Some say the idea that things happen in threes comes from Macbeth, a tragedy written by Shakespeare. Far be it for us to comment on the link between a 400-year old play of greed, ambition and lust for power and the European politics. What is interesting are moves that are quietly occurring in some markets, which could act as a harbinger of more volatility to come.
The European economy has been surprising most estimates this year in a widespread show of positivity. ‘Finally!’ some might say, nearly a decade after the financial crisis kicked off. Business sentiment, job creation and single-digit unemployment are generally at multi-month records. Indeed, fourth quarter Eurozone growth last year was estimated to be faster than the U.S. However, looming over this is the full calendar of European elections scheduled for this year, the most immediate of which happens in May when French voters go to the polls.
With Marine Le Pen outlining her manifesto over the weekend, one of the most unpredictable presidential elections in decades has caused investors to dump French debt, sparking a four-year high in spreads over the safe-haven German 10-year bond. Seemingly, we now have a situation where the only candidate sure to make the second round is Le Pen. Similarly, UBS Wealth Management gives Le Pen a 40% chance of becoming the next President.
With these moves in bond spreads reminding us of the swings seen during the Eurozone debt crisis, we have also seen moves in the single currency. EUR/CHF has now dropped to levels where traders are mindful of SNB intervention. EUR/USD, most importantly, has resumed its long-term downtrend. This pair bounced a number of times below 1.04 around the new year, creating a 14-year low of 1.0341, but the well-defined bull channel did not convincingly break above 1.08.
This barrier, paired with increasing political risks and renewed Greek debt warnings means it probably pays to be bearish on EUR rallies. The January rebound could be no more than a retest of long-term resistance so we will let the Eurozone political road show take its course and be our guide.
