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Political Ping Pong, A “Pounding,” And A Market Awaiting Trump

Well, we start in FX land on Monday morning and as has become the norm over the years, cable is moving on political news.

To be sure, the pound could really do without this right now. As I wrote last week in “Dear Sterling: It Would Be Best If You Just Accepted Your Fate,” the best way forward for the currency that Deutsche Bank suggested may soon become “irrelevant” may be for lawmakers to simply roll over and choose the path of least resistance even if the long-term outlook for the British economy after Brexit is indeterminate (at best). Any additional bickering may simply create further FX turmoil.

So even as talk of Scotland leaving the U.K. after the Brexit vote isn’t new, it’s still a huge pain the ass for cable. Here’s Bloomberg:

The pound fell against all its major peers after The Times reported that U.K. Prime Minister Theresa May’s team is preparing for Scotland to potentially call for an independence referendum.

Sterling, which has been held hostage by politics since a Scottish referendum in 2014, fell as much as 0.6 percent after the newspaper cited unidentified government sources as saying May could agree to a new Scottish vote, but on condition it is held after the U.K. leaves the European Union.


“The eventuality hasn’t been largely factored in the pound’s value so far,” wrote Ipek Ozkardeskaya, a senior market analyst at London Capital Group Limited. “If Scotland decides to proceed with the second referendum to quit the U.K., there would certainly be another fundamental downshift in the pound’s value, both against the U.S. dollar and the euro.”


Moving on to France, which has replaced Britain as the source of imminent political turmoil in Europe…



…things calmed down a bit on Monday after Emmanuel Macron secured “his third and fourth endorsements in less than a week Sunday as Socialist lawmaker Christophe Caresche said that he will abandon his party’s nominee in favor of the independent and former European lawmaker Daniel Cohn-Bendit officially declared he will vote for Macron as well,” Bloomberg wrote this morning.

“The Bayrou announcement was decisive,” Emmanuel Riviere, director of polling at Kantar Public France, said in an interview. “He is a personality with significant weight and he has generated momentum for Macron.”

Yes, “the Bayrou announcement was decisive.” And those who frequent these pages will recall that one Heisenberg reader predicted all of this more than a week ago, saying last Monday that “it is probable Mr Bayrou – a ‘center – left of center’ candidate of past presidential elections (with more than 10% of the vote) will decide to support Mr Macron.”

Meanwhile, it looks like a Benoit Hamon/ Jean-Luc Melenchon single candidacy is a no-go. “We met, he said he’d be a candidate, I said I’d be a candidate,” Hamon said on France Inter radio.

The end result of all this was bear-steepening in the core (German 5s30s steeper by 2bps) and a rally in OATs as French 10Y yields fell 4bps. Italian govies got a lift on risk-on flows as well with 10Y yields dropping 5bps before a decent auction of 5 and 10Y notes.

With all of that said, fighting the rally in the German front end is probably a fool’s errand.

Asian markets are lower across the board with the Nikkei down on a relatively strong yen. Trump’s speech on Tuesday night will be closely watched by FX markets. Here’s a bit of color on that from SocGen:

USD/JPY will capture the bond market sentiment most closely. The correlation between USD/JPY and real yield differentials is very good – but the correlation between USD/JPY and TIIPS yields alone is actually even better. TIIPS bounced off 0.3% on Friday. A clear break would take USD/JPY through our stop at 111.50. The US calendar starts slowly with durable goods orders, p[ending home sales and the Dallas Fed index today, and a second look at Q4 GDP tomorrow before we get to the ISM data (manufacturing Wednesday and non-manufacturing on Friday). But President Trump’s speech to Congress tomorrow evening (early Wednesday morning GMT) will be the highlight (more detail on fiscal policy please…) and we get the beige Book Wednesday and Janet Yellen Friday. If Pres Trump is bullish on tax policy, the data and beige Book are upbeat and Yellen is keeping doors to rate hikes open, will that be enough to support yields despite the positioning and thereby, get the USD/JPY uptrend back on track?

In China, yuan implied vol is on pace for its biggest monthly decline since 2005. At least one analyst thinks RMB’s “one-way depreciation has ended.” We’ll see about that.

Here’s a rundown of Asian markets: 

  • Nikkei down 0.9% to 19,107.47
  • Topix down 1% to 1,534.00
  • Hang Seng Index down 0.2% to 23,925.05
  • Shanghai Composite down 0.8% to 3,228.66
  • Sensex down 0.2% to 28,824.19
  • Australia S&P/ASX 200 down 0.3% to 5,724.18
  • Kospi down 0.4% to 2,085.52

In the US everyone is of course looking to tomorrow’s big speech (profiled in detail here). In the meantime – as noted above by SocGen – you can chew on the following raft of data:

  • 8:30am: Durable Goods Orders, est. 1.7%, prior -0.5%
  • 8:30am: Durables Ex Transportation, est. 0.5%, prior 0.5%
  • 8:30am: Cap Goods Orders Nondef Ex Air, est. 0.5%, prior 0.7%
  • 8:30am: Cap Goods Ship Nondef Ex Air, est. 0.2%, prior 1.0%
  • 10am: Pending Home Sales MoM, est. 1.0%, prior 1.6%
  • 10am: Pending Home Sales NSA YoY, prior -2.0%
  • 10:30am: Dallas Fed Manf. Activity, est. 19.4, prior 22.1

Happy trading.


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