Market Views

GLOBAL CREDIT BULLETS | Monday, 10 June 2024

European elections – Turning right
European Parliament elections surprised consensus with a more pronounced right-wing shift than expected. The new Parliament is projected to display 58% of seats to right-wing parties, a solid result. The biggest surprises were in Germany and France, where left-leaning ruling coalitions underperformed strongly. More extreme right-wing formations delivered solid results in France, Germany, Austria, Netherlands. In Italy and Greece ruling centre-right coalitions confirmed the lead. In France, the result was so extreme that President Macron was forced to dissolve the lower house and call new legislative elections in order to re-establish the political legitimacy of the current majority. New elections will be held on June 30 and July 7, and represents a key political event for Europe (arguably more than European elections themselves). A National Rally (Marine Le Pen’s party) majority would imply larger deficits and a right-wing shift in European politics, although the impact on the EU major files (like the Green Deals) is likely going to be relatively contained by the fact that the legislation is already passed and now in implementation phase. More confrontation will almost certainly emerge on the next EU budget, where the spending priorities of this EP are likely to be different than the prior one.

Fed – Higher for longer (again)
Friday’s blockbuster NFP print at 272k shook markets, which were expecting only 180k and risks to the downside. US treasuries sold off by 15bp, of which 10bp were taking out from the pricing of cuts for 2024 – now priced at <40bp. The Fed will hold rates on Wednesday, and confirm their higher-for-longer stance with a more hawkish dot-plot, which will potentially only signal one rate cut versus the three shown in the March projections. May CPI will be released just before the meeting, but is unlikely to swing the Fed either way given overall forecasting quality has improved and Q1 seasonality effects are fading. Consensus expects core to stay unchanged at 0.3% MoM, while headline CPI should stay unchanged at 3.4%.

ECB – Hawkish regrets
The ECB cut rates by 25bp to 3.75%, as widely expected, but surprised with stronger projections for growth and inflation. The cut was a “hawkish” one, whereby the committee had boxed themselves in for weeks to deliver it, but guidance sounded more hawkish amid stronger wage and inflation data. In particular, core inflation for 2024 and 2025 was raised to 2.8% and 2.2%, by 0.2% and 0.1% respectively. Lagarde had difficulties justifying the decision in the press conference, and questions were posed if this was a “one-and-done”. We believe the ECBs cutting path from here is less clear amid sticky services inflation and a continued strong US outlook.

EM – Election surprises bring volatility
Three big elections in emerging markets brought volatility to global markets, led by the very strong outcome of the Morena party in Mexico. The party of new president Claudia Sheinbaum had almost 60% of the votes, sparking fears of a super-majority with powers to change the constitution. The Mexican Peso weakened by more than 7% last Monday, sparking an unwind of carry trades across global currency markets. In South Africa, the incumbent ANC lost its majority, earning only 40% of the votes against expectations of around 45%, and fears of a coalition with extreme parties caused Rand weakness. In India, the incumbent BJP of prime minister Modi won for the third consecutive time, but with 240 seats fell short of the 272 majority mark.

Algebris Investments’ Global Credit Team

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