dinsdag 4 april 2017

SocGen: Suddenly, The Market Is Gripped In Political And Economic Nervousness

In his overnight FX note, SocGen's Kit Juckes explains why a certain foreboding feeling of political and economic nervousness abounds in market, which continue to ignore the near all-time highs in the S&P, and instead can't quite shake off the sense that something is wrong, starting with US car sales data which don't usually make big waves, but an underwhelming performance was enough to drive Treasury yields down again and concerns that the US economy is losing momentum have returned, putting a dampener on risk sentiment generally. Juckes adds that the planned meeting on Friday/Saturday between Presidents Trump and Xi Jinping is cited by newswires as another reason for nervousness in Asian markets. The upshot is that the yen's at the top of the global FX charts this morning, ahead of the dollar and then everything else, with AUD, NZD and KRW all down 0.5% against the dollar in Asia. The rand meanwhile, is down 1% overnight after S&P downgraded South Africa's foreign currency borrowing rating to BB+ from BBB-.
# US domestic car sales, are the wheels coming off? 

It's not obvious how the market escapes this nervous mood ahead of Friday's payroll data, but if we end up with an even longer period of range-bound US yields then ultimately, the urge to find yield will overpower other market emotions. It's mostly a question of biding time this week however. There's a certain amount of nervousness around ahead of the French presidential election too, despite opinion polls suggesting it's a foregone conclusion. With under three weeks to go until the first round vote, Emmanuel Macron and Marine Le Pen remain comfortably ahead of the pack but a 27bp Bund yield tells us something about the mood and the OAT/Bund spread is back out to 67bp too, while the BTP/Bund spread is out at 203bp and the drop in Bund yields means that they are keeping up with Treasuries, and the Tsy/Bund spread is still comfortably above 200bp, providing Euro bulls with no encouragement yet.
# BTP/Bund spread is above 200bp, anchoring the Euro...

The temptation is to think that French pre-election nerves are just that, and the opinion polls can't be THAT wrong. On that basis, these would be good levels to buy EUR/USD and also, EUR/GBP. Maybe the better part of valour is to go short GBP/CHF at 1.2475. The UK manufacturing PMI was a little softer, and construction PMI data are due today. The basic underlying sterling story though, is still one of a very cheap currency supported (or rather, not supported) by absurdly low real yields....