Ahead of Central Bank Meetings, Politics Dominates

<br /> Ahead of Central Bank Meetings, Politics Dominates – Marc to Market<br />


The US dollar is trading within its pre-weekend range against the
major currencies as participants await the central bank meeting starting in the
middle of the week. 
 The Federal Reserve, Bank of
England, and the Bank of Japan meet.  Only the Fed is expected to hike
rates, but given the disappointing growth and softening of the preferred core
PCE deflator (February through April), there is talk
of a dovish hike.  
Meanwhile, politics is front
and central. 
 UK Prime Minister May announced a
cabinet reshuffle over the weekend that gave two of her former rivals (Gove and
Leadsom) join the cabinet, while she lost two of her close advisers.  She
faces the backbenchers in Parliament today.  There is great uncertainty
whether May survives as Prime Minister, but it is not clear either who would
replace her and if they have greater support about the Tory base.  Brexit
negotiation was to begin shortly, and it is not clear if they will go
forward and if and how the newly chastened government’s position will be
In France, Macron’s new
party (Republic on the Move) appears to have won a little more than 31% of the
vote, suggesting that in the second round it can secure 415-455 seats in the 577-seat parliament.
 It polled about 10% more than the
center-right Republicans, the party from which the Prime Minister hails.
 The Socialists were decimated.
 It will likely see the number of seats it controls fall to 20-30 from
331.  Marring the results a little
was the extremely low turnout.  Nevertheless, Macron efforts to reshape
French politics and economics took a step forward.  His signature program
is labor market reforms, which seek to break the tradition of industry-wide settlements,
will go full steam ahead.  Macron
wants the measures ready before the end
of the quarter.
There were two political
surprises over the weekend.
  First, Italy had local elections in
around 1000 cities in the last flurry ahead of the national elections, which
must be held by next spring.  There had been some movement toward
elections later this year, but the political compromise between the four
largest parties unraveled last week.   Hobbled by internal strife, the
Five Start Movement (M5S) did particularly poorly, leaving it in a weak
position to compete in the second round on June 25. Investors responded
positively to the electoral developments.  Italy’s 10-year bond yield is
off six-seven basis points to bring the one week decline to 25 bp, and near 2%, it is near the lows for the
year. Its premium over Germany has narrowed 20 bp over the past week.  The
premium over Spain has narrowed 10 bp at the same time.  
Italian shares are off
around 0.3% in late morning turnover in Milan. 
 It is faring better than most European equity markets
today.  The Dow Jones Stoxx 600 is off twice
as much, led by information technology sectors that were hard-hit in the US before the weekend.  Italian bank
shares, however, are off 0.8%, for the second consecutive declining session.
 Italian large banks are considering injecting cash into two troubled
regional banks which would allow a  precautionary recapitalization.  This would prevent having to bail-in equity
investors and junior creditors.  A decision is seen necessary by the
middle of next week when a subordinated credit of one of the troubled banks
comes due.  
Separately, Italy’s economic
news disappointed.  
industrial output fell 0.4%, snapped a two-month advance, and defying
expectations for a 0.2% increase.  There was hope that the Italian economy
was finally catching gaining some traction.  Growth in Q1 was the best
since Q4 2010, but it was flattered by inventory accumulation.  Business
and consumer confidence softened in May.  
Finland is also facing a
political challenge. 
 A new head of the Finn’s Party
threatens to undermine the fragile coalition under Prime Minister Sipila.
 A more outspokenly, anti-immigration, anti-EU, socially conservative-wing of the party gained control.
 A cabinet meeting is to be held today to determine if the current
coalition can continue or if a replacement is needed.  Finland’s 10-year
yield is up a little, despite the decline in the other benchmark bonds in
Europe.  Finnish equities are off around 1%.  
The MSCI Asia-Pacific Index
also was dragged lower by the technology sector after the losses in the US
before the weekend.
  It was off almost 0.3%, its third
consecutive losing session, the longest losing streak in a month.  Losses
in the region were led by information
technology and/or telecoms.  Japan
reported softer than expected April machine orders (-3.1% compared with median
expectations for 0.5% gain).  It not only snapped a two-month advance, but
it offset it (February rose 1.5% and March 1.4%).  Despite the softer
Japanese data and steady-to-firmer US yields, the dollar continues to trade heavily against the yen,
perhaps amid falling equity prices.   It is straddling the JPY110 level
after having run out of steam before the weekend near JPY110.80.  
The euro extended the late
recovery in the North America before the weekend into Asia and European
activity today. 
 New bids seemed to dry up as the
euro approached $1.1230.  Recently, it was
turned lower after testing the $1.1285 area (ahead of $1.13) repeatedly.
 Still, despite the setback, it has not closed below the 20-day moving
average (now ~$1.1205) since April 17.   Sterling traded near $1.2770 in
late Asia but found sellers in early European hours, pushing it back toward the
lows, a little above $1.2700.  The pre-weekend lows near $1.2635 seem to
be inviting a retest.  

What promises to be an
important week for the US is beginning slowly. 
 The highlight is the FOMC meeting where a rate hike is widely expected, and nearly fully
discounted. The US also reports
producer and consumer price inflation, industrial output and retail sales.
 The investigation into Russia’s attempt to influence the US election will
hear from US Attorney General Sessions tomorrow.  



Ahead of Central Bank Meetings, Politics Dominates
Ahead of Central Bank Meetings, Politics Dominates

Reviewed by Marc Chandler

June 12, 2017

Rating: 5

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