Politics remain a key focus for markets, but the latest developments in Europe are positive. In France, the first round of the presidential election ruled out the least market-friendly outcome, and although eurosceptic Marine Le Pen is in the run-off as expected, polls suggest reformist Macron should win. The snap election called in Britain for June is a material positive game-changer for Brexit negotiations.
Beyond politics, focus has been on fading conviction in so-called Trump trades – higher inflation expectations and interest rates and buoyant risk assets – following speed bumps on the US domestic agenda and increased geopolitical tension.
But with global macro momentum solid – though off recent highs – and global growth expected to pick-up next year and approach 4% in 2018, do not dismiss inflation risks, especially in the US. Indeed the macro backdrop comforts the view that we are past peak central bank easing. The Fed will likely raise rates twice more this year and announce the start of the unwind of its balance sheet. The ECB is on track to announce a taper of its quantitative easing programme later this year, but the tone at the April meeting should still be quite cautious.
We have revisited our currency views. The snap UK election caused us to increase our sterling forecast but did not alter our medium-term bearish stance. We still expect the euro to break parity but the sequencing of the ECB's tightening policies is key: a shift toward rate rises rather than a withdrawal of quantitative easing would be bullish for the euro. In rates, we expect bond yields to climb beyond near-term election risk. In credit we expect the low default environment to persist. We see valid counters to the consensus view that European equities should outperform US equities.
David Folkerts-Landau, Group Chief Economist
Key pages this month:
P6 French election updateP7 UK snap electionP10 Fading Trump tradesP11 Don’t dismiss inflationP19 Updated views on sterling and euro [more]