Monday March 20, 2017

March 20, 2017

French Presidential Debate; Merkel, Abe Talks Quote of The Day By Geoff King and Colin Simpson What to Watch: The five leading French presidential candidates, with little more "There are still many than a month to go before the initial round of voting, hold their first televised debate of obstacles to cooperation. We the campaign (see chart below), from 8 p.m. German Chancellor Angela Merkel and don’t look to Europe to Japanese Prime Minister Shinzo Abe hold talks in Hanover, Germany, on trade and Asia, with a joint news conference planned for 12:15 p.m. European Central Bank balance the United States, Governing Council member Jens Weidmann speaks in Loerrach, Germany, 4:45 p.m. but we can hope that Europe Economics: Asking prices for homes in the U.K. rose 1.3 percent month on month in might help with the kind of March to an average 310,108 pounds ($384,223), with the Midlands leading the gains, American unilateralism or its according to Rightmove Plc. German producer prices are reported at 7 a.m. and tendency to do whatever it Russia's February retail sales and unemployment at 1 p.m. In the U.S., the February pleases that we’ve seen in Chicago Fed national activity index is at 12:30 p.m. the past." Government: Euro-area finance ministers discuss Greece, member states’ budgets, — Wang Yiwei, a professor of International jobs and debt issuance plans at 2 p.m. Scottish First Minister will seek Relations at Renmin University in Beijing and authority from the country’s parliament for a Section 30 order to hold a second a former Chinese trade official in Europe. independence referendum. Timing in Edinburgh to be determined. Speakers: Former U.K. Prime Minister gives a speech on the EU Commentary in This Issue and the rise of populism at Brown University. In Providence, Rhode Island, at 8 p.m. Chicago Fed President Charles Evans speaks about current economic conditions and With the prospect of a halt to the monetary policy at a National Association for Business Economics luncheon, 5:10 p.m. ECB's bond-buying program at the end of the year perhaps it's time to Markets: A gauge of the U.S. dollar headed for its longest losing streak since Donald resuscitate the old idea of Trump won the election as stocks retreated in Australia, South Korea and New centralizing bond issuance by all euro Zealand. members: Mark Gilbert. (All times local for London.) Complacency among equity investors is rising after Dutch voters inflicted a Le Pen Leading in First-Round Polls blow to political populism and JPMorgan Chase & Co. says it’s a good time to hedge against a slide in stocks: Adam Haigh and Lu Wang.

The U.K. economy is in focus this week, with the start of Brexit negotiations approaching: Jamie Murray and Scott Johnson.

U.K. Chancellor of the Exchequer dismissed The top five candidates in France's presidential elections will face each other on television this suggestions that the European Union evening. Marine Le Pen, Francois Fillon, Emmanuel Macron, Benoit Hamon and Jean-Luc would refuse to start trade talks until Melenchon will share the same stage to participate in a live — and probably lively — debate. Britain had agreed to settle its Brexit This is the first time in French politics that the major candidates have directly squared off before bill as a “negotiating position,” saying the first round of the vote, which takes place on April 23. he didn’t recognize the amounts — Maxime Sbaihi, Bloomberg Intelligence economist suggested that Britain may owe the bloc. View a live version of this chart on the Bloomberg terminal.

ECB Policy Economics Europe March 20, 2017 2

ECB Policy

Common Euro Bonds Can Smoothe ECB's Market Exit By Mark Gilbert, Bloomberg View The prospect of a halt to the European Rising Risk of Euro Break-Up Central Bank's bond-buying program at the end of the year removes a powerful bulwark against rising government borrowing costs. Together with the rise of anti-euro parties in Europe, it has also spooked investors. Now, perhaps it's time to resuscitate the old idea of centralizing bond issuance by all euro members. Spanish Prime Minister Mariano Rajoy revived the issue of common bond sales in comments to his domestic parliament on March 15: "We need to send a message of unity, hope and integration. Among other things, this means having a joint European budget that can help countries going through a complicated situation finance, conducts a monthly survey of foreign exchange reserves of and, possibly, issuing debt jointly — the investor expectations about a euro break- governments around the world is further euro bonds — so all Europeans can up. While the risk remains below the mid- evidence of the common currency's fall benefit from better financing conditions 2015 and mid-2016 peaks, when Greece from grace. that come with being backed up by a looked most vulnerable to an exit, it's It's probably no coincidence that European treasury, not just national edged higher to reach 25 percent. Spain's Rajoy wants to restart talks about ones." That recent jump coincides with polls common bond sales in the month before The benefits of common bond sales suggesting Marine Le Pen can win the the ECB scales back its bond buying to are easy to grasp. Individual bond issues first stage of the French election. While 60 billion euros ($65 billion) per month would be bigger and easier to trade, the she's predicted to lose soundly in the from 80 billion euros previously, as it market as a whole would be deeper and second leg, investors are taking the risk prepares to halt the program at the end more liquid, and weaker borrowers would of an upset seriously given her threat to of the year. While it's impossible to benefit from cheaper funding as yields take France out of the euro. quantify how much higher euro borrowing converged to an average level. Spain, for Hugh Hendry, who runs the London- costs would be without the ECB's example, pays about 1.8 percent to based hedge fund Eclectica Asset purchases, the 1.7 trillion euros the borrow money for 10 years, compared Management, is betting Italian bonds are central bank has added to its balance with Germany's 0.4 percent rate. particularly vulnerable to a Le Pen sheet in the past two years has But there are downsides too. If less victory, writing in a March letter to undoubtedly kept yields lower than they creditworthy governments can piggyback investors that he sees "a significant would otherwise be. off the fiscal discipline of their euro probability of such a political upset." If Le Common bonds could ease the ECB's peers, the incentive for reform Pen wins, Hendry sees the spread withdrawal from the market. They would disappears. Germany, in particular, is between Italian and German 10-year provide a way around the limits on which horrified at the notion of lending its AAA yields widening dramatically: "The country's debts the ECB is able to buy, rating to a freeloading neighbor. upside, however, is certainly not capped which is already proving problematic as it And yet, the euro project needs at the previous 2011 high," he wrote. runs out of eligible German and something to silence the growing chorus Even if Le Pen loses the election, Portuguese bonds. The move would of naysayers. On March 16, for example, Hendry sees the end of the ECB's QE prevent traders and investors from the Financial Times published an article program as a threat to Italian bonds: picking off the weaker euro members one with the headline "Italian Debate on "Even without any political upheavals I by one by betting against their debt once Merits of Ditching Euro Grows Louder." A would expect the ECB to continue to the ECB isn't there to backstop yields. It second article featured Michael unwind their purchase program and, as would also send an important signal of Hasenstab, who runs a $41 billion bond the private sector is required to fund more determination to stick with monetary fund at Franklin Templeton, betting of Italy’s maturing debt, yields will union whose flaws have become too against the euro because of the "not continue rising. As such we have a obvious to ignore. For Germany, the risks normal" situation in Europe where substantial position on the spread of a common bond program pale in "people start to question the very widening between the Italian 10-year comparison to the risk of a euro zone foundation, the legitimacy of the bond yield and its German equivalent." breakup. currency." The euro's diminishing role in the This column does not necessarily reflect the Sentix GmbH, a Frankfurt-based opinion of the editorial board or Bloomberg LP company that specializes in behavioral and its owners. Trading Europe Economics Europe March 20, 2017 3

Trading Europe

JPM Quant Frets Stock Complacency Too High After Dutch Vote By Adam Haigh and Lu Wang Complacency among equity investors is Fear Gauge Remains Low as the S&P Makes New Highs rising after Dutch voters inflicted a blow to political populism and JPMorgan Chase & Co. says it’s a good time to hedge against a slide in stocks. A selloff in equities is now more likely than not, because investors are now underestimating the chances of disruption when France holds presidential elections that start next month, according to JPMorgan Chase’s Marko Kolanovic. The bank’s global head of quantitative and derivatives strategy in New York says declines of roughly 5 percent for the S&P 500 Index would make shares worth buying. Kolanovic’s call comes fresh on the heels of Goldman Sachs Group Inc., View a live version of this chart on the Bloomberg terminal. which cut its outlook for global stocks this week, and a warning from Allianz Global Bond Market Worries Investors that equity valuations are becoming stretched. The defeat in this week’s Dutch elections of anti- immigration candidate Geert Wilders is being seen as a blow to populist political leaders, especially France’s Marine Le Pen. Investors should reduce positions in U. S. equities and buy cheaper emerging- market stocks, Kolanovic said in an email to clients on March 16. He also says American stocks will be attractive in the longer term, especially for patient investors ready to wait for a better entry point to buy. “Further complacency may set in in the aftermath of the Dutch elections,” View a live version of this chart on the Bloomberg terminal.

Kolanovic wrote. “There will be an immigration, is polling at about 27 percent since July 2014. increase of uncertainty related to French for the first round on April 23 though she’s The bond market seems to be more elections. Near-term, market weakness is projected to lose to independent concerned. The extra yield investors more likely than not.” Emmanuel Macron by more than 20 demand to hold French government debt The Dutch vote attracted an unusual points in the runoff. Volatility bets for the rather than German notes remains level of global scrutiny as it came before Euro Stoxx 50 Index slipped last week, elevated, even if it has declined from the France’s presidential election. Far-right trading near their lowest levels recent peak. candidate Le Pen, who is seeking to take France out of the euro zone and stop

Week Ahead Economics Europe March 20, 2017 4

Week Ahead

Hard Numbers for Britain, Soft for Euro Area By Jamie Murray and Scott Johnson, Bloomberg Intelligence economists The U.K. economy is in focus, with the U.K. Retail Sales Slowed in January start of Brexit negotiations approaching. Inflation is likely to accelerate above target. Retail sales could snap a recent streak of declines, but with a broader picture of weakening momentum. Public borrowing figures should confirm a brighter fiscal outlook — continued consolidation still lies ahead. While growth is probably slowing in Britain, it may be picking up in the euro area. Surveys should fill in the impression of the first quarter, which has been rosy so far. The week begins with political fireworks, as French presidential hopefuls face off in a debate. Further east, Russia's central bank decision View a more comprehensive week ahead on the Bloomberg terminal. carries unusual suspense at the end of the week, though BI Economics expects likely to have continued their rise as Thursday, March 23 no change. supermarkets begin to pass on the higher import costs to consumers. U.K. retail sales may tick up in Apparel prices are likely to unwind some February after two successive months of Monday, March 20 of the weakness seen in January and declines. Yet the first fall in the A one-off pension payment push up on the annual rate in February. underlying trend since 2013 suggests exaggerated the bounce in Russian The U.K.'s public-sector finances consumer spending may already have incomes in January and may have fueled statistical bulletin will report figures for turned a corner and risks losing gains in retail sales. February is likely to February. An unusually large boost from momentum fast from here. Having have seen slippage for both series, but in- self-assessed income tax receipts was weathered the Brexit vote in 2016, a line with modest seasonally adjusted expected at the turn of the year — the lift squeeze on real incomes is likely to be growth since end-2016. Real wages have looks small, but the February data will the biggest headwind to sales ahead. edged higher since October. Overall the confirm that. The bigger picture is one of Pay growth has slowed notably this year, rebuilding of consumers' purchasing fiscal improvement this year. Progress in while inflation is accelerating. That raises power should continue, with inflation deficit reduction is likely to slow in 2017 the prospect of negative real wage slowing and wider economic activity as GDP growth dips. The government's growth later this year. picking up. Savings could stay elevated March Budget shows plans for a large The mood of euro-area consumers has though, keeping the recovery in spending fiscal consolidation remain in place over proved resilient in recent months, despite gradual. the next few years. the increase in oil prices. The average of Euro-area finance ministers meet in the European Commission's confidence indicator for January and February of Brussels to discuss developments in the Wednesday, March 22 second review of Greece's minus 5.5 stands above that for October macroeconomic adjustment program, Wednesday brings plenty of time to to December of minus 6.4. That — along member states’ budgets and issuance take stock of the outlook. There are no with similar signals from all the major plans. major European data releases or surveys — creates upside risks for GDP economic events on the schedule. growth in the first quarter. The advanced Current-account figures for the euro area reading for March will reveal if shoppers Tuesday, March 21 are unlikely to generate much interest. — the primary drivers of the euro-area Britain's CPI inflation rate may have As for that outlook, BI Economics recovery — remained cheery during the edged above the Bank of England's 2 expects growth in the monetary union to final month of the quarter. percent target in February. Pump costs stay above-trend, slowing slightly but Also on Thursday, the European continue to lead the charge — prices driving steady gains in employment. The Central Bank will announce the total rose by 1.2 percent between January U.K.'s expansion is likely to cool, with amount borrowed under its final targeted and February this year, having dropped inflation accelerating. longer-term refinancing operations. by 1 percent between the same two months in 2016. Food prices are also

Global Events Calendar Economics Europe March 20, 2017 5

Global Events Calendar

By Phyllis Halliday, James Amott and Stanley James at Brown University. In Providence, Washington. Fed presidents Charles The U.S. House Intelligence Committee holds a Rhode Island, at 16:00 EDT. Evans of Chicago and Neel Kashkari of hearing on its investigation into Russia’s Minneapolis will also speak. Click here interference in the November presidential Tuesday for agenda. Yellen speaks at 08:45 EST. election. It’s likely to be the first in-depth public Conference ends March 24. inquiry into allegations of connections between Kansas City Fed President Esther Dallas Fed President Robert Kaplan Donald Trump and Russia. U.S. Secretary of George will discuss the nation’s will speak at the Chicago Council on State Rex Tillerson hosts a meeting in economic outlook at 12:00 EDT. Global Affairs in a moderated Q&A Washington of the leaders from the 68 member Cleveland Fed President Loretta Mester session on the U.S. economic outlook nations of the coalition fighting Islamic State, speaks at the University of Richmond as and monetary policy. In Chicago at 18:00 seeking to accelerate the defeat of the militant part of the Robins School of Business local time (19:00 EDT). group in Iraq and Syria. U.S. Federal Reserve Executive Speaker Series at 18:00 EDT. German Chancellor Angela Merkel Chair Janet Yellen gives a speech in Washington. Boston Fed President Eric Rosengren speaks at a rally of her Christian Charles Evans, president of the Chicago Fed, speaks at the 12th Asia-Pacific High Democratic Union in Saarland, where her and Neel Kashkari, president of the Minneapolis Level Meeting on banking supervision, in party is defending control of the state Fed, the lone dissenting vote in the recent rate Bali, Indonesia. The meeting is jointly assembly in elections on March 26. She increase, will also speak. organized by the Basel Committee on speaks in the town of St. Wendel at 16: Banking Supervision and the Financial 30 CET (11:30 EDT). Stability Institute, and hosted by Bank Monday Indonesia. Timing to be determined. The new Dutch lower house of Through March 23. parliament meets and takes the first The U.S. House Intelligence steps toward the formation of a coalition Committee holds the first scheduled EU finance ministers discuss VAT, government following Liberal Prime public hearing on its investigation into country reports, the G-20 finance Minister Mark Rutte’s election victory. Russia’s interference in the 2016 ministers’ meeting and the European Timing in The Hague to be determined. presidential campaign. FBI Director defense fund. In Brussels, beginning at 09:00 local time (04:00 EDT). French Republican presidential James Comey has been asked to testify candidate Francois Fillon gives a two- along with National Security Agency EU President Donald Tusk and hour television interview at 21:00 (16:00 Chief Mike Rogers. 10:00 EDT in European Commission President Jean- EDT). Washington. Claude Juncker meet with Japanese Prime Minister Shinzo Abe to discuss Swiss National Bank publishes its The five leading French presidential annual report. 07:25 in Zurich (02:25 candidates hold their first televised trade. In Brussels, timing to be determined. EDT). Separately, SNB board member debate of the campaign. 21:00 (16:00 Andrea Maechler speaks to money- EST). Follow the TOPLive blog for real- market managers in Zurich. 18:30 local time coverage here. Wednesday time (13:30 EDT). Chicago Fed President Charles Evans U.S. Secretary of State Rex Tillerson The ECB publishes its economic will speak on current economic conditions hosts foreign ministers and leaders of the bulletin. 10:00 in Frankfurt (05:00 EDT). and monetary policy at 13:10 EDT. 68-nation Global Coalition fighting the CENTRAL BANKS: Bank of Korea Islamic State, in Washington. Timing to German Chancellor Angela Merkel and holds first of four annual board meetings be determined. Japanese Prime Minister Shinzo Abe on financial stability, New Zealand rate hold talks in Hanover, Germany, on trade Canadian Finance Minister Bill decision, Poland minutes. and Asia, with a joint news conference Morneau presents the country’s budget planned for 13:15 CET (08:15 EDT). to the House of Commons.. Friday Scottish First Minister Nicola Sturgeon U.K. Secretary of International Trade will seek authority from the country’s speaks at an Advertising Pope Francis receives EU leaders at parliament for a Section 30 order to hold Week event at Ronnie Scott’s Jazz Club the Vatican on the eve of a summit a second independence referendum. in London. Timing to be determined. marking the 60th anniversary of the Timing in Edinburgh to be determined. signing of the Treaty of Rome, which led to creation of the European Economic Euro-area finance ministers discuss Thursday Community. 18:00 (13:00 EST). Greece, member states’ budgets, jobs and debt issuance plans at 15:00 CET Fed Chair Janet Yellen gives the CENTRAL BANKS: Russia rate (10:00 EDT) in Brussels. opening speech at the Fed’s Community decision with real-time coverage on the Development Research Conference in TOPLive blog. Former U.K. Prime Minister David Cameron gives a speech on the European Union and the rise of populism Economic Calendar Economics Europe March 20, 2017 6

Economic Calendar

Upcoming Releases Over the Weekend

TIME PLACE EVENT SURVEY PRIOR Scotland First Minister Nicola Sturgeon accused U.K. Prime Minister 07:00 Germany PPI MoM 0.40% 0.70% of being intransigent on 07:00 Germany PPI YoY 3.20% 2.40% the timing of a referendum on Scottish 08:00 Hungary Average Gross Wages YoY 8.40% 5.70% independence, and said it would “not be 09:00 Switzerland Total Sight Deposits CHF — 555.4b reasonable” to make Scots wait more than three years from now for a potential 09:00 Switzerland Domestic Sight Deposits CHF — 467.4b vote. “By that point Scotland will have 10:00 Euro Area Labour Costs YoY — 1.50% been taken out” of the European Union, 11:30 Chile Current Account Balance — -2772 Scottish National Party leader Sturgeon said on ITV’s “Peston on Sunday” 11:30 Chile GDP QoQ -0.20% 0.60% television show. 11:30 Chile GDP YoY 0.50% 1.60% — Flavia Krause-Jackson and Rebecca Penty 12:30 Canada Wholesale Trade Sales MoM — 0.70% German Chancellor Angela Merkel 12:30 U.S. Chicago Fed Nat Activity Index — -0.05 and Japanese Prime Minister Shinzo 13:00 Russia Unemployment Rate 5.60% 5.60% Abe called for a concerted effort to defend free trade, saying global markets 13:00 Russia Real Disposable Income 0.30% 8.10% can be both open and fair. The German 13:00 Russia Real Wages YoY 2.20% 3.10% and Japanese leaders opened the CeBIT 13:00 Russia Retail Sales Real MoM -1.50% -24.50% technology show in Hanover, Germany, by advocating a trade accord between 13:00 Russia Retail Sales Real YoY -2.00% -2.30% Japan and the European Union as a way 14:00 Canada Bloomberg Nanos Confidence — 58.2 to underscore the benefits of an 18:00 Brazil Trade Balance Weekly — $1725m interconnected global economy. 21:45 New Zealand Net Migration SA — 6460 — Arne Delfs 22:30 Australia ANZ Roy Morgan Weekly Consumer Confidence Index — 113.1 Deutsche Bank AG said it will raise 8 billion euros ($8.6 billion) by selling stock — Slovakia Unemployment Rate — 8.60% at a 35 percent discount to last week’s — Ukraine Retail Trade YTD YoY — 3.10% closing price as Germany’s largest lender — Belarus Retail Trade YTD YoY — -4.60% seeks to shore up its finances and boost Source: Bloomberg. Survey figures updated at 5:20 a.m. London time. growth. The company will issue 687.5 Click on the highlighted release to see the range of forecasts on the Bloomberg terminal. million new shares at 11.65 euros apiece, it said in a statement Sunday. — Steven Arons Bloomberg Briefs: Economics Europe

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