DXY popped and dropped Friday night:
AUD just dropped:
Commodities were mixed:
EM stocks (NYSE:EEM) held:
But junk (NYSE:HYG) is warning again:
As the curve steepened:
Which tech hated:
Credit Agricole (PA:CAGR) wraps where we are:
Global risk assets are haunted by the dual threat of tighter global financial conditions courtesy of the hawkish Fed and global growth fears. And, while the concerns about the European economic outlook have been around since the war in Ukraine began in February, more recently investors started worrying about the outlook for Asia, because of the worsening pandemic situation in China as well as some renewed fears about the country’s technology sector. Moreover, the efforts to boost oil supply seem to be helping global energy prices come off the boil and that is eroding the appeal of the most popular FX trade so far this year – longs in high-yielding currencies of energy exporters. Against this backdrop, the USD remains the high-yielding, safe-haven king of G10 FX with only the CAD and SEK able to hold their ground vs the currency. In contrast, the EUR has emerged as the biggest underperformer, dragged lower by lingering growth fears in the wake of the latest EU sanctions on Russia as well as growing political risks ahead of the French presidential vote over the weekend.
The EUR has underperformed over the past week, as financial markets woke up to the fact that the 2022 French presidential election may not be such a done deal. Recent opinion polls indeed suggest that the gap between incumbent President Emmanuel Macron and far-right candidate Marine Le Pen has closed. In our FX volatility monitor “What could possibly go wrong?” published last week, we warned that FX markets had possibly remained too complacent with regards to the French political risks, and our suggestion to be long 2W EUR/GBP gamma with downside strikes has paid off fairly well. Going into Sunday’s vote, the EUR now in our view discounts a better balanced pricing of the election risks/uncertainties, while the EUR could still be poised for some adjustment at Monday’s open depending on the outcome of this first round. Any comfortable lead for President Macron is likely to spur some relief rally in the EUR, while attention could also notably focus on the vote share of the extreme candidates (Le Pen, Zemmour and Mélenchon) and on the overall turnout. Any surprises eventually implying a greater chance for one of these three candidates to become France’s next President could keep the EUR under pressure in the run-up to the 24 April second round. It has to be noted though that the stakes do not seem as high as five years ago, as importantly none of these candidates have campaigned on the threat to leave the Eurozone. Therefore, any eventual jitters should remain relatively contained, as the main worry could be that France becomes harder to govern after the June parliamentary elections. In all, under our central scenario, we expect that the political status quo in France will be preserved even if we have to wait for the second round of the vote for a confirmation of President Macron’s re-election. To the extent that this helps soothe market nerves, it should also support demand for Eurozone assets and thus prop up the EUR over time.
I expect commodities to break down in due course as markets begin to price a forthcoming global recession as the five shocks – war and energy in Europe, property and OMICRON in China, and interest rates in the US – deliver a fatal blow to global growth.
That cannot be good for AUD as DXY also rallies into Fed tightening and rising risk aversion.