Markets were concerned that two anti EU candidates might
make it to the second round of French Elections. Now with only one anti EU
candidate qualifying, the markets are optimistic that Macron (pro EU) would
easily defeat La Pen (anti EU) as polls suggest that 70% of French want to stay
with the union. Expectations that with Netherlands and now (perhaps) France
political risks behind us, the ECB might cut down on its accommodative policies
driving EURO higher along with general risk sentiments.
Trump has set up a steep challenge for himself this week. On
Wednesday Trump is likely to announce tax cuts and introduce a new version of
the healthcare bill in the house. By Friday the debt ceiling has to be raised
to prevent the government from getting shut. Never before has the US government
gone into shutdown with the same party controlling the white house, house of
representatives and the senate. Therefore a shutdown now perhaps would be the
final nail for this administration coming from within the party. The tax cut
plan is unlikely to contain border tax (according to news reports) making it
look like a very ambitious claim, lacking revenue neutrality which therefore
will be difficult to pass in the house. The markets have taken Trump’s tax cut
announcements with a pinch of salt as US 10 Y yields have gone up mildly on the
back of this and French election results as well.
Risk sentiments lack momentum with the 3 Trump events in
focus for the week. If the tax cuts go through (without border tax) we might
see the Trump trade (higher US yields, stronger USD against G7, higher equities
and perhaps stronger EM currencies) coming back on the table, but right now it
looks difficult. USDINR 1m NDF is trading 3p left indicating increased buying
pressure in the offshore market on the pair. Levels on KRW indicate that the
warnings from North Korea have been taken as hollow by the markets and the
tensions are receding. CMP 64.52, Range 64.60-64.45.
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