The CAC index has posted slight gains in the Wednesday session, climbing 0.68 percent. On the release front, Eurozone Industrial Production climbed 0.5%, matching the estimate. There are a number of key events in the US, highlighted by the Federal Reserve rate announcement. As well, the US will release retail sales and CPI reports.
French President Emmanuel Macron is expected to cruise to a massive victory on Sunday, when France holds the second round of parliamentary elections. Polls point to Macron’s En Marche party winning as much as 80% of the seats in the National Assembly. Macron is a strong supporter of the European Union, and a Macron-Merkel alliance could strengthen the EU at a time when Brexit and nationalistic parties have undermined European unity. Macron met with British Prime Minister Theresa May on Wednesday, and with one leader heading for a massive majority, with the other clinging onto power by her fingernails, was irony that simply couldn’t be missed. Macron, who is expected to support a hard line against Brexit, stated that the EU would leave the "door open" in case Britain changed its mind. That is a far-fetched scenario, of course. As for May, she continues to exude an air of "business as usual", saying that the Brexit talks would commence as planned on June 19.
The Federal Reserve is widely expected to raise interest rates at the Wednesday meeting, so the markets will be focusing on the language of the rate statement and economic projections. The markets have priced in a rate hike at close to 100%, with an increase by 25 basis points raising rates to 1.25%. What is less clear, however, is what the Fed has planned in the second half of 2017. Analysts are predicting that the Fed will deliver a "dovish hike", meaning that together with the rate increase, the Fed rate statement will be cautious in tone, and dovish regarding additional rate hikes. Earlier in the year, three rate hikes in 2017 seemed almost a given, but currently, the odds of a September move are just 28%. There are two key items which could affect European stock markets. First, the Fed Economic Projections will detail forecasts of inflation, growth and unemployment, and most importantly, the rate hike path. With the US economy performing better in the second quarter, there’s a strong likelihood that the Fed will not moderate its rate hike projections,which is good news for the dollar. Secondly, the markets will be looking for details regarding its plan to lower the $4.2 trillion balance sheet. If the Fed outlines a plan to reduce its holding in H2, the dollar could respond positively. Another variable is the political paralysis which has engulfed Washington. With the Trump administration spending most of its energy on damage control, little progress is being made with regard to Trump’s agenda of tax reform and major spending on infrastructure. The markets are becoming more skeptical about Trump’s ability to work with Congress, and if this sentiment is shared by the Fed, it is likely to sound dovish regarding rate hikes in September or December.
