From Rabobank via ZeroHedge:
By Elwin de Groot, Head of Macro Strategy at Rabobank
We still have one more day to go in the European session before the weekend, but the week in review is already showing to be one of quick decisions, where the bond market was ‘saved’ by the US inflation data and where Macron may have asked for a Papal blessing. But whether that turns out to be sufficient remains to be seen.
Macron has gambled... and lost? According to the latest polls, only 40% of Macron’s MPs would gather enough support to even qualify for a second round of run-off votes. In a surprise move, the French president announced elections last Sunday. Macron may have acted quickly after the results of the European Parliament elections in the hope that he could ride a fear-inspired wave of solidarity that could stop Marine Le Pen’s National Rally in its tracks. However, that move could backfire pretty badly.
According to an Elabe/Les Echos survey, Macron’s approval rating fell to its lowest level in 5.5 years. Macron has made an appeal on voters and the more moderate political parties on both the left and the right to not succumb to the “fever of the extremes”, but it remains to be seen whether his strategy will succeed.
Left-wing parties have equally quickly decided to unite, with a joint programme and a joint list of candidates for the Greens, Socialists, Communists and France Unbowed. The Socialist Party issued a statement yesterday saying that “There was an expectation of union expressed”; but obviously not the unity that Macron was looking for. This quick decision may just undercut Macron’s. It means that the president’s centrist MPs could be squeezed out of parliament by their competition from the left and right side of the field.
Fever of the centre? Finance Minister Le Maire predicted earlier this week that France would face a debt crisis if the National Rally should come to power. This suggests that Macron’s strategy is first and foremost one of sowing fear, and that things have to get worse before they get better. But there seems very little time for that second leg of Macron’s strategy: to get better. Sometimes quick decisions are not always the best decisions.
Macron’s European peers seemed bewildered at the G7 meeting in Italy. According to the news wires Macron only met with Canada’s Trudeau, as well as the leaders of Algeria, India, and Brazil. And with the Pope. You’d wonder if he asked for a little prayer or perhaps a Papal blessing.
The political uncertainty in France seems to have turned into a classic risk-off sentiment. The search for safe havens were one of the reasons that the yield on 10y Bunds declined 6bp yesterday. Meanwhile, the spread between 10y French and German bond yields has widened to the highest level since April 2017. Alongside, the euro dropped below 1.073 and European equities were in the red (Eurostoxx 50 -2%). Prayer or blessing, it definitely did not reassure investors.
But safe-haven assets in both the US and Germany also found some support in the better-than-expected inflation data. Both the headline and core US PPI inflation were significantly lower than expected, strengthening the view that inflationary pressures have finally started to ease. The yield on 2y Treasury notes of fell the lowest level since 4 April, despite the Fed adjusting its dot-plot to reflect one instead of three rate cuts for this year and despite Powell’s reluctance to embrace the most recent CPI report.
More quick decisions. In any case, the prospect of further backlashes after the French elections, political uncertainty in Europe, and a possible Trump re-election are perhaps forcing more quick decisions....
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