Macron wins second term

• Incumbent president Emmanuel Macron has won the second-round run-off in the French presidential elections, beating Marine Le Pen into second place with 57%to 43% of the vote with 95% of ballots counted. The implied stability of a second term for Macron compared to the potential disruption of a Le Pen presidency could provide some stability for markets, although the euro has pared its gains after initially opening up against the dollar in early morning trading this morning. Macron’s win is a positive for supporters of greater European integration.
• The US composite PMI survey fell to 55.1 in April, from 57.7 the previous month. The decline was driven by the services sector, which accounts for around two thirds of the US economy and fell to 54.7. Analysts had anticipated that the measure would match March’s reading of 58.0. Manufacturing by contrast rose to 59.7 in April, beating expectations and up from 58.8 in March, but price pressures were evident in both surveys. Input and output prices both soared, implying that inflationary pressures will remain to the fore in the coming months even as some of the energy price rises pass through the base.
• UK retail sales including auto fuel fell -1.4% m/m in March, a far greater decline than the consensus projection of -0.3% in evidence that the cost-of-living crisis is starting to bite into household spending. YouGov and ONS surveys had already pointed towards households cutting back on non-essential spending as they cope with rapidly rising energy and food costs. In more signs that the recovery is slowing, the composite PMI dropped to 57.6, down from 60.9 and missing predictions of 58.7. The decline was largely driven by services, which fell from 62.6 to 59.3. More positively, the manufacturing PMI exceeded expectations for the April reading, coming in at 55.3, up from 55.2 in March (consensus 54.0). Nevertheless, business confidence is at a multi-month low and the deteriorating outlook is weighing on the pound. The IMF recently downgraded the UK’s real GDP growth forecasts for 2022 and 2023 from 4.7% and 2.3% to 3.7% and 1.2% respectively.
• The economic outlook has also deteriorated for Germany, which is especially exposed to Russian energy export. The IMF has downgraded its 2022 growth forecast from 3.8% to 2.1%, and IFO surveys due today are expected to show a further decline in sentiment. Bloomberg has reported that the German government is set to increase its borrowing by EUR 40bn to a total EUR 140bn this year, underscoring how the long-standing policy of extreme fiscal prudence has largely now been abandoned amongst the extraordinary shocks of the pandemic crisis and the war in Ukraine.
• The prospect of Lebanon securing a new deal with the IMF remains distant for the time being as the country’s banks have rejected the government’s proposed recovery plan, claiming that it puts the bulk of the losses in the financial system on Lebanese lenders and depositors. In its April 7 statement the IMF had listed ‘Cabinet approval of a bank restructuring strategy that recognizes and addresses upfront the large losses in the sector, while protecting small depositors…’ as one of the eight prerequisites to a new support package.
• Dubai plans to create a new “digital economy court” within the DIFC as it seeks to grow its digital economy and attract investment into the sector. Specialised courts will also be set up to hear intellectual property cases. Separately, Sheikh Mohammed approved a AED6.3bn package to build 1100 homes and allocate 3500 plots for UAE nationals.

Today’s Economic Data and Events

12:00 Germany IFO business climate, April. Forecast: 89.0

12:00 Germany IFO business expectations, April. Forecast: 83.5

Fixed Income

• The font end of the UST curve closed considerably lower last week as markets price in aggressive moves from the Federal Reserve at its upcoming FOMC meetings. The 2yr UST yield added 21bps last week to close out at 2.6672% though yields did dip on Friday. The 10yr UST yields showed wide moves last week, pushing up withing reach of the 3% level and adding 7bps over the course of the week.
• European bond markets are also pricing in a much more hawkish rate outlook from the ECB with yields on the 2ys Schatz up almost 24bps last week to 0.276% while the 10yr bund added 13bps to 0.969%. In the UK the 2yr gilt yield added 15bps to 1.70% while the 10yr added 7bps to 1.961%.
• Emerging market bonds were generally weaker at the end of the trading week. Indian 10yr yields added 2bps to 7.166% while there was broad selling across much of emerging Europe. South Africa was a notable outlier with yields falling, marginally, on Friday.
• S&P affirmed their rating on Egypt at ‘B’ with a stable outlook.

FX

• The dollar continues to benefit as UST yields rise and as markets move away from risk assets. The broad DXY index added 0.7% last week with a gain of 0.6% on Friday alone. EURUSD closed down 0.19% at 1.079 at the end of last week while USDJPY added more than 1.6% to take it within reach of the 130 level. GBPUSD, seen as a relative risk-on trade, fell 1.7% last week to 1.2839, its lowest level since Q3 2020.
• In commodity currencies USDCAD managed to hold out best with losses for the loonie limited to 0.8% last week. The pair closed at 1.271 on Friday, a single day rise of 1.03%. AUDUSD fell more than 2% while NZDUSD dropped 1.8% last week, falling particularly heavily as markets crumbled on Friday.

Equities

• Equity markets were pummeled at the close of last week as the prospect of more rapid tightening from the Fed became ever more likely. Friday’s losses on the key US  indices were especially severe, with the NASDAQ losing -2.6% and the S&P 500 and the Dow Jones both dropping -2.8%. This was the biggest drop for the blue chip Dow Jones since the peak of the pandemic crisis, while the S&P’s drop was the biggest since March. The three indices lost -3.8%, -2.8% and -1.9% w/w respectively.
• There were also sharp losses in Europe on Friday, but the week overall was more mixed. The CAC added 0.5% w/w and the DAX 0.6%, but the FTSE 100 lost -0.8%. The UK’s benchmark index is one of the few major global indices to be up ytd, however, current with a gain of 1.9% since the start of the year.
• Local GCC indices have also had a strong first four months of 2022 and the local markets added further to their ytd gains last week. The ADX added 1.6% and the DFM 2.3%. In Saudi Arabia the Tadawul closed down -0.6% w/w.

Commodities

• By the standards of other risk assets, the decline in oil prices last week was relatively contained. Brent futures closed down 4.5% over the five days to settle at USD 106.65/b while WTI fell to USD 102.07/b, down by 4.6%. Hawkish central banks, a stronger dollar and an uncertain demand outlook in China are all weighing negatively on the near-term outlook for oil prices.
• Rising yields, both nominal and real, are countering against gold’s supposed safe-haven status. The yellow metal dropped 2.4% last week to USD 1,931/troy oz while palladium was the only precious metal to manage any gains, albeit at just 0.2%, over the course of the five days.

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