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Start the week ..... "Politics Still Rule , OK ?"

February 27, 2017

 

 

 

Start the week ..... "Politics Still Rule , OK ?"

 

ref :- General Round-up

 

In normal circumstances, it can sometimes be tricky to find something of great interest on the wires on a Monday morning. That's simply a function of the markets being closed at weekends. But if, as now, markets are largely being driven by political developments ..... well, that's a different matter. "Politics" doesn't close down at weekends (more's the pity, some might say) and the market moves of interest today are entirely political in nature. So what's going on ?

 

Sterling is struggling on foreign exchange markets after the Times led with news that the British government is preparing for a most unwelcome call from Scotland's First Minister Nicola Sturgeon for a new referendum on Scottish devolution. PM Theresa May already has her hands full with the political turmoil in Northern Ireland, and it is thought Ms Sturgeon will table her demand to coincide with the triggering of Article 53 and the start of the Brexit process next month for maximum effect. Scotland of course voted convincingly to remain in the EU.

 

It's less than 2 1/2 years since the last Scottish vote and it is just possible that Mrs May may deny a second referendum on the grounds that with the decision to remain in the UK so recent, and the UK as a whole having voted for Brexit, a second devolution vote is not in order. This looks highly unlikely ..... to reject the demand out of hand would surely risk a constitutional crisis. One possibility is that Mrs May may grant a new referendum on the condition that it takes place after Brexit, which of course would mean that a newly independent Scotland would exist outside the EU, at least initially.

 

It's not as though this is entirely unexpected but right now it's something of a potential nightmare for the UK government. They're not the only ones with a headache, though . There's a feeling that Ms. Sturgeon's combative statements since the Brexit vote left her with no option but to call for a new independence referendum, which opinion polls (for what they're worth) currently say she will lose.

 

Anyway, it's all bad news for sterling, which traded down through 1.2400 versus the US$ overnight and towards 1.17 versus the Euro.

 

On to France, where at the start last week we saw increasing market anxiety over the National Front's Marine Le Pen's chances in the Presidential elections. In a flight-to-safety, the spread between the yields of German and French 10yr government debt widened out to 85 basis points , reflecting the attraction of German Bunds over their French equivalents. At the end of the week, Independent candidate Emmanuel Macron crucially secured the support of centreist Francois Bayrou and also Francois de Rugy, and over the weekend they were followed by two more figures of the centre and centre-left ( Caresche and Cohn-Bendit ).

 

According to polls, this puts Macron's support in the first round of voting close to Ms. Le Pen's at 26% to her 27%, and well ahead of embattled conservative candidate Francois Fillon (19%). In a run-off between the two first round leaders, polls suggest that Macron would defeat Le Pen by a margin of 61% to 39%.

 

Sounds pretty conclusive ..... what was all the fuss about ? Well, there a long way to go yet but the markets are breathing a bit easier. That 10yr yield spread ? Trading below 70 basis points this morning.

 

And finally to Donald Trump ..... of course. He's speaking to both houses of Congress tomorrow night in what amounts to a State of the Union Address, although in deference to the fact first-term Presidents have only just been inaugurated at this time of year it is not given that title in their first year. Make no mistake though .... this is pretty crucial. 

 

Both on the campaign trail and since taking office, Mr Trump has been making a raft of promises. To achieve 3%-4% growth in GDP, a massive plan of fiscal stimulus involving tax cuts and increases in infrastructure and military spending is in the pipeline, and markets reacted accordingly  --  stocks up (to record highs), dollar up, and bond yields up (and prices down). Remarkably, equity prices are still close to their record highs but foreign exchange and bond traders have become a little disappointed with the lack of a detailed plan, never mind any action itself. Measured by the Dollar Index, the dollar is nearly 3% off its level at the start of the year. 10 yr Treasury bond yields, up at 2.57 % in mid-December. were trading at 2.31% on Friday.

 

In short, Mr Trump needs to come out with something substantial tomorrow or the disappointment will be a lot deeper, and will be written all over market prices come Wednesday morning. 

 

See you then.....

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