Political Tensions in Europe Dominates the Scene
In France, Holland took office as expected with 52% of the votes, becoming the first socialist in 17 years to take over the second biggest economy in Europe. In Greece, the elections seem to favour anti-bailout parties, which could spur new concerns of Greece’s participation in the Euro. Against the US dollar, the Euro fell to three-month lows at 1.2955 on Monday.
The result of the French election was as the markets expected. Hollande took home 52% of the votes and can now take the office in France as the first social democrat in 17 years. The next step is now whether or not the Socialist party will be able to claim majority in the general elections on the 10 and 17 June. Mr. Hollande will be sworn in as President on the 15 May and a new government should follow shortly after.
In Greece, the result of the election was not favorable if the country wants to stay in the common European currency. The two main parties did not achieve a combined majority, and now a new coalition government has to be founded to secure the future of Greece and the future for the country to remain in the Euro as well.
The market response to the new political situation has been very clear: Risky assets taking a big hit. Equities fell initially more than 2%, the Aussie, Kiwi and commodities tumble despite a positive surprise in Australian retail sales. In Greece, the ASE index tumbled down around 7%. The US dollar and fixed income gained as investors are looking for safe haven.
The US employment for April showed a falling unemployment rate to 8.1% vs. 8.2% expected, which overall is a positive measure. The worrying thing element is the fact that the change in nonfarm payrolls came out lower than expected at 115k vs. 160k expected. This tells us that the US economy is not able to create the necessary jobs for keeping the economy on a positive growth path and questions on the results of the quantitative easing are picking up. Thursday’s initial claims also came out lower than the monthly trend, which confirms this scenario.
For the coming week, data is pretty light, but China will take the scene on Thursday and Friday when releasing trade balance, industrial production and inflation data. Any data falling short of expectations could add pressure on risk as China remains the primary motor for global growth.
From Europe, Bank of England will release rates on Thursday along with the Bank of Norway. Both are expected to go unchanged at 0.5% and 1.5% respectively. For the Bank of England, no added QE is expected, but instead a focus towards inflation. Should we see hawkish comments from the Monetary Policy committee, this could give scope for another round of bearish action for EUR/GBP and we could see a test of the 0.80-figure.
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