Rightwing joker in French elections, Rate Announcements to influence this week
Over the weekend, the IMF pledged another $430bn without earmarking them to the Euro zone. This is not to change anything although additional support adds to the buffer in case another country gets into severe trouble. In France, Sarkozy and Hollande almost tied. Le Pen received around 18% of the votes. The outcome of 6th of May, where the second round of elections is to be held will be difficult to predict, but Sarkozy will have to adapt a more nationalistic approach in order to attract Le Pen’s voters. On the macro front, FOMC and US GDP to be the key for the markets.
Last week, the US dollar index fell 0.9% after gaining for two weeks in a row. Strong US earnings have contributed to this due to the inverse relationship between the US dollar and equities, but subdued growth in employment has kept the US dollar rangy and no real trends have been formed despite an effort to get the respective economies back on track. We saw the same tendency in both 2010 and 2011 and as long as the cost of capital remains on a historically low front, then company earnings will continue to be strong. However, we will see if the saying “sell in May and walk away” will stick after the Fed has been reluctant to reveal any further hints for quantitative easing.
However, looking at the Fed Funds futures, a rate hike is not expected to be introduced before Q3 2014 and should the job market data continue to disappoint, additional stimulus has to be presented by the Fed. The overall temperature of the US economy will be revealed on Friday with the US GDP. Expectations are for a 2.5% increase for Q1 2012 versus 3.0% prior.
In the Euro zone political activity is high with France as mentioned and also in the Netherlands, where the PM Mark Rutte will offer his cabinet’s resignation to the queen. Bond yields in the south of Europe are increasing and Monday’s auction of German 5-year notes came out with the lowest yields ever. In Spain the 10yr yields revisited 6% after the release of the GDP showing a drop of 0.4% for Q1. A not so optimistic outlook was also shown in the PMI figures, which all showed an increased contraction for the manufacturing sector. Overall the euro zone is still on fire even after Greece has been bailed out.
USD/JPY will this week be in highlight as the BoJ also is announcing rates. Compared to the Fed, that not is expected to make any changed to monetary policy or stimuli, the BoJ could announce an expansion of their asset purchasing program, which should make the Japanese Yen depreciate against other majors. Technically, the USD/JPY is holding above the weekly Ichimoku-cloud, but it is looking fragile. More upside if the pair closes above the 100-week moving average, currently at 81.35
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