Global Economy & Markets, Weekly Roundup 17/06/24
Euro area equities moved lower and government bond spreads widened, due to fresh political risk premia
Euro area equities deteriorated in the past week, on account of intensified investors’ concerns regarding the outcome of French Elections (June 30th and July 7th). Euro area bourses were down by -4.2% on a weekly basis, with the CAC40 index underperforming by a wide margin, down by -6.2% wow, the steepest weekly decline since early-March 2022 and with bank stocks leading the sell-off (-13%). On Monday, the CAC40 was posting signs of stabilization.
On the other hand, US bourses rose to new record highs (S&P500: +1.6% wow) on the back of AI-related single name deals & product launches (Apple – OpenAI) and of restored confidence that interest rate cuts by the Federal Reserve are on the cards for H2:2024.
The Fed stood pat for a seventh consecutive meeting, as expected (5.25% - 5.5%) and acknowledged “modest” progress towards the inflation target of 2%, taking also into account the weaker-than- expected May’s CPI. The latter came out at +3.3% yoy in May from +3.4% in April.
Policymakers reiterated that more evidence will be needed that inflation is sustainably moving towards 2% before cutting rates. The median “dot plot” for end-2024 moved up by 50 bps compared with three months ago to 5.1% suggesting -25 bps of cuts (instead of -75 bps) from current levels.
Aided by restrictive monetary policy for longer in the course of 2024, the Fed maintains its central outlook that inflation will resume a convincing downward trend (+2.3% yoy by end 2025) and as a result, the median FOMC “dot plot” suggests four interest cuts to 4.0% - 4.25% by end-2025.
Note also that the US Producer Price Index (PPI) showed an easing in pipeline price pressures with the headline PPI down by -0.1 pp to +2.2% yoy versus consensus estimates for +2.5%. Overall, US 10-Year Treasury bond yields declined by -22 bps to 4.21% in the past week.
German 10-Year Government bond yields decreased by -26 bps to 2.36% due to, inter alia, increased intra-euro area safe haven demand, while French bonds underperformed. Specifically, the 10-Year government bond yield increased in the past week by +2 bps to 3.14%, with the OAT-Bund spread widening by +28 bps to 78 bps (highest since November 2012) as the French political uncertainty enhanced fiscal trajectory concerns.
In the event, France ran a budget deficit of -5.5% of GDP in 2023, while estimates from the European Commission suggest a deficit of -5.3% of GDP in 2024 and -5.0% in 2025, leading the gross general government debt to 113.8% of GDP in 2025 from 110.6% in 2023.
On top of political-induced volatility, the European Union (EU) decided to provisionally raise tariffs on Electric Vehicles (EV) imported from China, by percentages ranging from +17% to +38% (on top of a pre-existing rate of 10%) depending on the extent of compliance of each carmaker during an anti-subsidy investigation launched by the EU back in September 2023.
The move comes as the EU views the heavy subsidies provided by the Chinese State to its domestic EV producers as distorting the competition with EU carmakers. The new rates will be finalized on July 4th following negotiations with China, with the latter vowing to “take all necessary measures” to protect the Chinese automakers.
Euro area equities deteriorated in the past week, on account of intensified investors’ concerns regarding the outcome of French Elections (June 30th and July 7th). Euro area bourses were down by -4.2% on a weekly basis, with the CAC40 index underperforming by a wide margin, down by -6.2% wow, the steepest weekly decline since early-March 2022 and with bank stocks leading the sell-off (-13%). On Monday, the CAC40 was posting signs of stabilization.
On the other hand, US bourses rose to new record highs (S&P500: +1.6% wow) on the back of AI-related single name deals & product launches (Apple – OpenAI) and of restored confidence that interest rate cuts by the Federal Reserve are on the cards for H2:2024.
The Fed stood pat for a seventh consecutive meeting, as expected (5.25% - 5.5%) and acknowledged “modest” progress towards the inflation target of 2%, taking also into account the weaker-than- expected May’s CPI. The latter came out at +3.3% yoy in May from +3.4% in April.
Policymakers reiterated that more evidence will be needed that inflation is sustainably moving towards 2% before cutting rates. The median “dot plot” for end-2024 moved up by 50 bps compared with three months ago to 5.1% suggesting -25 bps of cuts (instead of -75 bps) from current levels.
Aided by restrictive monetary policy for longer in the course of 2024, the Fed maintains its central outlook that inflation will resume a convincing downward trend (+2.3% yoy by end 2025) and as a result, the median FOMC “dot plot” suggests four interest cuts to 4.0% - 4.25% by end-2025.
Note also that the US Producer Price Index (PPI) showed an easing in pipeline price pressures with the headline PPI down by -0.1 pp to +2.2% yoy versus consensus estimates for +2.5%. Overall, US 10-Year Treasury bond yields declined by -22 bps to 4.21% in the past week.
German 10-Year Government bond yields decreased by -26 bps to 2.36% due to, inter alia, increased intra-euro area safe haven demand, while French bonds underperformed. Specifically, the 10-Year government bond yield increased in the past week by +2 bps to 3.14%, with the OAT-Bund spread widening by +28 bps to 78 bps (highest since November 2012) as the French political uncertainty enhanced fiscal trajectory concerns.
In the event, France ran a budget deficit of -5.5% of GDP in 2023, while estimates from the European Commission suggest a deficit of -5.3% of GDP in 2024 and -5.0% in 2025, leading the gross general government debt to 113.8% of GDP in 2025 from 110.6% in 2023.
On top of political-induced volatility, the European Union (EU) decided to provisionally raise tariffs on Electric Vehicles (EV) imported from China, by percentages ranging from +17% to +38% (on top of a pre-existing rate of 10%) depending on the extent of compliance of each carmaker during an anti-subsidy investigation launched by the EU back in September 2023.
The move comes as the EU views the heavy subsidies provided by the Chinese State to its domestic EV producers as distorting the competition with EU carmakers. The new rates will be finalized on July 4th following negotiations with China, with the latter vowing to “take all necessary measures” to protect the Chinese automakers.