Bloomberg Briefs: Economics Europe
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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 Nicola Sturgeon 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 David Cameron 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 Philip Hammond 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.