Top-rated European Commercial Mortgage Bonds Set For First Losses Since Credit Crisis

Economic

Bond

Summary:

Holders of senior notes backed by UK shopping centres, German housing units and French offices to be hit, say analysts.

Investors in several European commercial mortgage bonds that were originally sold with top credit ratings look set to suffer losses, say analysts, the first time since the global financial crisis that the safest tier of this debt has been hit.

Among those set for losses are holders of the most senior bonds in a commercial mortgage-backed security that originally made a loan to Oaktree Capital Management to finance three UK shopping centres. The recently agreed sale of the underlying properties is expected to raise less than the value of the outstanding debt.

Meanwhile, rating agency Fitch has predicted that investors in the safest tranche of two more CMBS deals, including one set up to lend to Brookfield, are also facing losses.

“Certainly as an investor you wouldn’t expect to see losses at triple-A level, it’s not a good headline,” said Elena Rinaldi, a portfolio manager in the asset-backed securities team at TwentyFour Asset Management.

Rising borrowing costs over the past two years have triggered the worst downturn in commercial real estate since the 2008 global financial crisis, with the value of offices, retail and other assets falling by between a third and a fifth from their 2022 peak in Europe.

More conservative levels of borrowing today than in the run-up to 2008 have meant that signs of distress have been slower to emerge among property investors this time around. However, the latest predictions of losses show that the pain in the property markets is now hitting even the most protected tier of real estate-backed credit investments.

The loan was transferred to Mount Street — a “special servicer” that tries to maximise the recovery for investors — in 2020 after breaching covenants, and has been in default since then.

Elizabeth Finance 2018 DAC, the CMBS vehicle set up to issue the debt, announced last week that Mount Street had accepted a £35mn bid for the shopping centres in King’s Lynn, Dunfermline and Loughborough, known as the Maroon properties. The bid would deliver net proceeds of about £31.5mn to debt investors, it said.

Holders of the most senior bonds are owed £33.6mn, according to Bank of America, and therefore under this proposal are set to incur a 6.3 per cent loss.

“The biggest problem has been interest rates, quite simply,” said James Bannister, head of special servicing at Mount Street. “There’s no money left to do anything with the assets so we had to be honest with investors and say, ‘we can’t do any more, now is the time to move these assets on’.”

The most senior debt issued by Elizabeth Finance, which originally held two loans before one was repaid, was rated triple-A by S&P and Morningstar DBRS in 2018. Oaktree, one of the world’s biggest distressed debt investors, was the original borrower.

Last week DBRS lowered its credit rating on these senior notes to junk for the first time. On Wednesday, S&P did the same.

In 2018, Fitch voiced concerns that these notes did not warrant the triple-A ratings given to them by the other agencies because of the risk associated with the quality of the assets.

UK non-high street retail “is not a left-field credit risk. It’s been bubbling for a long time and the [coronavirus] pandemic was clearly an additional juggernaut that hit the sector and was fairly unkind to those kinds of assets,” said Euan Gatfield, head of Emea CMBS at Fitch.

Following Elizabeth Finance’s announcement last week, Fitch predicted it may be followed by losses for top-tier bondholders in two other European CMBS: Haus DAC and River Green Finance 2020 DAC.

Holders of the most senior debt of Haus CMBS, which is backed by 6,281 multifamily residential housing units across 92 sites in Germany, were also at risk because of falling property values as a result of high vacancy rates, it said.

Brookfield Property Group is the main borrower from the Haus CMBS. Brookfield declined to comment.

In March last year Moody’s downgraded all of the debt issued by Haus DAC, including more than €200mn of top-tier bonds, saying the properties had an average occupancy rate of about 58 per cent and were facing significant delays in planned refurbishments.

“Without a swift turnaround in operating performance, including a [capital expenditure] programme mired in delays and cost overruns, we believe all classes of notes will incur losses,” Fitch analysts wrote. Without top-up payments from Brookfield, the housing securing Haus “would be producing negative net operating income”, it added.

The other CMBS, River Green Finance 2020 DAC, was the first sustainability-focused CMBS in Europe and is secured by an office campus in outer Paris mostly leased to struggling tenant Atos.

Last year Moody’s downgraded all of River Green’s notes and increased the expected loss on the underlying loan after it was not repaid when due. It currently has €98mn in outstanding top-tier bonds.

Source:Financial Times

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Warren Takunda

Economic

According to this week's figures from Canada and Australia, global inflation could be heating up again. In Canada inflation unexpectedly rose 0.6% month-on-month in May, more than doubling the expected amount. In Australia, the monthly CPI indicator rose for a third consecutive month at 4.0% year-on-year.

"Australian price growth accelerated to its fastest in six months in May, knocking markets off balance and raising the likelihood of another rate hike this year," says Karl Schamotta, Chief Market Strategist at Corpay.

In both countries, the core inflation rate that the respective central banks like to watch showed building pressures. While inflation from these countries might not typically impact global markets, we have seen some contagion as global bond yields have risen sharply in response.

"The Canadian inflation print yesterday was emblematic of the situation we see brewing in many countries around the world these days which is one where we have very sticky inflation that refuses to go down further and moderating growth," says Brad Bechtel, Global Head of FX at Jefferies.

Rising global bond yields is a clear signal that investors are worried that a universal trend is underway and that central banks might be unable to cut interest rates anytime soon. Indeed, the odds of another rate hike at the Reserve Bank of Australia have risen to 60%.

"Inflation is firm enough to get central banks to pause and reassess before they cut further or even begin their easing cycles. The likes of the US, Norway, Australia, UK haven't even started their easing cycles yet and bit by bit they keep getting pushed out further and further," says Bechtel.

Markets entered the week with a 60% expectation the Bank of England will cut interest rates in August after last week's MPC meeting showed members were close to cutting interest rates.

UK inflation has fallen back to the target 2.0% rate, but core inflation and services inflation is running too hot for this to be sustained.

The Bank and institutional economists expect inflation to pick up again.

But, the experience of other nations could mean an August rate cut is still too early.

"This trend is something to keep an eye on for now," says Bechtel.

Source: Poundsterlinglive

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Alex

Economic

Commodity

In the months that followed its invasion of Ukraine and punitive Western restrictions imposed in response, Russia amassed a shadow fleet to ferry its oil around the world. Now there is growing evidence Moscow has begun to do the same for liquefied natural gas.

Gas is key to the Kremlin’s plans to boost exports, replenish government coffers and fund its war machine — but that requires a larger share of the global LNG market, now that the once-lucrative European pipeline trade has been almost cut off. To date, expansion plans have been hampered by US sanctions that have kept foreign companies away and stopped delivery of the specialized, ice-ready carriers that are vital to reach Arctic facilities.

New European curbs coming in next year, limiting port access, will hinder the current supply chain even further.

In the past three months, the ownership of at least eight vessels has been transferred to little known companies in Dubai, according to Equasis, a global shipping database. Four are ice-class and have already been granted approval from Moscow to sail through Russia’s Arctic waters this summer.

While Bloomberg has not been able to directly connect the vessels back to major Russian entities, the details are strikingly similar to maneuvers to create the nation’s shadow oil fleet, including the use of opaque companies and of ships so old that they would normally have already been decommissioned.

In the tight-knit LNG industry, several times smaller than the oil market, it is highly unusual for an unfamiliar name to procure specialized carriers that can cost hundreds of millions of dollars. At least three of the tankers also have their insurers listed as “unknown” on the International Maritime Organization database — another characteristic of dark-fleet ships.

“There are several indications pointing to efforts by Russia to create a dark fleet for LNG,” said Malte Humpert, founder of the Arctic Institute, a Washington, D.C.-based think tank. The purchase of older carriers, the transfer of ice-class vessels to a Dubai entity and a record number of permits for the Northern Sea Route indicate the pieces of “the dark fleet puzzle fall into place.”

The Russian government and Energy Ministry didn’t immediately respond to requests for comment.

After Oil, Russia May Now Be Building a Shadow Fleet for Gas_1

The Asya Energy is one of the vessels that has raised red flags in the industry. In June, as Houthi militants escalated their attacks on commercial ships in the Red Sea, it sailed north through the waterway unscathed — becoming the first LNG carrier to cross through the hotspot since January.

A 22-year-old vessel that sails under the flag of Palau, Asya Energy received its current name in May and, according to Equasis, is managed by Nur Global Shipping, a company unknown in the industry and operating out of the luxury Meydan Hotel, in a UAE free trade zone that has been criticized by officials for its lack of transparency. It has no known insurer.

As of Thursday, the Asya Energy was heading into the Mediterranean, tanker-tracking data compiled by Bloomberg show. It appeared to be unladen and signaled no specific destination.

Nur, which according to its website entered the energy sector in 2022, has managed three other LNG carriers since April — the Pioneer, New Energy and Mulan — according to Equasis. All are owned by companies based at Nur’s address. Two of those tankers’ insurers are listed as unknown, according to the IMO.

Nur did not respond to calls and emails requesting comment.

Four recently built ice-class vessels have separately had their ownership transferred to a company called White Fox Ship Management, also based in Dubai, according to Equasis data. Russia recently approved the ships — North Air, North Mountain, North Sky and North Way — for navigation in the Arctic this summer season.

North Way is currently arriving at the Zeebrugge terminal in Belgium to receive a shipment of Russian gas, according to port data.

White Fox has no formal office and operates from a desk shared with numerous firms, according to an official at the building where the company is registered. The person declined to provide further information, citing a client confidentiality policy.

Latest Sanctions

Not all the trappings of the Russian oil dark fleet will be available to an LNG alternative. The super-cooled fuel requires more technically proficient crews and more complex technology, so there are fewer vessels — making them more easily tracked with satellite data. While there are 7,500 oil tankers of varying sizes plying the world’s waters, the LNG fleet is less than a tenth of that.

Transshipment — or moving fuel from one vessel to another — can be done in open water for oil, and is a common means of masking its origin. That is far harder for LNG, hence Russia has until now used European ports for the maneuver, though tighter European restrictions mean that will be impossible from March next year.

Novatek PJSC probably has more experience than anyone in transferring LNG from ship-to-ship, according to the Arctic Institute’s Humpert.

Such transfers have “been going on at the Kildin anchorage north of Murmansk for years,” he added, referring to the Russian port above the Arctic Circle . Last year there were 13 transfers at the anchorage; between Jan. 1 and April 30, there were already 10, he said.

Novatek did not respond to requests for comment.

Russia, currently the fourth-largest LNG exporter, has every reason to press ahead in its effort to find alternative routes to market. The US has imposed separate sanctions to prevent the start of exports from Arctic LNG 2, a new facility developed by Novatek, Russia’s biggest LNG exporter.

A parallel fleet could circumvent restrictions, and would be a blow to a key area where Western sanctions have had immediate, tangible impacts, making it easier for Moscow to support its wartime economy.

“It is no surprise that Russia is resorting to building an LNG shadow fleet, just like it assembled an oil shadow fleet to circumvent the G7 and EU price cap on Russian oil exports,” said Agathe Demarais, a senior fellow at the European Council on Foreign Relations.

“Moscow’s willingness to assemble shadow fleets serves to illustrate the fact that sanctions are a game of whack-a-mole – once a sanctions circumvention network is up, western authorities will target it and it will then be replaced by another one in an endless game of cat and mouse.”

Source:Bloomberg

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Warren Takunda

Economic

Bond yields were a touch firmer as traders eyed Friday's PCE inflation report.

What's happening

The yield on the 2-year Treasury climbed by less than 1 basis point to 4.764%. Yields move in the opposite direction to prices.The yield on the 10-year Treasury rose 1 basis point to 4.344%.The yield on the 30-year Treasury were barely changed at 4.476%.

What's driving markets

Benchmark Treasury yields traded around two-week highs early Thursday after hotter-than-expected consumer prices data in Australia released the day before, reminded investors that inflation in many developed economies remains sticky.

The next guide to U.S. price pressures will come on Friday when the May personal consumption expenditure price index report, the Federal Reserve's favored inflation gauge, will be released before the opening bell rings on Wall Street.

And possible market catalysts before that on Thursday, include:

8:30 a.m. Eastern. U.S. weekly initial jobless claims.8:30 a.m. U.S. first quarter GDP (revision).8:30 a.m. U.S. durable goods orders for May.10:00 a.m. U.S. pending home sales for May.11:00 a.m. Kansas City Fed. composite index for June.1:00 p.m. Result of Treasury's auction of $44 billion of 7-year notes.3:00 p.m. Bank of Mexico interest rate decision.9:00 p.m. Debate between U.S. President Joe Biden and former President Donald Trump.

Markets are pricing in an 89.7% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on July 31st, according to the CME FedWatch tool.

The chances of at least a 25 basis point rate cut by the subsequent meeting in September is priced at 59.3%, down from 63.9% a week ago.

What are analysts saying

"What the Fed doves want to see is a reasonably softer economic growth combined with softening inflation. The risk is seeing a softening growth with insufficient retreat in inflation," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank

"Good news is that the inflation component in the GDP report won't matter much as inflation has started to ease after an early uptick in Q1, so we won't have the full picture to speculate on new Fed scenarios before tomorrow's PCE release. In all cases, rising bets that the Fed could cut rates by 300 basis points in the next nine months is overdone unless a big, big problem emerges in the U.S. economy," Ozkardeskaya added.

Source: MarketWatch

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JPMorgan

Economic

Stocks

The economy and the stock market are not always playing to the same tune. In today’s financial market ensemble, a stable economy plays a familiar melody with some nuance around rate cuts. Meanwhile, AI has staged a dramatic crescendo—perhaps lasting too long for comfort.

The S&P 500 is up a stellar 45.8% since the start of 2023, but subtracting just one name from the index, Nvidia, cuts that return to 37.4%. Subtracting the top 5 names further reduces that return to 23.4%. While impressive tech performance has boosted the overall market, excessive stock rallies and 31 new all-time highs this year have raised concerns about a potential bubble.

However, there are reasons to believe this isn’t the case.

1.Risk appetite. During the dotcom bubble, rampant speculation surrounded young companies flaunting internet excitement before profitability. In contrast, today’s AI beneficiaries are already very profitable companies that make their money selling key infrastructure and resources to the rapidly growing market of AI adopters. Additionally, interest rates are high, IPOs have slowed to a trickle and global VC investments have fallen from their peak in 2021[1]. While bullish sentiment has surely provided a boost[2], the impact of earnings upgrades is likely more significant—the Mag 7 posted a remarkable +50% y/y earnings growth in 1Q24[3].

2.Fundamentals. The Mag 7 account for a sizable 33% of market cap, but they also account for 39% of R&D spending, 23% of free cash flow and 16% of capex (see chart). The strongest are getting stronger, but they’re fueled on veggies and complex carbs, not short-term stimulants.

3.Shareholder return. The recent boost in shareholder return can also be attributed to tech strength. Certain mega-cap tech companies have announced substantial share buyback programs or first-ever dividend payouts this year. These announcements have contributed to a 6% increase in S&P 500 shareholder payout in 1Q24, and the S&P return-on-common-equity stands at a solid 18.5%.

Still, there are reasons to be cautious. Markets have a tendency to over appreciate the near term and under appreciate the long term. We think AI will lead to all sorts of business transformation and productivity gains in the long term, but recent performance has been driven by significant upgrades in near-term AI demand projections. If demand cools off unexpectedly, perhaps because the economy deteriorates, geopolitics, or capacity constraints become a binding factor, such projections could be overly optimistic. Further, pricing discovery is in its nascency and the costs to run complex LLMs are still massive. Once ChatGPT becomes integrated to your iPhone, how much would you pay for the premium subscription? How much should a small business pay for Microsoft’s CoPilot suite? If we moved the 9 billion daily searches in Google onto Chat-GPT today, could we supply a 10x increase in electricity demand[4]?

The alarm bells may not be ringing like the dotcom bubble. Concentration today appears to showcase corporate resiliency and companies that are at the forefront of growth, but questions abound whether recent performance can be sustained. As such, investors can still enhance diversification by exploring overlooked areas of the market, within and outside of the AI value chain, that have strong fundamentals. Is Stock Market Concentration A Warning Sign?_1

Is Stock Market Concentration A Warning Sign?_1

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Warren Takunda

Cryptocurrency

A total of $9.25 billion in Bitcoin options is set to expire on the morning of June 28. June’s monthly expiry is especially important given that it marks the end of the first half of 2024 and historically is the second largest expiry in every market, including the traditional finance industry. Investors are especially concerned after the $3 trillion tech giant NVidia traded down 12% since its all-time high on June 20.

Recent pressure on Bitcoin gave bears a potential $430 million advantage

It has been two months since the Bitcoin halving, which likely explains why 57% of the bullish bets have been placed at $70,000 or higher. But, in reality, the market displayed weakness in the past two weeks, making those call (buy) options essentially worthless. If Bitcoin remains near $61,500 on June 28 at 8:00 am UTC, the rights to buy BTC at $62,000 and $64,000 will not take part in the expiry. Similarly, put (sell) options at $58,000 and $60,000 are rendered null.

Bitcoin bulls have weak macroeconomic data on their side, which favors a more aggressive rate cut and monetary stimulus campaigns from the United States Federal Reserve and Department of Treasury. Sales of new U.S. single-family homes dropped to a six-month low in May, down 11.3% from the prior year. More concerningly, at the current sales pace, it would take 9.3 months to clear the new houses supply, up from 8.1 months in April.

A June 24 Charles Schwab report noted that the current finance market dynamics mirror 2021, potentially signaling a bear market on the way. Reasons for the alarm include a growing divergence between the S&P 500 and equally weighted indexes, with artificial intelligence stocks leading the way. The analysts conclude that there’s no imminent risk for the bull market but advise that “more members will need to start joining the party for the music to stay on.”

Currently, Deribit is the absolute market leader for the June BTC options, totaling a $6.65 billion open interest. The Chicago Mercantile Exchange (CME), the vice-leader, entices a $1.15 billion open interest, followed by OKX with $735 million and Binance at $520 million. On aggregate, the total call and put BTC options for June 28 stand at $9.25 billion, which is considerable but, at the same time, inflated by excessively bullish call options. Will Bitcoin Bulls or Bears Benefit from This Week's $9.25 Billion BTC Options Expiry?_1

Will Bitcoin Bulls or Bears Benefit from This Week's $9.25 Billion BTC Options Expiry?_1

Bitcoin options open interest for June 28 at Deribit, BTC. Source: Deribit

The 0.51 put-to-call ratio indicates an imbalance between the $4.4 billion call open interest and the $2.25 billion put options. Nevertheless, if Bitcoin’s price stays below $65,000 at 8:00 am UTC on June 28, only $440 million worth of these call options will take part in the expiry.

Bitcoin bulls need $64,000 to avoid losses

Below are the four most likely scenarios based on the current price trends. The availability of options contracts for calls and puts on June 28 varies depending on the settlement price.

Between $57,000 and $60,000

There are 660 calls versus 14,850 puts. The net result favors the put (sell) options by $820 million.

Between $60,000 and $62,000

There are 3,910 calls versus 11,140 puts. The net result favors the put (sell) options by $430 million.

Between $62,000 and $64,000

There are 5,220 calls versus 8,690 puts. The net result favors the put (sell) options by $215 million.

Between $64,000 and $66,000

There are 6,880 calls versus 6,940 puts. The outcome is approximately balanced between call and put options.

This rough calculation assumes that call options are used primarily for bullish bets and put options for neutral-to-bearish positions. However, this simplification does not account for more intricate investment strategies.

In short, Bitcoin bulls desperately need to sustain the $60,000 support ahead of the June 28 expiry to avoid a potential $820 million scenario favoring the put options at Deribit.

Source: Cointelegraph

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Economic

Political

France in political turmoil

President Macron’s decision to call a snap legislative vote hot on the heels of the European elections came as a complete shock not only in France but also across Europe, not to mention for financial markets. What is widely perceived as an attempt by Macron to reassert his authority in the French parliament after his party lost its majority at the previous election in 2022, the move appears to have backfired.

Macron was probably hoping that the mere threat of Marine Le Pen’s National Rally or Rassemblement National (RN) party coming into power after it won the most French seats in the European Parliament would have been a wake-up call for other parties, as well as the French public, to unite against the far right. But that didn’t happen.

With only a few days to go until the first round of voting on June 30, the Ensemble coalition that is led by Macron’s Renaissance party is a distant third in the opinion polls, overtaken by the newly formed alliance of left-wing parties called the New Popular Front (Nouveau Front Populaire – NFP). Meanwhile, RN has widened its lead, with most polls putting it ahead with at least 35% of the vote.

Doubts about a far-right majority

However, that may not necessarily translate to enough seats for RN to obtain an absolute majority in the 577-member National Assembly where 289 seats are required to control the legislative agenda in France’s lower house. This then raises a host of possibilities as to who could form a government.

Talks between RN and an even more hardline far-right party, Reconquete, which belongs to Le Pen’s rival, Eric Zemmour, broke down soon after the announcement of the snap elections. Since then, RN’s 28-year-old leader, Jordan Bardella, has signalled he is not interested in sharing power with other parties and has set the goal of winning an absolute majority.

Going mainstream

This can be seen as being both a positive and negative move. RN is clearly trying to appeal to mainstream voters to secure the majority it needs and in doing so, it has had to tone down some of its more controversial ideas. This is good news for the markets as it reduces the risk of a Liz Truss-style debt crisis and a confrontational relationship with the European Union.

RN’s likely candidate for the post of finance minister has said the party would abide by the EU’s fiscal rules, while Bardella appears to have rowed back on a pledge to undo Macron’s pension reforms, which raised the retirement age to 64. The party’s softened stance on many of its radical policies helped to calm investors’ fears, with the yield spread between French and German 10-year bonds declining somewhat from the post-European election spike. Is France Headed for Political Stalemate and How Bad is this for Euro?_1

Is France Headed for Political Stalemate and How Bad is this for Euro?_1

The euro has also been steadier but remains within its short-term downward trajectory amid the uncertainty about the outcome of the elections. If an RN majority was more certain, the euro might be under less pressure right now as Le Pen and Bardella seem to be taking the party in a similar direction as Italy’s Giorgia Meloni has done with her far-right Brothers of Italy party when she won the country’s election.

Is the left a bigger threat?

If RN wins the most seats but falls short of a majority, it’s still possible it would try to form some sort of a coalition with other parties, potentially with the right-wing Les Republicains, despite ruling it out for now.

The bigger fear is if the left-wing NFP comes a close second and manages to strike a deal with other smaller parties. Its policies include increasing public sector pay by 10%, lowering the retirement age to 62 and boosting healthcare and education. Although it plans to finance these by hiking taxes, it’s questionable if the amount raised would cover the planned 150 billion euros in spending. Is France Headed for Political Stalemate and How Bad is this for Euro?_2

Is France Headed for Political Stalemate and How Bad is this for Euro?_2

France already has a very high debt level of more than 100% of GDP and ran a budget deficit of 5.5% in 2023, in excess of the EU’s 3% limit. Any new government that triggers alarm bells about higher spending would likely spark another panic in the markets, sending French yields sharply higher and stocks lower. France’s leading stock index, the CAC 40, shed more than 7% as the political turmoil unfolded before rebounding somewhat. Is France Headed for Political Stalemate and How Bad is this for Euro?_3

Is France Headed for Political Stalemate and How Bad is this for Euro?_3

Can Macron’s party hold onto power?

A less disastrous scenario for the markets is if Macron’s Ensemble coalition were to agree to a pact with the NFP simply to keep out the far right and since this would be its only option of being in government given Macron’s plummeting approval ratings. An alliance between the left and centrists parties would probably produce a more moderate government. But even if such a coalition can be agreed, it might not last long or struggle to pass legislation.

In the event of a hung parliament, the President can play a role in pushing parties to reach a deal. The President can also exercise his influence by picking the next prime minister, especially when there’s no clear winner and so the post does not necessarily go to someone from the largest party. However, with so many fractures across France’s political spectrum, it’s hard to see parties putting their differences aside for the sake of avoiding political instability.

Political paralysis

Under the French constitution, new parliamentary elections cannot take place for another year after the last one. So, if no parties are able to form a government, there would likely be political paralysis for at least a whole year or until Macron’s term expires in 2027. If push comes to shove, Macron may decide to stand down before then, even though he has said he would not do so.

For currencies and financial markets in general, there is nothing more dreaded than uncertainty, so the prospect of a prolonged period of uncertainty in the Eurozone’s second largest economy does not bode well for the euro. Making matters worse are concerns about the rise of far right parties in other European countries such as Germany where the ruling coalition is hanging by a thread.

Euro bears eye dollar parity

Against the US dollar, the single currency has already taken quite a tumble, slipping from the $1.0900 level to lows of around $1.0670. With the final results of the election not due until after the second round on July 7, the euro could continue drifting downwards, possibly towards the April low of $1.0599. Is France Headed for Political Stalemate and How Bad is this for Euro?_4

Is France Headed for Political Stalemate and How Bad is this for Euro?_4

The heightened political risks that have rekindled fears of a fresh debt crisis are already weighing on business sentiment, endangering the Eurozone’s feeble economic recovery. Any sustained deterioration in business confidence could add to the euro’s woes, as the European Central Bank might be more inclined to cut interest rates aggressively.

Whilst steeper rate cuts would be positive for risk assets, it would be bearish for the euro. In the worst case scenario where an extreme right or extreme left party takes power with an agenda of unfunded spending, or even a messy situation where the ruling coalition is unable to ‘cohabit’ with President Macron, the euro could face the prospect of parity again with the dollar.

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