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Global Economic Weekly - June 5, 2017

For most of us in the UK, this week will be all about Thursday’s election – and rightly so. If we were to wake up on Friday with Jezza as our leader, UK equity markets would almost certainly tank, sterling would go into free fall and 10% of us would probably emigrate. A Labour victory (rather like an outbreak of plague) is simply not priced in.  I very much doubt it will happen, whatever Survation or YouGov might say – but then I’ve been wrong before. And there is something rather comforting about raggedy old men suddenly discovering their Inner Cool. Still, let’s keep things in perspective; despite the election and despite London’s vulnerability to terrorism, what’s happening across the Atlantic is probably more important.




There, President Trump has done it again – at least, that is what his many detractors allege.




It is true that, his (well-flagged) announcement that he will pull the US out of the Paris Accord on climate change plays to his “base” – the so-called ‘deplorables’.  It was, after all, something  he promised during the campaign, and it is certainly what voters in the so-called ‘rust belt’ states in the US wanted. Pittsburgh not Paris… However, as with many of Trump’s decisions, the reality is less dramatic than it appears:



-First, he did not say that he doesn’t believe in global warning (whatever you might have read). All he said was that the Paris deal is unfair to the US – which may be true.

-Second, the Accord is voluntary anyway. There is no enforcement mechanism, and countries were free to set their own targets. It is correct that the targets Obama had agreed for the US were tougher than those that China and India (for instance) had put forward, but there is no penalty for non-compliance.

-Third, although the US would not have met its targets anyway, its emissions are falling – and will continue to do so since cheap natural gas is pushing out much dirtier coal. In contrast, Germany’s emissions are increasing – and


doing so quite sharply, as a consequence of Ms Merkel’s quixotic decision to phase out nuclear and the resulting need to rely on filthy, dirty lignite for power generation.

-Fourth, and again contrary to the received wisdom, the US has not actually quit the Accord. Since Trump announced that he would pull out under the agreed terms for leaving, Washington cannot even formally submit its application to leave until November 2019 – and there is then a year to settle the details. That takes us beyond the next election – and, potentially, beyond the Trump Presidency. (Since there was a faster way to quit by revoking earlier legislation, this is unlikely to have been an oversight; Trump was sending a message.)



Nevertheless, Trump’s ‘base’ is happy – and his detractors have yet another stick with which to beat him. The row also served as a welcome distraction for the White House from other things that are going on.



One (that is, in my opinion, important and welcome) is that, despite intense pressure, Trump declined last week to move


the US Embassy in Israel from Tel Aviv to Jerusalem – though the waiver he signed only lasts for six months, meaning that he will have to reconsider the issue at the end of the year.  This directly contradicts a promise he made during the

campaign, but it is a small victory for common sense. Beyond that, there is still an intense focus in Washington on the Trump campaign team’s alleged links with Russia. Former FBI Director James Comey is (finally) scheduled to testify to Congress this week. In the meantime, Trump’s son-in-law, Jared Kushner and (even more bizarrely) UKIP’s Nigel Farage have been named as ‘persons of interest’ in the investigation. On top of that, two former Trump advisers, Mike Flynn and Paul Manafort, are also being investigated over their business links with Turkey and Ukraine respectively; in the end, those investigations may turn out to be more substantial than whether Kushner was or was not trying to set up a ‘back channel’ to Moscow. (If he was, more power to him; I still think a ‘reset’ with Russia would have been wholly positive.)



International meetings:   It has been a very busy couple of weeks – starting, of course, with Trump’s trip to the Middle


East and Europe.




As noted last week, that began pretty well in Riyadh, where he behaved himself – and ended not so well in Brussels and Taormina. While Trump was perfectly right to criticise European countries for their failure to meet NATO spending targets, his (perhaps unintentional) failure specifically to endorse NATO’s Article 5 pledge to come to any member’s assistance provided Ms Merkel with the opportunity to denigrate the US alliance and to insist that “we Europeans must really take our destiny into our own hands” – whatever that means, given that Germany’s defence spending is only about

1% of its GDP.  Things didn’t get any better at the G7 Summit, where Trump clashed with other leaders over trade policy


and climate change – and where the so-called “body language” was awful. (Again, I am not so keen to blame Trump; France’s newbie President was clearly making a point with his big, butch handshake.)



It may be stretching things too far, but several commentators  (particularly those of an anti-US orientation) are already


seeing Trump’s trip as a turning point in post-WWII international relations, with Continental Europe voluntarily opting out from under the US defence umbrella. The problem is that it is a violent world, with what the FT calls the “shared values of the Western order” under threat. Saturday night’s carnage in London, the Manchester bombing, the killing of Copts in Egypt, and the massive loss of life in Kabul on Wednesday all indicate just how much the global order has deteriorated

since 9/11. I sort of doubt Germany’s part-time soldiers are ready to step into the breach. Against this background, two other meetings from the last week are worth noting:

-Bilderberg: On Thursday, the annual (semi-secret) meeting of the so-called Bilderberg Group began in Chantilly, Virginia. The official agenda was supposed to focus on Russia, China, trans-Atlantic relations and cyber-security, but inevitably the top concern was Trump. There were 130-140 participants – including several senior US Administration officials (including National Security Adviser McMaster, Commerce Secretary Ross and one of Trump’s key strategists, the New Zealand-born Chris Liddell). NATO’s Jens Stoltenberg and the IMF’s Christine Lagarde were also there, along with virulent Trump opponents like Sen Lindsey Graham, former CIA Director John Brennan and several top Silicon Valley/Wall Street figures. One interesting addition was our own former Chancellor, the Evening Standard’s part-time editor, George Osborne – whom I am still tipping to defect to the LibDems in a couple of months.



-SPIEF: The annual meeting of Russia’s “anti-Davos”,  the St Petersburg International Economic Forum, began on Friday, with a surprisingly high-profile attendance list, including Putin himself, UN Secretary-general Guterres, Saudi Arabia’s Energy Minister al-Falih, India’s PM Modi and the heads of BP, Total and Boeing. Despite tough economic sanctions against Moscow, the US is said to have sent 369 delegates. Among the topics on the agenda were cooperation with OPEC, Nordstream2, the Shanghai Cooperation Organisation and the new Eurasian Development Bank. It will be interesting to see how hard Boeing, in particular, lobbies for sanctions to be eased.


On top of that, the EU held its own mini-Summit with a top Chinese delegation on Friday. In other words, whatever Merkel might say, international  cooperation is far from dead. (That said, I suppose one can see the GCC’s decision to cut ties with one of its own members, Qatar, over alleged support for Iran as a breakdown of regional cooperation – though it could equally be seen as an attempt to shut down criticism of Gulf rulers by al-Jazeera.)



The global economy:   While there has been a lot of public hand-wringing about global economic stagnation, it is worth pointing out that, when you look at the numbers, things are not so bad. One indicator of that was the World Bank’s latest Global  Economic  Prospects report, released yesterday, which confirmed global growth of 2.7% this year, rising to 2.9% next, with trade likely to grow 4% in 2017. But there is more. As shown below, the IHS/Markit manufacturing PMIs for almost all the major industrial countries are still comfortably above 50 (which indicates real growth) – and even in the case of Greece (where unemployment is still around 25%) things are not quite as bad as they were. Indeed, it was reported on Friday morning that Greek GDP was up 0.4% year-on-year in the first quarter, after a fall of 0.5% at the end of last year. That said, it is worth noting the fall in the Caixin (ie private sector) PMI for China below the 50 level:



Markit manufacturing PMIs May/April







It is also significant that global stock markets are at or close to record highs, with the MSCI Emerging Markets index, for instance, up 25% year-on-year, and most US indices at or close to a record. Although some see this as a bubble about to burst, it is supported by strong corporate profits – and at least one influential investor, GMO’s Jeremy Grantham, has come to the conclusion that higher market valuations are now a ‘permanent’ feature of the financial landscape.  (For many


years, Grantham has been known as a ‘permabear’, ie someone whose view of markets was deeply pessimistic.) Over the weekend, it was reported that another normally shrewd observer, Nobel prize-winner Bob Shiller, had come to the same conclusion; indeed, he was quoted as saying markets could rise another 50%. Personally, I am skeptical – but Grantham and Shiller are a lot richer than I am.



Obviously, much depends on the US – where things looked pretty good last week, at least until Friday, when the May employment data came out.



In my opinion, it is still virtually certain that the FOMC will raise the Fed funds rate by another 25 basis points when it meets on June 13-14. Indeed, one Fed Governor, John Williams, predicted last week that there would be “three or four” more increases this year. It also seems very likely that the Fed will announce plans for shrinking its bloated US $4.5 trillion balance sheet, probably in the third quarter. However, the employment data has introduced a small element of doubt.



On top of Williams’s comments, another Fed Governor, Jerome Powell, also spoke last week in favour of higher rates, and the Atlanta Fed predicted that the annualised GDP growth rate in the second quarter will be as high as 3.8% - up from just

1.2% in the first quarter.




One thing that clearly underpinned this optimism was the Fed’s own Beige Book survey of business conditions, which was strongly positive, especially about consumer spending – notwithstanding concerns about the automobile loan market. However, not everything else has gone so well.  In particular – and, as noted, somewhat to the surprise (and shock) of the markets – it was reported on Friday that non-farm payrolls for May rose just 138,000, down from 174,000 in April and considerably less than the 185,000 that had been expected. True, the unemployment rate fell from 4.4% to a rock-bottom

4.3%, and average hourly earnings were up another 0.2%. Nevertheless, this was a big disappointment. In addition, it was also reported last week:



-that the US trade deficit rose unexpectedly in April, from US $45.3 billion to US $47.6 billion – providing further ammunition for those who still believe free trade is designed to make a sucker of the US;

-    that pending home sales fell 1.3% in April (and were down 3.3% year-on-year); and


-    that the New York State ISM PMI fell last month from 55.8 to 46.7. On the other hand (and perhaps more importantly), it was also reported:




-that personal income was up 0.4% in April, after a rise of 0.2% in March, while personal spending also increased by 0.4%, after a rise of 0.3%;

-    that the Case-Shiller national house price index (where Bob Shiller made his money) rose 5.8% year-on-year in


March – its biggest jump in 33 months;


-    that the Chicago PMI jumped in May from 58.3 to 59.4; and


-    that the nationwide ISM manufacturing PMI also rose, from 54.8 to 54.9.



So, at worst, last week’s economic data was a wash. That was also true of inflation. At the beginning of last week, the (final) PCE price index for April was reported to have risen 0.2%, after falling by the same amount in March. Year-on- year, that means the PCE was up 1.7% - still well below the Fed’s 2% target, and down from 1.9% in March. Nevertheless, I don’t have much doubt that  the Fed is still on track to raise the funds rate next week.



As for the impact on equity and bond markets, it is worth noting that short S&P interest is now said to be at a three year low.  Despite that, US markets were generally quieter last week than the one before – when the DJIA was up 1.3%, the S&P500 was up 1.4% and Nasdaq was up 2.1%. Through the close on Friday (and despite the disappointing employment data), the Dow was up 0.6% at 21,206, the S&P was up 1.0% at 2,439 and Nasdaq was up 1.5% at 6,304.



As for US bond markets, the strong probability of an imminent rise in the funds rate has made little difference. Through the close on Friday, the yield on the benchmark  10-year Treasury fell from 2.25% to 2.16%, while the 30-year yield fell from 2.91% to 2.81%.



In the Eurozone, things are different. While the Fed is clearly preparing the market for a rise in US interest rates, Draghi continues to insist that ECB monetary policy will remain accommodative  – though he did tell the EP’s ECON Committee last week that the Bank will update its economic forecasts at its monthly meeting on Thursday.



The general feeling is that – despite Macron’s impressive victory in France, and the very real sense that anti-EU/ethno- nationalist sentiment is in retreat throughout Europe – the ECB does not want to do anything that would rock the boat, particularly given:


-the unresolved problem of Greece’s debt (due to be tackled again on June 15, with the Germans still holding out against the haircut that everyone else acknowledges is inevitable);

-the forthcoming Parliamentary elections in France (on June 11 and 18) – though the latest polls suggest that Macron’s En Marche! could get 30% of the vote in the first round and that it should come very close to an overall majority in the second, which would be a genuinely impressive achievement given that Macron was virtually unknown three years ago; and

-the growing possibility of an election in Italy, perhaps as soon as September, following passage of a new electoral law modelled on that of Germany (based on proportional representation with a 5% threshold).



That probably means that the ECB will be much less keen to raise interest rates than the Fed – and even (depending on the outcome of the UK general election) the BofE.



That said, the Eurozone economy is also in decent shape and probably doesn’t need much more stimulus. Last week, for instance, it was reported:



-    that business lending in the eurozone was up 2.4% year-on-year in April;


-    that the Commission’s industrial confidence indicator rose from 2.6 to 2.8 last month;


-    that the overall unemployment rate fell from 9.4% to 9.3%; and


-    that the consumer confidence indicator for the eurozone improved from -3.9 to -3.3.




However, it isn’t all good news. In particular, the business confidence index fell from 1.1 to 0.9 and, more important, the Commission’s overall Economic Sentiment Index fell in May from 109.7 to 109.2 – which was a big surprise. Still, even a Eurogrump must concede that things are generally picking up.



As for individual Eurozone members, things were mixed:




-In Germany, for instance, it was reported that retail sales fell unexpectedly in April by 0.2%, or by 0.9% year- on-year – considerably weaker than the 2.3% gain that had been expected. Moreover, the (harmonized) inflation rate also fell in May from 2.0% to just 1.4%. However, the unemployment rate dropped from 5.8% to a record low of 5.7%.


-In France, it was reported that first quarter GDP growth has been revised up from 0.3% to 0.4%, with consumer spending up 0.5% in April, and the consumer confidence index rising from 100 to 102. On the other hand, as in Germany, inflation is falling: the preliminary year-on-year increase in the CPI last month was just

0.9%, down from 1.4%.




-In Italy, meanwhile, the unemployment rate edged down in April from 11.5% to 11.1%, while (as in Germany and France) inflation eased last month from 1.9% to 1.4%.




-In Greece, retail sales were down 1.0% year-on-year in March, after a rise of 9.9% in February. However, as noted first quarter GDP was up, just.




Whatever, the Commission is clearly keen to take any advantage it can of (allegedly) rising pro-European sentiment. On Tuesday, therefore, it presented a highly ambitious draft 2018 budget – proposing an 8.1% increase in spending to €145 billion. In part, this is an attempt to get as much out of the UK as possible before ‘Brexit’ takes effect; however, it is also recognition that, with a new Merkel-Macron  axis, it is possible, once again, to think about ‘deepening’ European integration. (It may have to move quickly to take advantage of Macron’s ‘honeymoon’; he is already having to cope with two separate scandals involving Cabinet Ministers – with the more important one alleging that Richard Ferrand, his Housing Minister, a former Socialist mayor, had his hand in his local cookie jar.)



As for the UK, it’s a mess… In particular, the debate over ‘Brexit’ has been overwhelmed by concerns over domestic terrorism, taxation and pressures on social services in an election campaign that has become more chaotic than any in recent memory.



According to the latest Survation poll for the Daily Mail, the Conservatives are now ahead of Labour by just one point – which would translate into a net loss of seats for Mrs May. I don’t believe it, but a more plausible YouGov hybrid poll gave the Tories a lead of only 4-5 points – which would potentially translate into 317 seats out of 650, compared with 253 for Labour (with other parties winning a total of 80 seats). If this were accurate, Mrs May might well need the support of Northern Irish MPs – and that could make negotiating ‘Brexit’ very tricky. It might also mean either a Cabinet shakeup (perhaps replacing the Chancellor, Philip Hammond, with the newly bespectacled Amber Rudd, who for some reason is seen as a rising star) or a leadership challenge, since it is widely believed that Mrs May’s decision to call an election was unnecessary and that her election campaign has been shambolic. (Blame Nick and Fiona.)


To me, it still seems most unlikely that the Tories will do anything like that badly; an overall majority of 60-70 seats seems the best bet given that security has clearly moved up the agenda and that the Tories can always point to Diane Abbott as a future Home Secretary. Nevertheless, it will certainly be interesting to see what the party takes away from this election. Labour has closed the gap despite (or because of) a commitment to raise corporate taxes sharply and to hit the ‘rich’ with higher income tax. It has also targeted City ‘fat cats’ with a so-called ‘Robin Hood tax’ (a favorite scam promoted by its hard-left tax adviser, Richard Murphy). And, unlike the Tories, it has made a fair fist of costing its proposals. And, in his avuncular, Bernie Sanders-type way, Corbyn has turned out to be a much better campaigner than anyone expected – with even his gaffes being seen as a sign of sincerity and (dare one say it?) decency.



But, to me, the two big mysteries of the election are still:




-    what happened to ‘Brexit’, which has scarcely figured at all in the campaign? and


-where are the LibDems, who really ought to be rolling in it since they are the only national party reflecting the views of the 48% who voted to Remain?



As for ‘Brexit’ itself, the current intention is to begin formal negotiations on June 19. So far, there is very little sign that the


EU is softening its hard-line positions – notably on the ‘exit fee’ that the UK will (allegedly) have to agree to before talks on trade can start. If Mrs May only has a small majority, it can be assumed that EU negotiators  will have little incentive to improve the terms on offer since they will hope she can be replaced with a PM less committed to ‘Brexit’ and less likely to be intransigent in any negotiation.



Meanwhile, the UK economy is sending out mixed signals. On the one hand, it was reported over the last week:




-     that GfK’s consumer confidence index improved in May, albeit only from -7 to -5;


-    that M4 was up 8.2% year-on-year in April (which will please Tim Congdon), compared with 6.6% in March;


-    that Markit’s construction PMI (which is particularly important in the UK) rose last month from 53.1 to 56.0;




-    that the World Bank has upgraded its GDP growth forecast for this year from 1.2% to a fairly respectable 1.7%. On the other hand, it was also reported:


-    that (according to the Nationwide) UK house prices fell 0.2% in May, the third consecutive monthly drop –


though they were still up 2.1% year-on-year;


-    that the EU’s economic sentiment index for the UK fell in May from 110.5 to 108.2; and


-    that Lloyds Bank’s regular survey of business optimism fell in May from +60 to +26, the lowest level since last






As for inflation, the BofE’s  latest  Inflation Report expressed concern that price rises are finally working their way through. However, last week, the BRC reported that its shop price index fell 0.4% year-on-year in May, following a fall of 0.5% in April. So, the weaker pound isn’t really showing up at the High St level – at least, not yet.



The impact of all this on European markets has been generally positive. Two weeks ago, the Xetra Dax was down 0.3% - but the CAC-40 was up 0.2% and the FTSE-100 was up 1.0%. Last week, through the close on Friday, the Xetra Dax was up 1.8% at a record 12,823, the CAC was up 0.2% at 5,343 and the FTSE was flat at 7,548. Meanwhile, the yield on the 10- year German bund fell from 0.33% to 0.27%, while that on the comparable UK gilt eased from 1.09% to 1.04%.



In Japan, equities were also strong last week, with the Nikkei-225 closing on Friday at 20,177 – up 2.5% for the week, and


3.1% in the last two weeks.




That is genuinely impressive. It seems to reflect a belated recognition that “Abenomics” is, indeed, working and that


growth is – finally – starting to pick up. Last week, for instance, it was reported:




-    that the unemployment rate in Japan was unchanged at 2.8% in April – the lowest level in 20 years;


-    that the ratio of jobs-to-applicants is now 1:48:1 – the highest since 1974;


-    that retail sales were up 3.2% year-on-year in April, up from 2.1% in March;


-    that preliminary data showed industrial production up 4.0% in April, or 5.7% year-on-year – following a fall of


1.9% in March;


-    that housing starts were up 1.9% year-on-year in April;


-    that the consumer confidence index rose last month from 43.2 to 43.6; and


-    that total vehicle sales were up 6.1% month-on-month in May.


Against that, it was reported that household spending was down 1.4% year-on-year in April and that construction orders were off 0.2%. Nevertheless, the market seems finally to be taking notice of what really seems to be a significant turnaround.



For once, China looks less impressive… As noted, the Caixin PMI was disappointing. Nevertheless, one should bear in mind that it is private, whereas the NBS PMIs are official. Not surprisingly, therefore, the NBS PMIs are more optimistic. The official manufacturing PMI for May, for instance, was unchanged at 51.2, while the services PMI improved from 54.0 to 54.5.



However, what really got the market’s attention last week was the PBoC’s vigorous defence of the renminbi – which, thanks to aggressive intervention, is now 2% higher against the dollar (at RMB 6.82/US $) than it was before Moody’s downgraded China ten days ago. It appears that the authorities in Beijing are trying to make a point.



As noted, the emerging markets in general have been a pretty good investment over the last few months – even Brazil and


Russia. Nevertheless, in my opinion, there remain serious grounds for concern:




-Brazil: Despite the continuing  ‘car wash’ scandal, the central bank was able to cut the Selic rate last week by one point, to 10.25% - which should give industry some breathing space, and boost GDP (which was up 1.0% in

the first quarter after two negative quarters). The rationale is that inflation is now at a 10-year low – well below


the Bank’s 4.5% target. In the meantime, however, JBS (the holding company run by Joesley Batista) has agreed to pay a fine of US $3.2 billion for its involvement in Brazilian corruption (it acknowledges that it paid US $150 million in bribes to local politicians). Although that fine will be payable over 25 years (and therefore is not quite as onerous as it might appear), it is indicative of the scale of corruption in Brazilian politics – which has tainted absolutely every party and almost every major political figure.



-Venezuela: The row over Goldman Sachs’s US $865 million purchase of US $2.8 billion worth of PdVSA bonds continues to simmer. The Opposition in Caracas has called them ‘hunger bonds’, and has indicated that it might not honour them should it come to power. (Good on you.)  Goldman, meanwhile, has denied that it bought the bonds through the Central Bank – ie that it was effectively providing liquidity to the Maduro government. However, these denials have been met with considerable skepticism; even if the purchase was (as


Goldman hints) through a middleman, the bonds were effectively in the central bank’s portfolio – and hence did provide liquidity to the Maduro regime.




Currencies:   Friday’s weaker than expected US employment data gave the dollar a little nudge down at the end of the week – but, even before then, it had been falling against the euro, in particular.


The week before last, the dollar had been up 0.1% against the euro and up 1.8% against sterling. It had, however, closed down 0.2% against the yen.  Last week, through the close on Friday, it was:




-    down 0.8% against the euro, at US $1.128/€;


-    down 0.6% against sterling, at US $1.289/£;


-    down 0.7% against the yen, at Y110.40/US $; and


-    down 1.0% against the Swiss franc, at SF0.963/US $.




Sterling’s partial recovery might suggest that FX traders are less concerned by the tightening of UK opinion polls than are political commentators – who are anxious to avoid a third ‘mistake’ (after ‘Brexit’ and Trump). It seems very likely that a Conservative majority of 30-40 seats next Thursday is already ‘baked in’. Anything less, and the pound will be under pressure; anything above 60, and it is likely to appreciate. The euro’s strength is, perhaps, more surprising given Draghi’s doveishness and the fact that, while US interest rates are clearly headed up (despite the jobs data), the ECB seems likely to stay in accommodative mode for a while longer. Nevertheless, it was also reported last week that short positions against the euro are now at their lowest in three years.



The ECB’s next policy meeting will be in Tallinn on Thursday; it will be closely watched for any hint that Draghi is succumbing to pressure from the Bundesbank – whose President, Jens Weidmann, has made it abundantly clear that he wants the ECB to move faster on ‘normalisation’.



As for gold, it normally moves inversely with the dollar – and that was again true last week. At the opening last Monday, spot gold was trading at around US $1,265/oz. By the close on Friday, it was at US $1,279 – up almost 1.0% for the week.



Energy:   News stories last week emphasized Saudi Arabia’s new desire to “coexist” with North American shale producers


– recognizing that the recently-renewed OPEC/non-OPEC production restraint agreement will not put them out of


business. There is clearly some disappointment among traders that, although the agreement was extended at the latest


OPEC Ministerial meeting, it was not “deepened” – and that has tended to depress spot prices.




Nevertheless, other factors are also at play – notably, a continuing fall in global stocks. In the US, for instance, it was reported last week that (according to the API) private sector stocks were down another 8.7 million barrels in the latest week, while (according to the EIA) total stocks were off 6.4 million – or 10.9 million in just two weeks.



Despite that, prices are down. In late trading on Friday, for instance, WTI for July delivery was trading at US


$47.76/barrel, off 4.4% week-on-week, while August Brent (the new front- month contract) was at US $49.95, off 4.6%. With further talks between Saudi Arabia and other non-OPEC producers having undoubtedly taken place in the margins of the St Petersburg meeting, that may turn out to be close to a bottom. However, we now have a new situation, with Qatar’s ostracisation within the GCC. Although the country is not a major oil producer, it is a big exporter of gas, which tends to be fungible at the margins. That could cut two ways. If it is seen as a threat to Gulf exports, it could boost prices; if it is seen as boosting Qatari exports to recapture revenue lost through the boycott, it could force prices even lower.  Take your pick.



Banking and finance:  Two news stories are worth flagging, both from Europe:




-Last Wednesday, the European Commission published an ambitious proposal for a new asset class. It is proposing that sovereign debt from individual Eurozone member states should be packaged into a single financial instrument, which would (it intends) be zero-weighted for capital purposes. This idea (which was incorporated into its blue-print for the EU post- ‘Brexit’) would be a major step towards its goal of a single Eurozone Treasury – something that will be resisted strongly by German Finance Minister Schäuble (at least until France gets its public finances in order).



-On Thursday, the Commission gave its formal approval to a complex bailout and restructuring deal for Italy’s most troubled bank, Monte dei Paschi di Siena. The deal (which breaks many EU rules) permits the Italian government to pump €6.8 billion into the bank in return for 70% ownership. It also involves conversion of €2 billion of junior bonds into equity, the sale of €26 billion of ‘toxic’ loans to a new ‘bad bank’, branch closures, job losses and pay caps for MPS executives. It may keep MPS alive – just. But it won’t solve the broader


problems of the Italian banking sector, which will be pushed under the table until after the election (now, possibly as soon as September).



As for this week, the City will inevitably focus on the UK election; anything less than an overall Conservative majority of


35-40 will be a disappointment – whatever the polls say. Markets will also focus on:




-    the ECB meeting in Tallinn, though (since no one is expected any change in interest rates) attention will mostly


be on Draghi’s subsequent comments for any hint as to when the Bank will start to tighten; and


-    Comey’s testimony to the Senate Intelligence Committee  (also likely to take place on Thursday).




At the very end of the week, Puerto Rico is due to hold its plebiscite on whether or not to apply to become the 51st State.


In the past, the issue was independence; now, with the Commonwealth  officially bankrupt, statehood has suddenly become a whole lot more popular. However, chances that the US Congress (which has the final say) will go along are slim to zero.


Almost everywhere, the main economic releases of the week will be the non-manufacturing  (ie services) PMIs. Other than that, in the US, traders will look for factory orders and durable goods orders, both for April.




At the eurozone level, the main release will be retail sales for April and the Sentix investor confidence index for June. Among member states, the key releases will be German factory orders and industrial production for April.



Here in the UK, retail sales, industrial production and the trade deficit are all due.




In Japan, the main release will be first quarter GDP, though markets will also focus on the preliminary reading for leading


indicators in April. In China, key releases are FX reserves for May, inflation data and the trade surplus.




And then, at the very end of the week, there will be the first round of the French Parliamentaryelections; as it stands, the expectation is that En Marche! will do very well – perhaps even winning an overall majority. Whatever one might think about the substance of Macron’s policies that would be an astonishing achievement.





Andrew Hilton



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