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Thursday, April 20, 2017

LePen and Menenchon raise Frexit danger that could push euro as low as $0.90.

The dollar is on the defensive against most other currencies except the yen at the same time yields are firming up a little. Yesterday morning (11:00ET) the 10-year is 2.224% at the WSJ and 2.228% at MarketWatch (below) from 2.20% at the close and 2.179% Wednesday morning. That’s progress, if fractional. But the dollar is not benefitting. Against the yen, the dollar is making a more noticeable gain that seems to come from squaring recently placed safe-haven yen buys. It’s not coming from a renewal of confidence in the US economy or institutions.

Ahead of the French first-round election on Sunday, French yields are lower and the CAC is higher. Go figure. This looks like whistling past the graveyard.

Oil prices are moderating but not crashing as OPEC meets to talk about extending the output cut by 3 months to one year. Hmm, the first output cut deal was for 6 months, so the new timeframe is a bit puzzling and maybe worrisome. The WSJ reports Saudi “energy minister Khalid al-Falih hinted at the extensive behind the scenes negotiations among big oil producers ahead of next month’s meetings. He said a preliminary agreement to extend the cuts had been reached, but it still needed final sign off from some OPEC members. ‘Consensus is building, but it is not done yet.”

• In Japan, the Match trade surplus was ¥614.7 billion, more than forecast. Exports rose 12% y/y, especially exports to Asia (16.3%), while imports were up 15.8%, a surprise and implying the economy is in better shape than we thought (this always happens in Q1, though).

• In the eurozone, Feb construction output rose a lovely 6.9% m/m as the weather allowed (after - 2.4% in Jan). The y/y is 7.1%, the best in 5 years.


The euro consolidated Wednesday yesterday on an inside day but is trucking along higher Thusrday morning to a high of 1.0778 so far. As a general rule, we expect a bigger pullback after a wild breakout. That the correction was minor and short-lived this time is quite worrisome. What does it mean? It can mean profit-taking is just being delayed (greed) and we will get a thundering pullback today or tomorrow, or it can mean the FX market is betting on the “good” outcome in the French election, i.e., Macron beating LePen and Melenchon by a wide margin. There will still be a run off but a big win would be decisive.

The Main Event

The U.S 10-year yield index closed at 2.202% from 2.179% the day before and is quoted a little higher this morning at 2.224%. This is attributed to a relaxation of geopolitical tension. The Bund yield is quoted at 0.233% this morning from 0.201% yesterday and 0.178% the day before,.


Bond yields everywhere rose a little on relief from geopolitical tension, even French yields with the election looming on Sunday. Markets have been focused on recent displays of White House machismo, but an equally big disrupter could be the French election.

We are puzzled by the euro not losing it moxie ahead of the electoral run-off in France on Sunday. Econoday published the latest poll below. The expected outcome is Macron and LePen coming out on top for the second run-off in May, but if it’s Melenchon, head for the bunkers. The FT’s Chisholm, who knows a hawk from a handsaw, has a tidbit today saying the negative scenario (LePen and Menenchon) raise Frexit danger that could push euro as low as $0.90.

Nobody trusts polls after Brexit and Trump, but CNBC reports the Cevipof opinion poll published yesterday “showed frontrunners Macron and Le Pen both losing some momentum ahead of Sunday's first round, and conservative Francois Fillon and Melenchon still in contention for the second round run-off in May.”

Oddly, Bloomberg reports France auctioned €5.5 billion in 3-year and 5-year notes today and got a bidto-cover of 1.99, better than the 1.86 seen in the Jan auction. That was for a 5-year note. The FT reports “The premium for 10-year French bonds over Bunds has generally been around 40 basis points in recent years, so the current spread above 70 bps is certainly enticing for traders willing to bank on a middleground candidate eventually winning. We have already seen money flow into Europe, ignoring the sight of various volatility measures straining at the leash like a half-starved whippet.” The FT has 0.67 bp for the French-German spread at around 8 am today. Here’s the question—why is it not much, much wider?

We like to think the worst-case outcome in France will affect only European yields, but is that really so? Why would the US yield not also dip on a safe haven inflow if the outcome is LePen-Melanchon? We could get the strange outcome of falling US yields and a falling dollar/rising euro on an event that “should” clearly be euro-negative. We have seen stranger things. And let’s note that three of the four top candidates are pro-Putin. We have no idea what this may mean down the road.

We intend to get out of any positions by 1 pm on Friday. We seem to be the lone coward. The bond boys are having a ball betting on the French election.

Here’s another possible disruption this coming weekend: the World Bank/IMF meetings start today in Washington. Normally we get only a random nugget or two on the sidelines, but this time the central issue will be Trump’s America First stance, which runs directly counter to the very heart and soul of the IMF. Insiders say IMF chief Lagarde intends to “socialize” the Trumpies, especially about protectionism.

Commerce Secy Ross already pushed back with remarks last week that the US is the least protectionist of the majors. Trump pushed back on Monday with “Buy America” and “Hire America.” Former IMF official and generally smart guy Prasad told Reuters "The IMF has little leverage since its limited toolkit of analysis-based advice, persuasion, and peer pressure is unlikely to have much of an impact on this administration's policies." That’s the polite way of saying the Trumpies will be pig-headed.

Reuters reports Lagarde will interview TreasSec Mnuchin on stage during the meetings. Yikes! He did not acquit himself well in the FT interview on Monday. Mnuchin is no dummy but not accustomed to the public stage and visibly torn between the conventional sane and reasonable approach to international economics vs. the Trump version.

Having said that, the Trump version is not entirely wrong. In fact, it’s largely right. It’s perfectly true that other countries have manipulated currencies and do subsidize exports in various ways, some of them buried so deep in their infrastructure they are really very hard to find. A policy approach that favors US self-interests more openly is not a bad thing.

We just wish the Trumpies would do it in a brainier and classier way. The Treasury must have dozens of economists in the backroom with piles of data at hand. But it’s a hallmark of the Trump administration not to use hard facts and sound analysis, but rhetorical blasts instead. For example, VP Pence is in Indonesia today offending the government by complaining about its trade surplus with the US. Pence is not the brightest bulb in the chandelier and almost certainly not qualified to talk trade.

We are especially worried about Japan in this context. PM Abe was out front in starting trade talks with the US and has been leaning over backwards to get friendly treatment. It seems to have been working so far—we haven’t had any outbursts from the White House against Japan. China is in the same position, with Trump seemingly willing to swap help with N. Korea for less strident trade demands. But just wait.

If you are going to shoot first and ask questions afterwards, okay—but then you really do need to ask the questions. The US vs. the rest of the world is not going away when the Washington meetings end, either. We are in for a long slog. We may get a new version of presidential interference in the FX market next week when Trump meets Italian PM Gentiloni in Washington. Then he’s on to a NATO summit in Germany and thence to G7 in Sicily (May 26-27).

From Left Field: We are watching failed state Venezuela out of the corner of the eye. Things keep getting worse. Here’s a doozy for the trigger-happy Trump: the government seized a GM plant in Valencia and halted operation. It seized assets, which we guess means the factory itself and its bank accounts.

Politics: Bill O’Reilly bore the brunt of a renewed awareness of misogyny triggered by Trump. O’Reilly said he was railroaded by unfounded charges, which would come as a surprise to the fancy whiteshoe law firm that did the research and judged he had to be fired. Not just smoke, real fire. Even some sports heroes declined to attend a White House shindig lest their children see them hob-nobbing with the groper-in-chief. Civil liberties groups joined forces, too.

Now it remains for the libs to do it right this time and not become so insufferably holier-than-thou that even dyed-in-the-wool feminists and libertarians are repelled.

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