Markets Enter Consolidative Mode Ahead of Weekend

by Marc Chandler

Neither the terrorist attack in Paris nor the strong eurozone flash PMI has managed to shake investors. Judging from the social media, many suspect that the terrorist attack plays into Le Pen's hands, but investors do not seem particularly concerned. The French interest rate premium over Germany has narrowed, and gold is flat. UK retail sales fell sharply, yet sterling isholding on to the bulk of this week's gains, which are the most here in 2017.

The US 10-year yield is holding on to the lion's share of its gains as well. It had bottomed on Tuesday near 2.16% and rose to 2.25% yesterday and is at 2.24% now. Treasury Secretary Mnuchin's claim that tax reform will be passed by the end of the year seems to be more a statement of intent than a reliable forecast. As President Trump's 100th day in office approaches, the legislative agenda still seems to be tied up between the different wings of the Republican Party. Indeed, the attempt by the Republicans to forge a majority instead of reach across the aisle to some Democrats is proving more difficult and frustrating than manyanticipated.

Although it is too late to have much impact on the French election, the flash PMI reading for April was impressive as it pulls further ahead of Germany, if such comparisons are valid. French manufacturing rose to 55.1 from 53.3, and the service reading rose to 57.7 from 57.3. This lead to the composite is rising to 57.4 from 56.8. All were above expectations.

The German manufacturing edged to 58.2 from 58.3, and the service PMI fell to 54.7 from 55.6. The latter was weaker than expected. The composite stands at 56.3 from 57.1.

The flash EMU composite of 56.7 represents a new six-year high. The chief caveat is that survey data has been running ahead of real sector data. The US and UK report Q1 GDP next week, but Europe's estimates are in the first week in May. Next week's highlights will include the flash CPI readings, with a small uptick expected, and the ECB policy meeting. There is room to adjust the securities lending program to relieve strain in the repo market.

The most market friendly French election result would likely be a Macron-Fillon run-off in the second round, assuming that it is unrealistic than any candidate garners more than 50% of the vote. Many suggest that the euro could rally on a Macron-Le Pen second round, given the tradition of forging a united front against the National Front. Yet this would seem to be the least surprising result. Nearly every poll suggeststhis is the most likely scenario. And as we have noted, investors are relative calm.

The relative calm in the face of geopolitical uncertainty is also evident in Korea. The strongest currency in Asia this week, gaining 0.5%. This snaps a two-week slide. Korean stocks gain 0.75% today, which is about half of the weekly advance. The Kospi and KOSDAQ are among the best-performing equity markets in Asia this week. The MSCI Asia Pacific Index is up 0.7% on the day, which is enough to push the index higher in the week to break the four-week down leg. Chinese shares posted their worst week of the year with the Shanghai Composite off 2.25%. Regulators have tightened up their enforcement and also seem to be attempting to curb leverage.

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About the author

Marc Chandler has been covering the global capital markets in one fashion or another for more than 25 years, working at economic consulting firms and global investment banks.

Officially, Marc Chandler is Global Head of Currency Strategy, Brown Brothers Harriman since October 2005. Previously he was the Chief Currency Strategist for HSBC Bank USA and Mellon Bank.

Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets. This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency. There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.

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