Market movers today
We kick off the week with German ifo business survey for April this morning. The forward-looking expectations index took a big hit in March, and consensus looks for a small further decline in April.
During the week focus will not least be on the Riksbank meeting on Thursday, where a first repo rate hike is in play.
On the global front this week we get Euro inflation for April on Friday, where we look for a new high in the headline index above 8% y/y. US GDP for Q1 released on Thursday is expected to drop to 1.0% q/q AR from 6.9% q/q AR in Q4 2021. Focus will also continue to be on the development of the
Shanghai and Beijing covid outbreaks.
The Fed has entered the black-out period so we will get no further communication ahead of the May 4 FOMC meeting where a 50bp hike is widely expected.
The 60 second overview
French election: Emmanuel Macron won the run-off against Marine Le Pen, making him the first incumbent president to win re-election in France since Jacques Chirac 20 years ago. However, during his second term Macron is facing increasing headwinds, both from the economy and political fragmentation. With only 58.5% of voters endorsing him for a second term (compared to 66% in 2017), he has to govern a divided country and the weaker mandate could make it challenging for Macron to push ahead with his ambitious reforms of the pension, health and education systems. To what degree he can implement his plans will depend on parliamentary elections held on 12 and 19 June. Should his party and allies fail to get a majority in the National Assembly, this could pave way for a ‘cohabitation’ government (in which President and PM hail from different parties), which will make addressing fiscal vulnerabilities and structural challenges more difficult in our view.
Market round-up: Stocks dropped sharply on Friday as S&P500 shed 2.8% with the risk-off move weighing on US bond yields this morning. Oil prices have dropped from USD107 per barrel on Friday to USD 103.7 this morning. EUR/USD is broadly flat from Friday.
China covid outbreak: Symptomatic cases seem to be trending lower in Shanghai with an average of 2000 in the past two days down from a peak around 3,500. Deaths have been rising and hit 51 on Sunday. The strict lockdown continues this week. Vice-premier Sun Chunlan said Shanghai had to be resolute, because a prolonged battle against the virus could exhaust social resources. Beijing is also in focus now as 14 symptomatic cases were detected yesterday after the authorities said the virus had been spreading undetected in the city for about a week. It fuels concern that Beijing could be next to see a widespread lockdown.
ECB: The President of ECB Christine Lagarde said on Sunday that while both Europe and the US are struggling to contain inflation they are also “facing different beasts”. Lagarde said 50% of the increase in Eurozone inflation stemmed from a surge in energy costs and that “If I raise interest rates today, it is not going to bring the price of energy down”.
Equities: Equity markets were very negative on Friday with both the European and US cash session ending at day lows. The sell-off was rather broad based across sectors while value made another day of outperformance vs. growth. Valuation of long duration stocks continue to adjust lower despite short-term earnings outlook holding up relatively well. Growth stocks are the worst performing style bet year to date with an underperformance vs. value of 15%. Uncertainty crept higher on Friday with VIX moving close to 30. In US Dow -2.8%, S&P 500 -2.8%), Nasdaq -2.6%) and Russell 2000 -2.6%.
The negative sentiment has carried over to Asia this morning with all indices lower led by China and new Covid challenges. This time around centred on Beijing. European futures down 1-2% this morning while US futures are down 0-1%.
FI: Following re-election of Emmanuel Macron as president of France, we expect the 10Y OAT-Bund spread to move 40bp as Macron’s election will keep the focus on more European integration. We still think that ECB is too aggressively priced especially in 2023 and there is value in buying e.g. 2Y-3Y Germany and France given the massive roll-down.
FX: EUR/USD initially bounced 50 pips on the French election result before falling somewhat back again; overall a fairly modest move compared to the embedded risk of option market pricing. Otherwise, last week ended in a broad setback to high-beta currencies with notably AUD, GBP, NZD, CAD and NOK all trading poorly vs the USD. CNH has weakened considerably over the past week.
Credit: The high level of uncertainty led to a negative session in credit markets on Friday, closing the week with with Itraxx main 3.1bp wider at 81.9bp, while Xover was 11.4bp wider at 387.5bp.
Nordic macro
No key releases today but highlight of the week will be the Riksbank meeting on Thursday.
