global market: 5 global market themes for the coming week
The US Fed, which is expected to follow suit in May, receives March inflation data, while the ECB faces pressure from its hawkish factions on Thursday to start tightening policy.
And Europe has become aware of the risk of an upset French election.
1. MADAM PRESIDENT?
Far-right French politician Marine Le Pen, who caused panic ahead of the 2017 presidential elections, is experiencing a resurgence in opinion polls and markets are scared.
With the first round of presidential elections scheduled for Sunday, Le Pen is closing the gap with incumbent President Emmanuel Macron.
Macron is still expected to win the presidency, but the possibility of an upset has set in. A victory for Le Pen would hamper European cohesion, while his program of big spending and tax cuts would send France’s spending bill skyrocketing.
The premium demanded by investors to hold French debt relative to Germany rose, while shares of companies targeted by Le Pen for nationalization fell.
Unlike 2017, Le Pen does not advocate abandoning the euro. But a strong showing on Sunday will herald market turmoil ahead of the April 24 decider – and possibly after.
2. HAWKS OVER FRANKFURT
With Eurozone inflation at 7.5%, Thursday’s European Central Bank meeting will see the hawks come out strong.
They have become increasingly vocal as markets now target a rate hike in July, having increased their bets since the March meeting.
ECB Chief Economist Philip Lane warns against reacting to short-term energy-related price spikes. And the war in Ukraine is weighing heavily on the economy and consumer confidence.
The ECB knows well the price of a political error. It has raised rates in the past, only to turn around quickly. Yet inflation shows no signs of peaking, let alone returning to the 2% target. The roar of the hawks can get louder.
3. BIG RIFLES, BIGGER HIKES
Canada and New Zealand appear poised for their biggest interest rate hikes in 20 years, underscoring the global struggle to contain inflation.
The two banks meet on Wednesday. The swaps assess a greater than 90% probability of a 50 basis point hike from the Reserve Bank of New Zealand and a greater than 80% probability of the Bank of Canada doing the same.
With Canadian inflation above target until 2024, another move of 50 basis points could occur in June. New Zealand hiked 25 basis points in February – its third – and signaled the possibility of bigger hikes to come.
These would be the most drastic G10 hikes this cycle. Until May, when the Federal Reserve is expected to raise rates by 50 basis points.
4. PRICE WAR
Minutes from the Fed’s monetary policy meeting in March showed bigger rate hikes and aggressive balance sheet runoff are likely in the coming months as the central bank battles inflation. .
All of this sheds light on Wednesday’s inflation data. February’s 7.9% print was the largest annual increase in 40 years. In March, consumer prices rose 8.3% year-on-year, according to surveyed economists, as the war between Ukraine and Russia sent commodity prices soaring.
And as Americans dig deeper for rent, gas and food, wage gains are eroding — the inflation-adjusted average hourly wage fell 2.6% year-on-year in February. A strong impression of inflation will strengthen the case for more drastic policy tightening.
5. BANKS IN THE TRIAL
As rising bond yields, labor shortages and soaring commodity prices rattle stock markets, first-quarter U.S. earnings will give investors a chance to gauge the resilience of balance sheets, pressures on business costs and share buyback plans.
Overall, S&P 500 earnings growth is expected at 6.8% in the January-March quarter, up from the 53% rebound seen a year ago after the COVID-era slump, according to Refinitiv BIBS.
Big banks kick off the season with reports from JPMorgan on Wednesday, followed a day later by Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley.
Banking stocks have done poorly this year, with losses of 11%, compared to 6% for the S&P 500
The six largest lenders are expected to post a 35% drop in net income compared to the previous year. Investment banking revenues may have shrunk, especially after the Russian invasion of Ukraine, while some banks need to build provisions for Russia-related losses.
Finally, see if banks can rein in share buybacks after seeing excess capital eroded by first-quarter losses on their bond holdings.