The Chinese bond market opens

Co-authored with Zouhoure Bousbih

The Chinese bond market is becoming more international and opening up to foreign investors. Coinciding with the 20th anniversary of the handover of Hong Kong to China, the Chinese authorities are displaying their aim of shaping world affairs, acting directly on the largest and most important financial market worldwide.
The Chinese bond market is the third largest worldwide after the US and Japan, with assets of $9,000 billion (source FT) if we combine sovereign bonds, agencies and corporates.
Foreign investors only account for 1.5% of this market, which is ridiculously small for an economy the size of China’s. The magnitude of the Chinese economy in the world and the proportionate weighting of its bond market are not yet comparable. But this is set to change, and this shift in balance will mark a lasting transformation compared to the current situation.   Continue reading

It’s all up in the air with central banks

Have the central banks become sources of confusion for investors? We may well think so after comments by the president of the European Central Bank Mario Draghi, and the governor of the Bank of England Mark Carney. At the ECB conference held during the week of June 26, both made comments suggesting a swift change in the two institutions’ policies.

Mario Draghi referred to above trend growth in the euro area to imply that the ECB should factor this in when deciding on its strategy. He stated that “deflationary forces have been replaced by reflationary ones”, and listeners instantly took this as a sign of the end to monetary accommodation with the beginnings of tapering at a specified date. This prompted a surge in the euro against the dollar and a swift rise in long rates. The ECB indicated that this reaction was too forceful and that investors had over-interpreted the president’s comments.

Meanwhile at the Bank of England, Mark Carney hinted at an interest rate rise by the central bank, having displayed quite a different stance just a few days before. At the latest Monetary Policy Committee meeting, the Canadian governor of the Bank of England had left the policy stance unchanged, leading to a rise for sterling and the 10-year interest rate. Continue reading

France: General elections – Second round – Employment and Europe in line of sight

The President-elect has won an overall majority after the general elections. His party will have 306 seats and 348 when the Modem, a close political party, is included (on 577 seats). Nevertheless, the new majority will not depend on ally (Modem).
It’s far from the tsunami that was expected after the first round. The new President majority will represent 60% of the seats (versus almost 80% expected after the first round) it is close to the average seen since 1981.
France-legislatives2emeround-2017-en
Continue reading

Two days before the runoff

Two days before the runoff of the French Presidential Election, Emmanuel Macron is still clearly leading in polls. He is expected to have 62% of voters versus 38% for Le Pen. The recent upside for Macron is the consequence of Wednesday debate between the two contenders.
Le Pen was very aggressive as she wanted to destabilize Macron. She spent all her energy on that and nothing on explaining her program. Moreover on Europe which is a very important topic for her and her political party she was not clear. Her program is to exit from the Euro Area and from all European institutions. But she was not able to explain why and on the currency framework that would prevail after a Frexit. What she said was approximate and sometime totally wrong. Macron knew more on this topic than her.
At the same time Macron was not destabilized and was able to explain his program. In polls after the debate he was the winner with a large margin.
Polls-FE-May-5-2017

The second point to mention is that we now have polls on the general elections. (June the 11th and the 18th)  Macron’s party “En Marche” could have an absolute majority, the second would be Les Républicains the conservative party, the Parti Socialiste which current President Holland Party would be third, ahead of Le Front National of Marine le Pen and le Front de Gauche of Jean Luc Mélenchon (Source OpinionWay).
On the 535 districts (just France without Atlantic and Pacific Islands and Corsica). En Marche would have between 249 and 286 seats (the average is 267.5 or 50% of the 535), Les Républicains would have between 200 and 210 seats (38%), the Parti Socialiste between 28 and 43 (6.6%), the Front National (of Marine Le Pen) between 15 and 25 seats (3.7%) and le Front de Gauche (Mélenchon) between 6 and 8 seats (1.3%)
The balance of strength would be for En Marche. This is not surprising as French people are legitimist. They will give an important power to the President-Elect.

Markets have already this scenario in mind. The Euro is close to 1.1, the CAC 40 is at its year high and the spread between French OAT and German Bund has narrowed. The mood is back to “business as usual”. Two things to say: the risk on risky French markets for Monday is a drop (buy on rumor and sell on news) but the French economy is doing well as the Euro does also. It means good prospects for France in months ahead.

The risk of a Le Pen’s win appears limited now.