Political Turbulence

UK Prime Minister Theresa May called for a snap general election June 8. This move signals that the UK could be more conciliatory in its negotiations of Brexit. Sterling rose and equities fell. This week in Turkey, a vote on constitutional reform, of the regressive kind, was won with a wafer thin margin and hands more power to Mr Erdogan raising fears of more autocratic rule and friction with Europe.

And on Sunday, one of the most important French Presidential elections entered its first round, important not in and of itself but in the context of Brexit, Trump, and all the populist and anti-establishment noise that has risen to a crescendo. The Euro rose after the market’s favoured candidate – Centralist Emmanuel Macron won the first round of the French election. Round two will see the Macron face far-right leader Marine Le Pen in a run-off for the French presidency on 7 May.

  • There is no real trade here. A long French or Italian bond versus short bund trade bets that all goes well and the reverse is a tail hedge against what would be the beginning of a pretty disruptive journey. Spreads have already widened ahead of the week end.

China and Luxuries

China’s economy is on a tear with 1Q GDP rising 6.9% YOY firing on all cylinders from federal and local government investment, private investment and consumption. While the PBOC has been busy reining in credit, leverage has leaked out into the shadow banking system and total social financing is continuing to rise apace. On the fiscal front, China announced this week a cut and rationalization of its VAT amounting to some 280 billion CNY. At the micro level, signs of a recovery are evident in the China luxury market with Remy Cointreau raising prices of its booze between 3-5% this year in line with its price hikes last year. The company is offering its flagship Louis XIII cognac at US$80,000 a bottle. A six litre bottle.

  • The luxury sector remains firmly in recovery mode.
  • Even watches, which have yet to recover, will see better company fundamentals as the underlying product market forces consolidation and reorganization.

Japan

In an interview in New York, BoJ governor Kuroda stated quite unequivocally that despite recent gains in growth, inflation, at zero % was well below the 2% target and that QQE would continue unabated. This was and is our view and we see the BoJ as the last to come out of accommodation.

  • JPY strength is likely to be capped due to  the interest rate differential as well as policy divergence.
  • Japanese exporters will get some respite and together with the manufacturing recovery is likely to support the Japanese equity market.
  • The JGB market will remain fairly static and under the determined control of the BoJ.
  • Banks and insurers which sold off, for no other reason than a general de-risking, will likely recover.

Energy

Oil inventories fell while gasoline inventories rose yet the market chose to ignore the former signal and sell off. Energy E&P companies sold off heavily with the flat price. Notwithstanding, Citigroup analysts see oil turning a corner and expect higher prices, joining the likes of Goldman Sachs and Morgan Stanley with a constructive view on oil. As for E&P companies, earnings reporting looms and it is likely that producer hedging has been quite sizeable while profitability should improve.

  • We expect the flat price to end the year closer to 60 than 50.
  • The main beneficiaries will be the free riders in the Permian and Bakken.

Banks

US banks turned in a robust performance for Q1 earnings (with the exception of Goldman Sachs). Wall Street activities (FICC) dominated Main Street. We have been optimistic about the outlook for European banks for some time, from a capital adequacy perspective and have positioned in the CoCos and AT1s but we have been light in US banks as value has been hard to find.

  • Time to increase US bank exposure as rates rise and boost net interest margins. As in European banks, the conservative trade is to target bank capital in the form of preferred stock and perpetuals, eschewing the more volatile equity.

Week ahead:

Apr 23

  • French Presidential Elections, round 1

Apr 24

  • German Ifo
  • Singapore CPI
  • UK GDP

Apr 25

  • HK exports and imports
  • US consumer confidence and Case Shiller

Apr 26

  • Singapore industrial production
  • Germany retail sales and consumer sentiment

Apr 27

  • BoJ rate decision
  • ECB rate decision
  • German inflation
  • Eurozone business climate, consumer sentiment, economic confidence, industrial sentiment.
  • US durable goods, trade balance
  • Japan CPI, industrial production, retail sales,

Apr 28

  • France GDP
  • Eurozone inflation, M3
  • US GDP, Chicago PMI
  • Spain GDP