Julius Baer: elecciones Francia, BCE, Brexit y China

Redacción - Martes, 07 de Marzo

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ECONOMICS French presidential elections 2017: Juppé says “non merci”, Fillon tries to hang on Yesterday brought some clarity to the candidacy of the republication party for the French presidential elections 2017, where the first round will be held on April 23. Alain Juppé, former contester for the spot of Les Républicains, announced not to stand in as replacement candidate for Francois Fillon, whose approval has suffered severely due to his job payment scandal involving his family. Comments by Mr. Juppé that Fillon had given away the victory may have their truth but surely will not help the Républicains gain support. Meanwhile, all looks set for a Le Pen first-round victory, with Emmanuel Macron following into the 2nd round, where Macron would become president at currently 60% support for that 2-way race, if he can continue his campaign without major hickups. A wild card could loom in the socialist camp, where a withdrawal of Mélenchon, supporting Hamon, could theoretically bring up to 25% of polling shares. A similar occurrence happened when centrist Bayrou withdrew his candidacy and supported Macron (see chart). However, no such signals have been visible in the left camp, which does not seem to be able to unite.

 

Juppé’s refusal to replace Fillon puts the French Republicans under pressure and underpins the LePen/Macron scenario for the 2nd round, with Macron as most likely future president. All clear for markets to remain calm. A united Socialist camp would have chances but remains a wild card with a small probability.

 

David A. Meier, Economist, Julius Baer

ECB not ready to signal policy tightening

 

• The ECB will reject tapering fantasies for the time being despite higher inflation and a noticeable inflation forecast revision.

• The Fed stands ready to raise rates in March, helping the USD to resume its rally.

 

In the US, the Federal Reserve is getting ready to hike rates again at its next meeting in March. In the eurozone, we expect the European Central Bank (ECB) to resist the trend for the time being and stick to its ultra-loose monetary policy stance at this week’s meeting. Most recent inflation figures will be the key challenge for the ECB’s loose monetary policy stance. Eurozone inflation reached 2% in February and the ECB inflation forecast of 1.3% for 2017 looks rather outdated. A noticeable upward revision to 1.9% is foreseeable and should stir the debate if it is advisable to reduce monetary stimulus by reducing the volume of asset purchases or to end the negative deposit rate regime. We expect the ECB to strictly reject these tapering fantasies for the time being.

 

To some extent the ECB’s hesitation is understandable, not so much because of the policy uncertainty in Europe but rather due to the fact that the surge in inflation is driven exclusively by higher energy prices, which are raising serious doubts about the sustainability of this return of inflation. The core inflation rate has barely moved in the past two years and wage inflation remains moderate at around 1.4%. Meanwhile, the Federal Reserve’s readiness to hike rates at its 15 March meeting has increased. Good economic data and signals from a number of Fed officials have pushed implied probabilities of a rate increase above 90%. This divergence of monetary policy is again becoming a major support for the USD, which is expected to resume its upwards trend. The tapering fantasies when it comes to ECB policy alleviate the pressure on the euro and we expect only minor weakening over the next three months.

 

David Kohl, Chief Currency Strategist and Head Economist Germany, Julius Baer

Brexit: Bill in “ping-pong” mode while momentum wanes

 

• Delays in the parliamentary passing of the Brexit bill will unlikely cross the timeline to invoke Article 50 by end of March.

• Evidence of fading momentum supports projections of a slowdown in the second half of 2017 as well as a bearish GBP stance.

 

Wednesday last week, the House of Lords, the UK’s upper house, voted in favour of an amendment to the Brexit bill. This amendment aims to secure civil rights for EU citizens already residing in the UK. The Bill had previously passed the House of Commons, where the conservative party holds an absolute majority, without any comment. While the House of Lords’ vote was presented in media as a “defeat” to Prime Minster May’s plans, we evaluate the situation as less dramatic. The amendment, which would force May to present a plan on how to protect EU citizens within three months of triggering the Brexit, indeed contrasts with her plans to do this only once EU member states have accepted reciprocal deals, guaranteeing rights of UK citizens in EU countries. Furthermore, from a tactical point of view, it seems impractical having to make pre-emptive concessions towards the EU. However, it is not a devastating blow to May’s plans: She is still entitled  to seek a “hard Brexit”, leaving the EU single market and restore access through a free trade agreement. Therefore, markets’ reacting to the news was rather calm, with some limited pound-softening, and not perceived as a relief, such as forcing May to a softer shape of Brexit. The bill is now in the “ping-pong” phase, back at the Commons, who may either accept the amendment or delete it and pass the bill back to the Lords - a repeating process until both chambers accept. Mrs May wants the amendment to be removed, but the outcome is hardly predictable. It is possible that the House of Lords will backpedal in order not to take the blame for delaying the process, while Prime Minister May cannot allow to demonstrate political weakness ahead of tough negotiations with the EU. The ping-pong phase has the potential to delay the clearing of the bill and previous expectations that May will present her letter on the EU summit commencing this Thursday will not come true, we believe that the timeline to invoke Article 50 by end of March can still be held. Meanwhile, leading indicators are showing first signs of deterioration, suggesting that the Brexit is slowly beginning to bite. After months of positive data surprises where negative views on the Brexit’s consequences for the UK economy had to be justified, we could be finally experiencing the rolling-over of economic momentum in the UK. This supports our GDP outlook of flat growth in the second half of 2017, with growth fading to an average of 1.4% for the full year. Furthermore, our bearish view on the pound sterling, with a target of EUR/GBP 0.92 over the 12-month horizon also prevails. Last but not least, this Wednesday’s spring budget statement will unlikely show a turning away from the overall stance of fiscal austerity. Post-referendum strength indeed causes better fiscal numbers and will allow the presentation of a GBP550m boost for innovation and technology spending. Nevertheless, Chancellor of the Exchequer Hammond believes that “gas in the tank” is needed facing the Brexit fallout.

 

David A. Meier, Economist, Julius Baer

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China 2017: Steady as she goes

 

• A slightly lower growth target of c.6.5% and a focus on containing risks to the economy were flagged as the top priorities for 2017.

• We expect stable growth in H1 2017, with a softening in the second half. Monetary policy should keep its bias towards tightening.

 

The economic goals for 2017 were announced right at the beginning of the National People’s Congress last Sunday in Beijing. The growth target was lowered slightly to around 6.5% (2016: 6.5%-7%, 6.7% reached). The lower target comfortably allows for embedding

the other important priority, namely the containing of financial risks and the reduction of overcapacities. At the same time, the overarching goal of doubling the gross domestic product until 2020 can be maintained with an annual growth rate higher than 6.4%. The Chinese leadership is thus voicing what we have been observing already for a few months. Last year, it started to reduce overcapacities and combat bubbles in financial sector debt and in the property market. Later, it guided interest rates slightly higher to further encourage the deleveraging. These measures shall be continued this year. With regard to deleveraging, reducing corporate debt has now come into focus, also with the aid of a debt-to-equity-swap programme.

 

While it sounds good to focus on financial risks, given the massive and risky rise of debt over the past years, the measures will actually be prudent, as economic stability is paramount during this important year of leadership change. Moreover, ample funds remain available for fiscal support should growth surprise to the downside. The neutral monetary policy with a tightening bias can thus be maintained this year. The renminbi is likely to soften further over the next few months.

 

Susan Joho, Economist, Julius Baer

COMMODITIES

 

Platinum and palladium: Diesel’s sad jubilee

 

• Consumers are turning away from diesel-fuelled cars in Europe, curbing platinum demand and limiting upside. We expect a sideways trend going forward and maintain a neutral view.

• Another soft reading for Chinese car sales in February would confirm the weaker demand backdrop and should trigger the expected correction in palladium prices. We stay cautious.

 

With prices not too far from recent multi-months highs, sentiment in the platinum and palladium futures markets is surprisingly bullish. We believe this is in contrast to the fundamental backdrop, which has been deteriorating as of late. For platinum, catalysts used in diesel-fuelled cars are the biggest single source of demand, accounting for around 35% of total demand. Europe is the world’s largest market for diesel-fuelled cars and according to data from the region’s five largest markets – Germany, France, Italy, Spain and the United Kingdom - the decline in market share accelerated in recent months. As a result of the emission scandal and amid rising concerns about air pollution, falling re-sale values and looming bans from city centres, consumers appear to be turning away from diesel engines exactly 125 years after Rudolf Diesel filed his patent in February 1892. We believe the structural decline in diesel-market share will curb platinum autocatalyst demand growth over the coming years, keep the market in balance and limit upside to prices. We expect a sideways trend for platinum going forward and maintain a neutral view. At the same time, we keep our cautious view on palladium as we still expect a short-term correction in prices. Palladium is mainly used in catalysts of gasoline-fuelled cars, which dominate globally. The surprisingly bullish sentiment does not reflect the looming slowdown in global car sales, driven by China. Last year, sales were up 16% as consumers pulled forward purchases due to a looming increase in sales taxes this year. While also impacted by an earlier Chinese New Year, sales dropped by 10% in January. Another soft reading for February would confirm the weaker demand backdrop and should trigger the expected correction.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

Copper: Where is the tightness?

 

Despite lasting disruptions at the world’s two largest mines, copper has retreated from its recent highs above USD 6,000 per tonne. Prices were down another percent yesterday after the London Metal Exchange reported the biggest one-day increase of its inventories in more than fifteen years. While exchanges only account for a small share of the total inventory, they provide a readily available and reliable snapshot of the market. Hence, yesterday’s big increase raises the question whether the current fears of undersupply and the related bullishness in the futures market are overdone. We think so, as we struggle to find indicators pointing towards undersupply and a tightening market balance. The future’s curve remains upward sloping while physical premiums have moved sideways or even moderated, signalling no rush by copper consumers to secure metal. While the risks related to today’s disruptions should not be underestimated, we believe they should be offset by sizeable stocks of non-refined metal in China and increasing recycling. Overall, we remain of the opinion that copper prices have moved too fast too far, primarily driven by improving sentiment rather than improving fundamentals. For further details on our view on copper, please refer to our upcoming study “Copper: Overhyped” which will be published later today.

 

Copper prices have retreated from the recent highs as the market is lacking signs of tightening despite lasting supply disruptions at the world’s two largest mines. We remain of the opinion that prices have moved too fast too far and maintain a bearish view.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

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