Market movers today
Today is a very quiet day in terms of economic data releases. We get Danish CPI for May, which we expect fall to 0.9% y/y from 1.1% in April due to a reversion of package holiday prices after the surge in April (Easter effect ), lower fuel prices and base effects from food prices.
Focus on the outcome of the UK and French elections. See below and our update on the UK election: Research UK: Hung parliament adds government risk premium to GBP, 9 June 2017.
The main event this week is the Fed meeting on Wednesday where in contrast to the consensus expectation and market pricing we think the Fed will stay on hold and instead make an announcement on balance sheet reduction.
Selected market news
Emmanuel Macon and his party La Republique en Marche won a sweeping victory in the first round of the French parliamentary election yesterday . According to polls Macron’s party is on the way to win a clear majority in the French parliament with 70% of the seats when the second round of the election is held on Sunday. The Socialist party of Francois Hollande faced a humiliating defeat getting only 10 to 14% of the votes, which is likely to give them only 15-25 seats down from 284 seats currently. The National Front led by Marine Le Pen also suffered a poor election with only 13.5% of the vote, which would only add a couple of seats compared to today.
The result will give Macron a strong mandate for reforms in France and will put France in a role to strengthen the EU in alliance with Germany’s Angela Merkel, who is again leading polls for the German election on 22 September. The latest German polls show a 14 -15 point lead for CDU/CSU over SPD. Macron’s first test will be his proposed labour market reforms, which will encourage flexible company-based agreements between businesses and employees instead of industry-based deals. The reforms are likely to face strong resistance from the unions, which will be weakened by such a move.
In the UK some of The resa May’s key ministers are working for a softer Brexit. With May clearly weakened after the UK election her vision of a ‘clean break’ is no longer on the table.
Stock markets finished on a strong note on Friday apart from US tech stocks (Nasdaq down close to 2%). Asian stock markets have traded mostly lower overnight , though.
The bearish tone in bond markets on Friday continued overnight in Asia ahead of the Fed meet ing this week. While the market is pricing a high probability of a Fed hike this week (around 90%) the rate path priced after that has become very subdued with the next hike not fully priced until mid-2018. We look for the Fed to skip hiking this week (and instead announce a plan for balance sheet reduction) but to hike in both July and December, see also Weekly Focus.
