European elections
The EU parliamentary elections were perhaps a bombshell in the longer term perspective, but the market isn’t sure what to do with these results in the short term, as the mainstream parties still have a solid majority and the Eurosceptic parties will not create broad-based alliances. We are only assured from here that the noise from the EU parliament will be far more varied and interesting to listen to and that the mainstream parties’ decisions will be far more critically analysed by the opposition sceptics. The next steps from here, politically speaking, remain the degree to which the core will commit to the EU project after Germany’s Alternative for Germany (AfD) party saw strong results (for Germany which has such a long history of voting for mainstream parties and is always running from its historic shadow), coming from nowhere to take 7 percent of the vote after narrowly missing the hurdle at the last German general election. France’s Le Pen and Italy’s Grillo results must also be compared and contrasted as well, as Le Pen garnered the strongest single party results in France, while Italy’s Grillo faded slightly and was overshadowed by Prime Minister Renzi’s centre left party. The next EU elections are a long five years off, so from here it is about how the EU question plays domestically during the next national elections. Meanwhile, in financial markets, it will be about watching the European Central Bank's ability and will to act and whether they are able to keep the EUR peripheral spreads low and lower, or whether that particular trade has peaked. Chart: EURUSD EURUSD is not sure what to do with the EU parliamentary election results, but as the euro has been so heavily sold lately, the initial reaction may be to see a bit of consolidation, as it doesn’t immediately bring the prospect of existential strain to the institutions of the EU and peripheral spreads have tightened significantly in the wake of these elections. The first major areas of contention are the 200-day moving average (right here around 1.3635) and then the 1.3700/50 zone.
The ruble is strengthening to the highest level since January after the Ukrainian election saw an overwhelming victory and therefore solid political mandate for incoming president Petro Poroshenko. Russian President Vladimir Putin signalled on Friday that he would be willing to work toward a solution in Ukraine with whoever wins the election. Oil dipped a bit lower on the news, but is still elevated relative to recent weeks and months, with forward US futures contract months breaking to new highs. This has supported CAD, with USDCAD trading back well below 1.0900.
Looking ahead
Today is a bank holiday in the UK and the Memorial Day holiday in the US, which traditionally kicks off the long US summer (US school children have around three months of summer holiday). There is very little to grab the attention on this week’s economic calendar, as the US data is mostly second tier stuff ahead of next week’s main event, save perhaps for Friday’s PCE inflation data. In Europe, it’s all about next week’s ECB meeting. Japan does see a number of data releases this week, though we’re still sifting through and discounting the effects of the April VAT hike.
US equities (the S&P500, at least) and the German DAX are setting all-time highs, the latter perhaps as this EU parliamentary election result is not seen as having apple-cart upsetting potential for now. So, the market continues to celebrate the central bank punchbowl and indulge in carry trades. This favors yen shorts and emerging currency longs as long as it persists, though the EM rally is getting rather long in the tooth. If US long rates begin to tick up from here, it will begin to pressure those EM trades from a liquidity perspective.
Economic data highlights
- New Zealand Apr. Trade Balance out at +534M vs. +634M expected and +935M in Mar.
- Germany Jun. GfK Consumer Confidence out unchanged at 8.5 as expected
Upcoming economic calendar highlights
- US and UK market’s closed for holidays
- Eurozone ECB president Draghi to Speak (0800)
- Eurozone ECB’s Constancio to Speak (0830)
- Eurozone ECB’s Coeure to Speak (1100)
- Japan May Small Business Confidence (0500)