Week in Focus

Could we live with a little more Europe?

Emmanuel Macron’s election as French president has given new life to calls for more redistributive policies in the euro zone, with even the German government showing a more open mind. A euro zone budget, joint sovereign debt, and common deposit insurance are all ideas in the mix. We demonstrate which concrete steps Europeans might agree on after the German election is over. Financial markets will no doubt applaud what appear to be efforts to fix the euro zone’s flaws, but more redistribution is likely to compound intra-European political tensions over the long term.

Outlook for the week of 26 to 30 June 2017

  • Economic data: June CPI data in the euro zone should put another damper on speculation about an ECB rate hike in 2018 with underlying inflation pressure remaining muted. Also, the continued decline in the headline inflation rate to 1.2% will not be to the ECB’s liking, as it will dampen market inflation expectations.
  • Bond market: In the money market, the Euribor strip flattened to the lowest levels in almost a decade judging by the 3m/6m basis. At the long end of the Bund curve, we switch back to a more constructive stance on duration positioning and suggest buying into dips at 10y yields above 0.3%.
  • FX market: Three votes for a rate hike at last week’s BoE MPC meeting gave the pound a moderate tailwind last week. When BoE Chief Economist Andy Haldane explained the hawkish stance this week, the tailwinds had already disappeared. This could bode ill for the British currency.
  • Equity market: Against the backdrop of the ECB’s ultra-expansionary monetary policy, the trend of earnings expectations for the Euro Stoxx 50 and the DAX have been quite disappointing. US equity markets, in contrast, have enjoyed a stronger uptrend in earnings expectations during this cycle, particularly US tech stocks.
  • Commodity market: The oil market is in danger of over-reacting to pessimism just as it overreacted to optimism at the start of the year. The next survey-based OPEC production estimates due out next week could trigger another wave of selling, as output is likely to have risen in June, thanks to increased production in Nigeria and Libya.

For further information, please contact:

Stefan Gringel

Phone +49 69 136 51435