GBP recovers from Libor hit as French fears start to mount

Sterling is in recovery mode this morning after dipping at the market open on Sunday night after reports that the BOE pressured some banks to reduce Libor rates at the peak of the financial crisis, we doubt that this will have a longer-term impact on sterling, however, markets are jumpy this morning and likely to react to news headlines.

Crucially, the S&P 500 managed to close above key support at 2,346, the 50-day moving average, after Friday’s disappointing NFP data. Considering everything that is going on, including rising Russian/ US tensions and the non-existent fiscal stimulus from the Trump administration and weak payrolls, volatility remains low by historical standards. Perhaps it’s the decline in US bond yields, which are falling once again on Monday, that are helping to prop markets up and protecting these key support levels.

Is the Trump trade dead and buried?

We believe the evidence supports a sell-off in stock markets, but we don’t think there is the desire to push equities lower right now. However, there are signs of some recalibration in stocks, with defensive sectors outperforming riskier sectors of the S&P like financials and energy stocks. While daily movement in stock indices remains so low it is hard to detect any trend or themes that could dominate, but the fact that stocks have stopped rallying suggests that investors are giving themselves time to pause and reflect on whether the conditions warrant another leg higher in the Trump trade.

CZK upside not a concern for the CNB

FX markets are livelier than stocks right now. The Czech Koruna is continuing its march higher after the Czech central bank dropped its peg to the euro last week. This was widely expected by the market, and the koruna has appreciated nearly 2.5% since last week. Considering this was a major FX event, the reaction in the CZK has been fairly measured, suggesting that the CNB has done a great job at managing the transition from a pegged to a free-floating currency. Last week the CNB head said that the bank was ready to intervene to stabilise the Koruna if it experienced too much appreciation, so far this has not been necessary.

Could sterling extend its recovery this week?

Investors may be looking ahead to the long weekend, but there is still important economic data to watch out for this week. Inflation data in the UK and China, and PPI in the US, is due out in the next couple of days. A stronger than expected reading from the UK could trigger sterling upside if it manages to lift UK bond yields. The yield spread between UK and US yields remains stubbornly low, but did manage to recover at the end of last week on the back of the very weak US payrolls report. Sterling’s recovery this morning may be a delayed reaction to this and if the yield spread recovers highs.

French election: the battle between Le Pen and Fillon continues

A reminder about the French elections, with less than 2-weeks’ to go before the first round of voting, Le Pen has seen her odds of winning the election rise, she has a 27% chance according to Oddschecker, compared with 25% last week. Front-runner and independent candidate Macron has seen his odds slip slightly, to 57%. We mentioned last week that Francois Fillon, the centre right candidate, who has suffered a number of setbacks in his campaign, is still one to watch as he still could beat Le Pen in the first round of voting, his odds of winning have remained stable at nearly 20%. There’s also a new kid in town to watch out for,

far-left candidate Melenchon has seen his chances of winning the keys to the Elysee palace jump to 8% from 3% last week. The question now is, will the support for the Far Left hurt Le Pen, Macron or Fillon? We don’t think that Melenchon will make it to the second round, however, the key race for now is between Le Pen and Fillon. The French – German yield spread has started to rise once again, and this is weighing on the euro at the start of this week, which has fallen below 1.06. It is hard to see how the euro can recover ahead of this crucial election. Key support lies at 1.0340 – the low of the year so far.