1. La question
Sunday was a good day for the euro with the centrist French presidential candidate Emmanuel Macron beating the far right’s Marine Le Pen and German Chancellor Angela Merkel’s Social Democrats also seeing victory over the SPD in the northern region of Schleswig-Holstein. The SPD’s loss could make upcoming elections in the much larger North-Rhine-Westphalia, which holds its own regional vote on May 14, a bigger challenge if the SPD’s Martin Schulz is to unseat Chancellor Angela Merkel in September. Victory for Merkel may have a soothing effect on the market, but a win for Schulz could be even more positive for bond spreads across the euro zone, as his stance is far more geared towards spending than the fiscally conservative Merkel. By next weekend, it may be clearer how likely a Schulz-Macron axis is to come about.
2. BOE breather
The Bank of England releases its latest quarterly inflation report and arguably matters have turned in its favor. A hawkish assessment at its meeting in mid-March was read largely as reflecting some panic over the prospect of more weakness for the pound that would drive up inflation further just as banks are cutting staff again and consumers and businesses are facing up to the risks of Brexit. But the economy is far from ready for rises in interest rates to support sterling. Prime Minister Theresa May’s calling of an early election two weeks ago, however, may have solved that problem in one fell swoop. Sterling has jumped around 3%, with the prospect of more to come if May wins well and is perceived as having strengthened her hand against hardline Brexiteers internally. That should enable the bank to provide no surprises on Thursday, and just one cautionary vote for a rise in rates, although there is some speculation that new appointee Michael Saunders could make it two.
3. Great expectations
The second half of Europe’s earnings season will provide further evidence to either cement investors’ optimism on European equities or dash expectations of a revival. Of the half having reported so far, 74% have beaten earnings estimates while 21% have missed. This season, so far, has been the best in seven years, UBS equity analysts say. Moreover, companies are beating forecasts not only on profits but on revenues, indicating increased underlying demand for products is driving the improvement. Expectations are very high for the energy sector in particular. First-quarter earnings growth for energy stocks is expected to be 40% overall, the highest of any sector. BP, Royal Dutch Shell and Statoil impressed with better than expected profits in the past week, but any disappointment in figures from Eni, the region’s fourth-biggest oil stock by market cap, on Wednesday, could weigh on the market.
European corporate events include Adecco, Aker, Commerzbank (Tuesday); E.On, Eni. Unicredit, ING (Wednesday); Credit Agricole, Deutsche Post, Deutsche Telekom, Telefonica, Generali (Thursday); Richemont, ThyssenKrupp (Friday)
4. Oil spill
Emerging markets had a pretty solid start to the year. But a recent rout in commodity prices has stoked investors’ fears about the health of the global economy, curbing risk appetite and weighing on the assets of resource exporters in the developing world. Oil prices hit their lowest level since November on concerns about a persistent supply glut despite assurances from Saudi Arabia that Russia was ready to join oil cartel OPEC in extending supply cuts. Industrial metal copper also traded at a five-month low. Chinese iron ore futures plunged to their weakest since January on worries about slowing construction and infrastructure demand. Investors will scrutinize a flurry of Chinese data, including trade figures for April expected on Monday, for more clues on the momentum in the world’s second-largest economy and what it may mean for emerging markets.
(Reporting by Abhinav Ramnarayan, Patrick Graham, Helen Reid, Marc Jones, Karin Strohecker, compiled by Nigel Stephenson; Editing by Hugh Lawson)