. Exp. 16.8% (Prey. 22.3%)
- Imports (CNY)(Apr) 18.60% vs. Exp. 29.30% (Prey. 26.30%)
- Exports (USD)(Apr) Y/Y 8.00% vs. Exp. 10.40% (Prey. 16.40%)
- Imports (Apr) Y/Y 11.9% vs. Exp. 18.0% (Prey. 20.3%)
"Investors will now go back to the basics of watching the underlying euro zone economic and inflation data and what implications it may have for monetary policy," said Iain Stealey, a fixed income portfolio manager for JPMorgan Asset Management.
Eslewhere, the dollar strengthened, Treasuries held steady and futures for U.S. stocks pointed lower. Oil swung as the Saudi oil minister said OPEC’s supply cuts will be extended into the second half of the year and possibly beyond. Energy names have been lifted by further OPEC and non-OPEC jaw-boning as Russian and Saudi rhetoric has revealed a desire to extend output cuts beyond 2017 if needed, even as China's oil imports dropped from a record as independent refiners slow buying and both WTI and Brent trading modestly lower at publication time.
Looking at global equity markets, Japan’s Topix soared 2.3% to the highest since December 2015 as investors played catch-up after a three-day holiday. South Korea’s Kospi jumped 2.3% to a fresh record ahead of Tuesday’s election. Meanwhile, the selloff in China continued, with the Shanghai Composite Index dropping 0.8% to the lowest level since October, despite data showing overseas shipments held up in April. The Stoxx Europe 600 slipped 0.2 percent in London, dragged down by miners. Futures on the S&P 500 were down 0.2% .
The yield on 10-year Treasury notes was flat at 2.35 percent. French benchmark yields fell two basis points to 0.82 percent.
Oil prices, which hit almost six-month lows last week on worries about a global glut of crude, edged up on prospects of output cuts agreed by the OPEC producers group and others could be extended. Brent futures rose 38 cents to $49.48 a barrel.
Gold rose 0.3 percent to $1,231 an ounce. Copper prices fell 1.4 percent to four-month lows around $5,015 a tonne as Chinese trade data showed April imports of the metal dived 30 percent from a month earlier.
Bulletin headline Summary From RanSquawk
- French Presidential Candidate Macron became the President Elect after he won the 2nd round run-off
- Oil up as Russian and Saudi rhetoric has revealed a desire to extend output cuts beyond 2017 if needed.
- Looking ahead, highlights include comments from Fed's Bullard and Mester.
Global Market Snapshot
- S&P 500 futures down 0.1% to 2,395.25
- STOXX Europe 600 down 0.2% to 393.60
- MXAP up 1.4% to 150.67
- MXAPJ up 0.8% to 488.52
- Nikkei up 2.3% to 19,895.70
- Topix up 2.3% to 1,585.86
- Hang Seng Index up 0.4% to 24,577.91
- Shanghai Composite down 0.8% to 3,078.61
- Sensex up 0.4% to 29,966.27
- Australia S&P/ASX 200 up 0.6% to 5,870.89
- Kospi up 2.3% to 2,292.76
- Brent Futures up 0.7% to $49.46/bbl
- Gold spot up 0.2% to $1,230.83
- U.S. Dollar Index up 0.1% to 98.78
- German 10Y yield fell 1.1 bps to 0.407%
- Euro down 0.3% to 1.0961 per US$
- Brent Futures down 0.1% to $49.06/bbl
- Italian 10Y yield fell 8.6 bps to 1.872%
- Spanish 10Y yield rose 2.9 bps to 1.587%
Top Global News From Bloomberg
- Emmanuel Macron pledged to heal France’s rifts after his victory over Marine Le Pen in the presidential election, saying that he’ll work to address the concerns that were exposed during one of the most divisive campaigns of recent history
- Saudi Arabia and Russia signaled they could extend production cuts into 2018, doubling down on an effort to eliminate a supply surplus just as its impact on prices wanes
- Sinclair Broadcast Group Inc. is close to buying Tribune Media Co., a deal made possible after the Federal Communications Commission voted last month to ease a limit on TV-station ownership in the U.S.
- KKR & Co. is in talks with Toshiba Corp. about a preemptive bid for the Japanese company’s memory chips business that would accelerate completion of a sale and end negotiations with other potential acquirers
- Akzo Nobel NV rejected PPG Industries Inc.’s third takeover bid, saying its own breakup strategy is superior and raising the prospect that the U.S. rival will take the $29.5 billion offer directly to the Dutch coating and chemical company’s shareholders
- JD.com Posts Surprise Profit as Chinese Consumption Strengthens
- Buffett Confronts Search for Next Big Thing After Missed Chances
- Malone’s Liberty Global Pares Growth Target on U.K. Slowness
- Western Digital CEO Said to Plan Japan Trip for Toshiba Chip Bid
- S. Africa Approval of Bayer-Monsanto Deal Rests on Liberty Sale
- Einhorn, Gundlach to Speak at Sohn Investment Conference Monday
- Sinclair Said Close to Buying Tribune for About $45 a Share
- TPG Group Bids $2.1 Billion for Sydney Morning Herald Owner
- Southwest Braces for Upgrade of 30-Year-Old Reservations System
- Delta Is Said to Consider Delaying $3 Billion Airbus Order
Asia equity markets traded mostly higher following digested mixed US jobs data and the French Presidential election results where Macron triumphed as expected. ASX 200 (+0.5%) was led by commodity-related sectors after oil rebounded from last Friday's lows to approach USD 47/bbl to the upside, while Nikkei 225 (+2.4%) surged as it made up for lost ground following its 5-day weekend. Elsewhere, Shanghai Comp (-0.8%) and Hang Seng (+0.3%) were mixed as the mainland underperformed after the PBoC refrained from open market operations and following the latest Chinese trade data in which Exports and Imports fell short of expectations. Finally, 10yr JGBs were lower amid a mostly positive risk sentiment in the region, while the BoJ's Rinban announcement was also for a relatively paltry total amount of JPY 370bn.
Top Asian News
- Tycoons From China Plant Money Management Flags on Wall Street
- KKR Said in Talks With Toshiba for Preemptive Bid for Chips Unit
- China End-April Forex Reserves at $3.0295t; Est. $3.0200t
- China Said to Consider Merging 8 Companies Into 3 Power Giants
- India Said Poised to Unveil New 10-Year Bond This Week
Focus in European trade has largely centred around the materialisation of the expected victory for Emmanuel Macron in the second round of the French Presidential election. European equities began on the front-foot, albeit modestly so, before slipping into negative territory in a 'buy the rumour, sell the fact' fashion with the CAC 40 trading lower by 0.5%. In terms of broader performance across the continent, material names underpefrom in the wake of disappointing Chinese trade data which saw imports and exports fall short of expectations (Copper imports - 22.9% Y/Y). Elsewhere, energy names have been lifted by further OPEC and non-OPEC jaw-boning as Russian and Saudi rhetoric has revealed a desire to extend output cuts beyond 2017 if needed. In fixed income markets, Bunds have been supported throughout the session alongside the downtick in equities while French paper benefitting from yesterday's election result. Recent talk has suggested that OATs are likely to see a return of cash back into OATs from Asian investors. Additionally, the FR/GE spread has been relatively stable at this stage of the session with not much left on the data docket for investors to digest.
Top European News
- Buy Bayer Before Rights Issue, Co. May Raise Forecast: Jefferies
- European Miners Lead Stoxx 600 Lower; Macquarie Sees Opportunity
- U.K. House Prices Post First Quarterly Decline Since 2012
In currencies, it has been a rather uninspiring morning in FX, but one which highlighted the fact that much of the EUR buying towards the end of last week was on the anticipated French election result. We may have seen 1.1000 breached, but life above this level will be hard-fought until we get some fresh drivers to inspire fresh longs against short term differentials From the USD perspective, some will argue that moderation may take us lower than 1.0900-1.0850, some of the EU data run of late suggests ECB policy change is perhaps a little sooner than communicated by Draghi and his colleagues — Germany would agree. GBP has had a positive morning, maintaining pressure on 1.3000 against the USD, but watching EUR/GBP strong interest to sell above 0.8500 now sees a fresh push for the low 0.8400's. House price data this morning was of little consequence, but Super Thursday is the focus from here.
Commodity prices are lower across the board, but this does not paint the whole picture. From a risk perspective, one does not have to go too deep into the impact of the Macron victory in the French elections this weekend, further dampening precious metals. Losses in Gold on the modest side, but we are closer to USD1200 than the highs seen in mid Apr. The next support we see is just under USD1210.00. Silver has already tested its respective support point at USD16.20 and holds so far. Base metals still trading off China data and supply concerns, with Copper now delving into the support zone at USD2.45-50. Oil prices recovered sharply off their lows seen last week, but have eased off better levels despite more encouraging talk of an output cut extension. The pick-up in activity in the US and rising rig count temper this.
Looking at the US this afternoon is the April labour markets conditions index. Bullard and Mester will be today's Fed speakers.
US Event Calendar
- 10am: Labor Market Conditions Index Change, est. 1, prior 0.4
- 8:45am: Fed’s Mester Speaks at Chicago Council on Global Affairs
DB's Jim Red concludes the overnight wrap
Europe's ability to maintain a healthy relationship was enhanced last night by Macron's large 66.1%-33.9% victory over Le Pen. Turnout was around 75% which is lower than previous elections but the result was decisive. Le Pen conceded defeat shortly after the exit polls were released while world leaders including UK PM May, German Chancellor Merkel and US President Trump have been quick to congratulate Macron on his victory. The new President-elect – who will be the youngest ever elected French president - has also addressed his supporters outside his campaign headquarters in which he pledged to unite the rifts in France and do “everything in the next five years so that they have no more reason to vote for extremes”.
In terms of the next steps, Macron will now have to name a Prime Minister with parliamentary experience, who will lead the lower-house election campaign and then manage the daily business of parliamentary politics. Macron mentioned that his PM and government will be revealed after the inauguration that needs to happen by May 14th. Our economists in France highlighted in their Focus Europe piece on Friday that recent electoral results and polls suggest that Macron’s party could be the main party in the French lower house post the June elections (held from the 11th to 18th). An outright majority for his new party “En Marche!” appears numerically possible. If not, they also suggest that a majority could be reached with the participation of moderate centre-left and/or centre-right MPs who have already expressed their preparedness to govern with Macron in such a situation.
The reaction in FX markets this morning has been muted for the most part which isn’t hugely surprising following the first round result and the extent to which last night’s outcome was already priced in. The Euro was at best up +0.23%, touching an intraday high of 1.102, but it’s since fallen back to 1.098 as we go to print and about -0.20% versus Friday’s close. In Asia equity markets with the exception of China are firmer. The Nikkei is +2.25% (although that reflects some catch up from last week after markets were shut in Japan on Friday), with the Hang Seng +0.37%, Kospi +0.674% and ASX +0.41%. The Shanghai Comp is -0.92% after export growth was reported as slowing more than expected in April. Gold is little changed while WTI Oil is +1.38% and extending Friday’s rally with the boost this morning coming after Saudi’s oil minister said OPEC production cuts will likely be extended into the second half of the year. Futures are little changed. It’s worth noting also that today is a national holiday in France.
Coming back to the election theme, as it stands right now, the margin of victory for Macron is even greater than that suggested by the recent polls. In fact this has been a bit of a recurring theme for European elections of late. Indeed if you include the two French presidential elections (rounds 1 and 2), then the last six elections in Europe have all seen the nationalist candidate underperform relative to what the polls suggested. We’ve obviously seen this with Le Pen in the two French elections, while the Dutch General election back in March saw Geert Wilders’ Party for Freedom movement perform worse than expected (taking home 13.1% of the votes compared to the polling average of 14.1%). The same can also be said for the Freedom Party in Austria back in the December Presidential election, as well the recent Finland Municipal Election (in which the Finns Party underperformed relative to polls) and Bulgaria’s Parliamentary Election (in which the United Patriots Party underperformed). An interesting trend.
Meanwhile, much of the other weekend news concerns other European politics. Over in Germany Chancellor Merkel’s CDU party was given a big boost following victory over Schulz’s SPD party in the Schleswig-Holstein state election (had been an SPD-led coalition since 2012). The result was a surprise victory for the CDU with preliminary counts estimating the party to have taken 33% of votes (from 30.8% in 2012) versus 26% for the SPD (from 30.4%). Significantly, this makes for positive momentum for the CDU going into next weekend’s big North-Rhine Westphalia state election (the most populous state and SPD- coalition run). Recent polls for this state election have proven to be too close to call. Elsewhere, in Italy two of the last three opinion polls have shown the 5SM party to again have fallen behind the PD (Democratic Party). The polls, covering May 2nd-4th from Ipsos, Ixe and SWG show the average lead for PD of 0.9%. Clearly it’s extremely tight however and well within the margin of error but go back to mid-March to early April and the 5SM was holding a lead or anywhere from 2%
to 7% over the PD so there has been a bit of a shift.
Moving on. Before we look at the week ahead, a quick wrap-up now of Friday’s session. For those that missed it, the main focus of attention was the NFP print in the US which came in at a better than expected 211k (vs. 190k expected). Revisions to prior months were fairly insignificant at just a cumulative -6k over the last two months. Private payrolls also rose 194k in April, partly due to a rebound in employment growth in the previously weather-impacted leisure and hospitality sector. Away from that the labour force participation rate nudged down one-tenth to 62.9% while the U-3 unemployment rate was the biggest surprise after falling to 4.4% (from 4.6%) compared to expectations for a rise to 4.6%. That is now the lowest rate since May 2007 and a tenth below the Fed’s most recent year-end target. The broader U-6 measure also declined, by three-tenths to 8.6%. In terms of wages, average hourly earnings were up +0.3% mom in April as expected however the combination of base effects and downward revisions to earlier data saw the annual rate fall one-tenth to +2.5% yoy.
Markets weren’t hugely moved by the data. Treasury yields spiked and then dropped in the moments following the report but by the end of the day were pretty much flat at 2.350%. The Greenback was a shade weaker with the US Dollar index finishing -0.15%. Meanwhile in equity markets the S&P 500 closed +0.41% but this was more to do with the rebound that we saw across the commodity complex than anything else. After we had reported WTI Oil plummeting below $44/bbl in the Asia session on Friday, energy prices staged an impressive rebound into the close with WTI actually ending the day up +1.54% at $46.22/bbl – an intraday high-to-low swing of well over 6%. That rebound appeared to be technically driven rather than from any fundamental data or news. Industrial metals were also better off for the most part on Friday with Copper (+0.76%), Zinc (+0.51%) and Nickel (+1.39%) all firmer, although Iron Ore was again the exception after suffering its second consecutive 5% daily decline. Prior to this in Europe we’d seen equity markets finish firmer heading into Sunday’s election with the Stoxx 600 +0.65% and CAC +1.12%. Peripheral bond yields were also 4-9bps lower which compared at a 2.4bps rise for 10y Bund yields to the highest (at 0.418%) since March 21st.
Finally there has also been a decent amount of Fedspeak to sift through. On Saturday San Francisco Fed President Williams reiterated his view that 3 to 4 rates hikes this year remains appropriate while at the same time noting that the April employment report was further confirmation that Q1 GDP was an “aberration”. St Louis Fed President Bullard said that he wouldn’t oppose one more rate hike this year and that the Fed should start trimming its balance sheet “maybe sometime in the second half of the year”. The Boston Fed’s Rosengren emphasised also his desire to start shrinking the Fed’s balance sheet “relatively soon”. There was nothing particularly relevant from Fed Chair Yellen’s speech.
Looking at the week ahead now, this morning in Europe the early release comes from Germany where we’ll get March factory orders data, followed then by house prices data in the UK and the Sentix investor confidence reading for the Euro area in May. The only data in the US this afternoon is the April labour markets conditions index. Kicking off Tuesday will again be Germany where March trade and industrial production data is due. In France we’ll also get the Bank of France business sentiment reading while in the US in the afternoon it is quiet again with the April NFIB small business sentiment reading, March JOLTS job openings and March wholesale inventories the only data due. Kicking off Wednesday is China where we’ll get April CPI and PPI prints. In France trade data and industrial and manufacturing production reports are due. Over in the US on Wednesday we will get the April import price index reading and April monthly budget statement. In Asia on Thursday the lone release is from Japan where we get the March trade balance. In the UK we then get industrial and manufacturing production for March along with the latest trade balance. The Economic Commission is also due to release its latest economic forecasts while around lunchtime we’ll get the BoE policy meeting outcome and latest inflation report. In the US on Thursday we are due to get PPI and initial jobless claims data. It’s a busy end to the week on Friday. In Germany we get Q1 GDP and April CPI while Euro area industrial production for March is also scheduled. We finish the week in the US with the April CPI report, April retail sales figures and first look at the May University of
Michigan consumer sentiment reading.
Away from the data this week’s Fedspeak consists of Bullard and Mester today, Kashkari, Rosengren and Kaplan on Tuesday, Rosengren on Wednesday Dudley on Thursday and Evans and Harker on Friday. ECB President Draghi is also due to speak on Wednesday while the BoJ minutes from the April meeting are also due Wednesday. BoE Governor Carney speaks after the BoE meeting. Away from this US Secretary of State Rex Tillerson is due to meet Russia Foreign Minister Sergei Lavrov on Wednesday. G7 finance ministers also meet on Thursday for a threeday meeting. Earnings wise we’ve got 39 S&P 500 companies due to report and 100 Stoxx 600 companies scheduled.
