Markets have been pricing in a Macron win for two weeks so there should be no surprise at the yawn today in markets. We now await the Parliamentary elections in June to see what kind of government he can form. France has a real chance now of liberating their economy, particularly on the tax side and regulatory side. On the flip side, Mario Draghi is losing another excuse for his scorched earth monetary policy and this is the Catch 22 we are now in. The better the economic news gets, the greater the likelihood we see more reversals in accommodation. And if the case, the European bond market is a sitting duck and a train wreck waiting to happen. My two visuals for you.
Reflecting the economic pickup in Europe and the political fires being put out in France, the Netherlands and in Austria, the Sentix euro area confidence index for May rose to the best level since July 2007. They also commented on the ECB by saying, “This tension between the market and the ECB is likely to be decisive for the future bond market development.” European confidence on the US economy has faltered and has given back the post election jump and “there are also signs of fatigue in Asia ex Japan.” Sentix said “The ‘attractiveness’ of Trump’s policy is becoming increasingly smaller. At the same time, the US central bank is preparing a further rate hike in June.”
Speaking of the ECB, Executive Board member Yves Mersch today said “The recovery in the euro area is gaining more and more traction. The confirmation of a broadly balanced risk outlook for growth is within reach.” On what this means for another taper he didn’t specifically say “but we could examine the interaction of our different policy measures and their functioning in a new environment of balanced prospects, as opposed to the environment of deflationary risks that prevailed when they were first introduced…If the euro area economy recovers and inflation proceeds further on its path toward the ECB’s inflation aim in a sustained manner, a discussion on policy normalization becomes warranted in the future.” The June ECB meeting will be a big deal.
Germany reported its March factory order data and it was a touch above the forecast with a 1% m/o/m gain vs the estimate of up .7%. The German Economic Ministry said “Manufacturing orders continue to be vibrant. Economic conditions in manufacturing are favorable. This is also reflected by strongly improved business climate indicators.” As China is a big customer of Germany, we’ll watch closely in coming months for any ripple effects
I’ll talk about China AGAIN after they reported weaker than expected trade data for April. In dollar terms, exports were up by 8% y/o/y but that was below the forecast of up 11.3% and half the rate of March. Imports grew by 11.9% but well less than the estimate of up 18%. This resulted in a wider trade surplus of $38.1b. While the most in 3 months, it stood above that most of last year. With the backdrop of the recent fall in industrial commodity prices (which are down again today), volume imports of copper, steel, iron ore, crude, fuel oil and refined oil products all moderated from March but were still sharply higher y/o/y for crude, fuel oil, iron ore, and steel. Also, coal imports were up as were soybeans too both m/o/m and y/o/y. Copper imports fell 23% y/o/y. Copper today stands at the lowest level since the day after the US Presidential election. After being bullish on industrial commodity prices since early last year because of sharp supply cuts, I’m leaving this trade as China is now a major unknown for now.
China over the weekend said its FX reserves rose by $20b m/o/m in April to $3.0295T, about $9b more than expected as its currency has been relatively stable of late, its non dollar currencies have traded well against the US dollar and capital controls dissuade money from leaving. With growth now clearly slowing, it will get real interesting what happens from here as the offshore yuan is quietly at a 2 month low today.
The Shanghai composite closed down by .8% to the lowest level since mid October but the H share index was higher after 5 straight days of declines. Interbank rates in China are slightly lower after last week’s jump but their 10 yr yield was up by 5 bps, higher by the 5th day in the past 6. The yield stands at 3.62%, the most since July 2015. I cannot emphasize enough that we can all analyze company fundamentals and the macro economic environment all we want but in this world of central bank dominance over markets, mostly follow the flow of money and liquidity and that spigot is slowing down. China is serious about deleveraging its financial system and corporate balance sheets and things are going to break in that process as it will elsewhere as QE gets reduced and rates rise. China’s business activity in April has moderated and we should not just whistle right past that.