France may seal the fate of the EU

18 April, 2017

France may seal the fate of the EU

This week the market sentiments will be orchestrated by speculations of the outcome of the France presidential race. The high uncertainty in the election outcome will surely curb any attempts Euro makes to rise and will affect the fixed-income market, possibly fueling a further fall in bond yields due to the increased demand.

The course of the risk aversion has been clearly traced in the defensive assets dynamics, such as Gold and the Japanese Yen. A spate of factors, including mediated confrontation between the US and Russia in Syria, the US bombing in Afghanistan, the elections in France and Trump’s statements regarding the Dollar – this all urges investors to restrain their yield appetite. It’s wise to consider buying Gold, Yen and the Swiss franc from the current levels, but we should be alert to pullbacks as a profit taking move on the investors part.

The illusion of excellent performance of the US economy has been skewed by the release of spending data which stoked the uncertainty in the bulls camp, wagering on the faster rate hikes by the FED. The core CPI grew by 2% YoY falling short of the expected 2.3%, while retail sales sank by 0.2%, which was in line with the forecasts. However, lacklustre data for the first quarter is offset by upbeat figures of leading indicators, such as consumer confidence and initial unemployment benefits, which allow investors to remain optimistic about the summer FED meeting. The index of consumer confidence from the Conference Board showed an increase to 125.6 points in March, being at the peak of 17 years, providing hope that the reports on inflation and the sales for the next two months will not confirm a negative trend in the economy.

The “bullish” optimism in the US currency was significantly undermined. Falling to the support level of 100 after Trump’s comments about the dangers of strong Dollar, the index won back losses on Friday despite the weak data. Sales have resumed on Monday. The supposed weakness of the Euro makes it difficult to assess the scale of exodus on the Dollar, but it is expected that the Dollar index will be able to defend the support level 100, given its Friday reaction.

The European markets are busy assessing the outcome of the first round of the presidential elections in France, where the main struggle unfolded between the representative of the National Front Party Le Pen and the left candidate Emmanuel Macron. If the right party wins, the financial markets will face a serious test for strength, as among the electoral promises of Le Pen is the organisation of the referendum in France on the withdrawal from the EU. At the beginning of April, Makron and Le Pen almost equalled in the presidential race, which is causing serious fear among investors that France can repeat Britains decision. Uncertainty increases the demand for fixed income securities – since March, the yield on French 10-year bonds has fallen from 1,113 to 0.922 points, and the yield of German bonds has fallen more than threefold – from 0.450 to 0.188 points.


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