Off-kilter Le Pen debate helps Europe
A slightly off-kilter French presidential debate performance from Marine Le Pen has lessened a little more of the political tension across markets.
The French CAC index outshined the German DAX. Investors appear to be pre-empting the French election result, taking on a little more exposure in France at the expense of “safer” German assets. Voters like Le Pen’s clear policy message but are worried on the issue of the euro. Undecided French voters face the unenviable choice of protesting a corrupt establishment or putting their euro-denominated savings at risk.
The mining sector tracked a rise in the price of copper while bank stocks reacted positively to strong economic data to lead the FTSE 100 higher. Lloyd’s shares underperformed bank peers after it announced the closure of 100 high street branches.
Wall Street watching Trump and Xi
Wall Street opened higher on Wednesday with the Dow Jones breaking out to a 2-week high. A surprise jump in US private sector job growth reignited the reflation trade while the $7.6bn acquisition of Panera Bread by JAB Holding added to the optimism.
A little apprehension before Federal Reserve minutes and the meeting between US President Trump and Chinese Premier Xi capped some of the enthusiasm. The assumption seems to be that Trump will toe the line for President Xi. This seems like a big assumption. Confronting German Chancellor Merkel over Germany’s NATO contributions is not the action of a man who kowtows to foreign leaders.
Trump has openly labelled China a currency manipulator so his position is clear. The open questions are whether Trump follows through on his rhetoric, and if he does how China adjusts. Neither of these will be answered this week.
Aussie in crosshairs of trade war
Sterling erased the previous day’s losses after service-sector data saw an upside surprise. The Services PMI for March rose to a three month high after a five-month low in February. The bounce back in services despite signs of higher prices is comforting after disappointing data on Monday showed the Sterling-inspired jump in manufacturing hasn’t quite taken hold just yet.
The US dollar rose on Wednesday after private payrolls grew faster than expected but a slowdown in the service sector took the edge off before the release of Federal Reserve minutes. Fed speakers have been quite transparent since March about the number of rate hikes expected this year. The unanswered questions relating to the minutes relate to the balance sheet. We doubt the minutes will give any details on how or when the Fed could shrink its balance sheet.
Politics were probably a positive influence on the euro after the French presidential debate but positive surprises in UK and US economic data saw it decline against the pound and the dollar.
The Australian dollar could be one to watch during the Trump-Xi meeting. Anything that threatens the Chinese economy almost always prompts a negative reaction in the Aussie. The last thing Australia needs is the world’s superpower picking a fight with its biggest customer.
Cyclone Copper and oil nears $55
Copper prices jumped on concern of disruption to mining in Australia from a cyclone as Chinese traders returned after a long holiday weekend.
A rise in the price of copper seems to show investors comfortable there will be no Trump-Xi showdown. If one makes the natural assumption that a trade war is bad for the Chinese economy, then the price of copper, which is heavily consumed in China, should fall if US-China tensions escalate.
Brent crude neared $55 per barrel as sentiment continued to improve in oil markets. Last Thursday we said “Given the velocity of the oil price slump three weeks ago, if sentiment has turned, the recovery could be equally fast. $55 per barrel in Brent would be a natural upside objective for oil bulls.” The declines three weeks ago were akin to releasing the pressure valve. Oil bulls are returning now the steam has been let off.
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