In India, the ruling BJP made significant gains in important state elections which were being seen by market participants as a referendum on the Modi administration post demonetization. The BJP won very large majorities in Uttar Pradesh and Uttarakhand and came in a close second in Goa and Manipur. The principal opposition Congress party won Punjab. The popular support for Modi and the BJP increase the odds that the reform campaign underway will gain momentum. The most significant policy last year was the Insolvency and Bankruptcy Code, this year a number of big initiatives await, among them a unified sales tax to replace local and state taxes.

While the election success is seen as an endorsement of Modi, the BJP which has a simple majority in the Lok Sabha or lower house still has not the same in the Rajya Sabha or upper house and Modi will still need to rely on opposition cooperation.

The elections will have positive effect on sentiment and impact on Indian equity markets.


A protracted slump in global trade is showing signs of abating in the short term. We don’t think it is a turnaround but an adjustment rebound. Strong Taiwan exports point to a rebound in regional Asian trade while a worsening trade balance in China was due in part to strong import growth and signs of a robust domestic economy.

Strong US payrolls data increases the likelihood the Fed will raise rates Mar 15.


Equities traded in a tight range and seemed to lose some momentum. The stand out was Japan which was boosted by the weak currency.


That Mar 15 rate hike is priced by the market with a 98% probability. The treasury curve has flattened since Nov and looks set to bear flatten further.

Bunds, however, have not priced in a rate hike, at least not until recently, and have reacted to speculation that the ECB might raise rates before its done with QE at year end. Spanish and Italian 10 year spreads to bunds remain elevated as political risk still looms in Europe. French spreads have tightened back somewhat as the market begins to price more carefully the probability and impact of a Le Pen presidency.

Credit spreads are beginning to exhibit more volatility with US HY widening over 40 bps over the week. EU HY and IG spreads were stable.


A more hawkish ECB has driven a divergence between EUR and JPY against the USD.


Oil prices fell heavily after US oil inventory surprised on the upside. It seems that the OPEC cuts which have supported the oil price are emboldening US shale producers. WTI ended the week below 48 and Brent on the cusp of 50.

However, on Tuesday Mar 3, the EIA published a report which on the face of it shows an oil market closer to balance in early 2017 and balancing by 2018. We believe the longer term dynamics are supportive of higher oil prices for 2 reasons, the first is the Aramco IPO and Saudi’s need to maintain a floor under prices until that happens, and the second is the underinvestment in capacity going forward. OPEC needs to maintain the price in a tight range, sufficient to be commercially viable and capped to prevent a free rider problem from US shale.

Industrial metals also had a tough week but we see this as a correction in a market that has had a very good run and in technically overbought territory. The metals market is supported by the recovery in manufacturing which seems to be global in breadth.


Week ahead:

Mar 13

  • India CPI

Mar 14

  • Germany, Spain inflation data
  • Eurozone ZEW economic sentiment
  • Eurozone industrial production
  • US PPI

Mar 15

  • France, Italy inflation data
  • US CPI, retail sales
  • Japan industrial production
  • Italy retail sales
  • UK average earnings, claimant count, unemployment
  • US Empire State
  • FOMC rate decision.

Mar 16

  • BoE MPC
  • Eurozone inflation data
  • US building permits, housing starts, initial claims, Philly Fed

Mar 17

  • HKMA interest rate
  • Singapore NODX
  • US capacity utilization, industrial production, Michigan Sentiment.