Market News | Amana Capital
Russian Presidential Election, March 18: What Will the Market Think About Status Quo?
The Russian Presidential election, scheduled to be held in March 18 2018, shows a plausible re-win by Vladimir Putin, just like Egypt’s President Sisi. Putin’s victory would bring in the fourth era of his leadership after having served as President for four years in two consecutive terms each from 2000-08; again, he secured victory for the third time of six years in 2012.
To his credit, he possesses around 80% approval ratings, aided by an assertive foreign policy undertaken mainly in Ukraine, and Syria amid a slow-performing economy and US sanctions. However, despite the high poll figures, Putin will probably not leave anything to chance.
As is evident from a recent interview by the All-Russia Public Opinion Center, over two-third of the participants are seen to be supportive of Russian President Vladimir Putin in the upcoming presidential election over the weekend on Sunday. The respondents, surveyed between February 19-22 and 24-26 were sought to know their support had the elections held on the immediate Saturday. The response was only a notch higher than the previous poll conducted February 12-18, where a total of 69.5% turned up in favour of Putin.
The 65-year politician is not deemed to run unopposed, but his protagonist rival has been barred from running the election. According to reports from Voice of America, the other candidates in opposition to Putin are mainly "viewed as a Kremlin ploy to boost voter participation".
One of Russia’s significant opposition leaders, Alexei Navalny, has been disallowed from contesting elections, following his judgment for "economic crimes". 30-year old Ksenia Sobchak, daughter of Putin’s political guide and hailed as Russia’s "Paris Hilton", has jumped into the political ring and according to recent reports, she has met Putin and agreed not to criticize him on political grounds.
According to recent news from Financial Times, Putin’s campaign has been a struggle "beset by a lack of competition" and that "the threat of a low turnout from disgruntled voters turned off by the lack of choice" may very well weigh upon his reputation.
In addition, the Organization for Security and Co-operation in Europe (OSCE) has thrown accusation upon the President of an electoral scam following the 2012 election. It also said that "the point of elections is that the outcome should be uncertain. This was not the case in Russia. There was no real competition and abuse of government resources ensured that the ultimate winner of the election was never in doubt".
Vladimir Putin’s perennial challenger in Russia’s presidential elections has pledged to crack down on oligarchs and impose a “brutal dictatorship” in the unlikely case that he is elected, the Moscow Times reported.
Meanwhile, the recent state-run surveys show that President Putin is on his way for a clear victory in the elections scheduled for 2-1/2 weeks from now. LDPR party leader Vladimir Zhirinovsky is seen at a farther third position, with only 6% probability. He is generally viewed as a public figure whose bizarre comments are intended to ignite public interest in an otherwise predictable political landscape.
Please download and read our global political outlook report: Political Road Map 2018
The United States’ JOLTs job openings for the month of January came in at 6.312 million, higher than the market expectations of 5.890 million in the Reuters, up from 5.811 million in the previous month of December.
Over the month, hires and separations were little changed at 5.6 million and 5.4 million, respectively. Within separations, the quits rate and the layoffs and discharges rate were little changed at 2.2% and 1.2%, respectively.
Further, the number of job openings increased to a series high of 6.3 million. The job openings level increased for total private (608K) and edged up for government. The job openings rate increased to 4.1% in January in the South, Midwest, and West regions
A higher than expected reading should be taken as positive for the US dollar, while a weaker than expected reading should be taken as bearish for the currency. Meanwhile, as of 14:00GMT, EUR/USD traded 0.07 percent lower at 1.3750.
The United States’ building permits for the month of February came in at 1.298 million, missing market expectations of 1.320 million, from 1.377 million in January. This is 5.7 percent (±0.7 percent) below the revised January rate of 1,377,000, but is 6.5 percent (±2.4 percent) above the February 2017 rate of 1,219,000.
Further, privately-owned housing starts in February were at a seasonally adjusted annual rate of 1,236,000. This is 7.0 percent (±16.7 percent) below the revised January estimate of 1,329,000 and is 4.0 percent (±12.2 percent) below the February 2017 rate of 1,288,000.
Meanwhile, privately-owned housing completions in February were at a seasonally adjusted annual rate of 1,319,000. This is 7.8 percent (±14.8 percent) above the revised January estimate of 1,224,000 and is 13.6 percent (±16.0 percent) above the February 2017 rate of 1,161,000.
In the United States, the March FOMC meeting is the key event next week, and important data releases include existing and new home sales as well as durable goods. Also, next week’s BoE and RBNZ monetary policy meeting will be closely watched.
United States: Markets expect headline durable goods orders to increase 1.0% m/m, partially offsetting the January decline. Economists see ex-transportation orders to post a modest 0.3% gain. February existing home sales are likely to decline 0.6% m/m, as pending home sales fell sharply in January. New home sales in February are likely to improve 3.7% m/m.
Eurozone: In the euro area, Markets forecast another leg down in PMIs as growth continues to moderate from extremely high levels. Manufacturing and services PMI are likely to fall to 57.9 and 55.8, respectively, in March. This should bring the composite PMI to 56.7 from 57.1. Economists expect consumer confidence to fall to -0.7 in March. German composite PMI should fall to 56.5 in March, with manufacturing PMI falling to 60.0 and services PMI falling to 54.6. Also, Ifo business climate to fall slightly to 115.3, with a fall in current assessment (125.7) more than offsetting a slight improvement in expectations (105.6).
United Kingdom: The key event of the week will be the EU summit on Thursday and Friday. We expect an agreement on the transition deal, which should provide some relief for businesses and be positive for growth and rate expectations. The CPI inflation to fall from 3.0% y/y to 2.8% y/y in February and core inflation to fall from 2.7% to 2.5%. Retail sales should be up by 0.3% m/m in February. Markets expect the unemployment rate to be unchanged at 4.4% and regular pay growth should rise from 2.5% to 2.6% in the three months to January.
Central Banks: We expect the FOMC to hike rates 25bps at their March meeting. We expect the SEP (“dots”) to shift in a hawkish direction. We expect the BoE to vote 9-0 to keep rates unchanged at 0.5% but maintain its hawkish bias in the minutes and validate the market pricing of a May hike (i.e. 80% probability). We expect the RBNZ to be on hold, in line with consensus. In emerging markets, we expect the central bank of Brazil to cut the Selic rate by 25bp to 6.50%, in line with consensus. We expect the central bank of Russia to cut the policy rate by 50bp to 7.0%. The central banks of Colombia, Chile, Philippines, Taiwan and Indonesia are expected to keep their policy rates unchanged.
So, just approaching two weeks after the March 4 general election in Italy and no one is any the wiser as to what kind of government will likely run the country for the next five years. This follows nigh on six months of political impasse in Germany before another grand coalition (Groko) was finally established to rule for the next four years under the leadership of Angela Merkel.
It is anyone's guess what kind of coalition will be formed in Italy and when. It is already evident that nothing will be decided before next month when President Mattarella begins consultations with the elected speakers of the Chamber of Deputies and Senate, straight after Easter, to break the impasse and find a coalition. The process of electing the speakers of each house starts on Mar 23 and fingers are crossed that this does not drag on for too long.
The consultations with the President could take up to three rounds prior to finding a coalition - of which there are three practical possibilities - a coalition between a) the centre-left Democratic Party (PD) and the centre-right alliance [comprising Northern League (NL)/Forzia Italia (FI) etc], b) the PD and anti-establishment M5S, and c) the M5S and the ultra-right NL. At this juncture, we would hazard a guess at a final formation of a governing M5S/PD coalition, but better signals will be provided by the way in which the election for the two speakers go in the weeks ahead.
Judging by recent utterances from the leaders of the M5S (Luigi Di Maio) and NL (Matteo Salvini), it would seem that the market would need to be wary of any coalition government that includes the NL - whether in a government coalition with the M5S or as part of a government grand coalition of centre-left and centre-right parties.
Salvini - an ardent Eurosceptic - who toned down his Euroscepticism only very recently, has reignited market fears again by stating that the EUR is not irreversible. Di Maio for his part has been keen to stress that he has no intention of creating financial and economic chaos in Italy, eschewed his previous plan to leave the Eurozone and highlighted the need to tackle profligate public spending. He also wants to bring to an end the automatic mechanism to raise VAT if the public deficit exceeds pre-established thresholds. What he hasn't rescinded though is his party manifesto guarantee of a minimum wage of EUR780 per month - a pledge that would prove unaffordable for the fiscal coffers. Debt/deficit reduction will thus prove difficult under this scenario in a country still grappling with a debt-to-GDP ratio of circa 132% unless he modifies these plans.
So, it is difficult to see the 10-year BTP/Bund spread narrowing much under this scenario. But add to that the prospect of a government partnership with the NL, and the spread can easily blow back out above 160 basis points because it is clear that the latter hasn't genuinely abandoned its desire to leave the EUR. - It has paid lip service for now but what happens a couple of years down the road? And it should be remembered that it has a manifesto pledge of implementing a 15% flat tax rate, which would clearly hurt the fiscal finances also.
In practical terms, the two single parties with the largest number of seats won at the March 4 general election - the NL and the M5S, can form a governing coalition, but the market will see it as a lethal cocktail. The NL has promised not to throw its ally - the trailing FI - under a bus by unilaterally forming a coalition with the M5S. It has also sworn not to govern with the PD. At the same time, the M5S has declared a willingness to negotiate with other parties - including the PD - to set a common programme. This is a softening of its previous stance that eschewed ruling with any of the establishment parties.
It also is trying to present a more moderate/acceptable face to Europe and the world at large by rejecting any liaison with the NL's extreme far-right party allies in the European Parliament - the French Front Nationale and the Dutch Freedom Party. No doubt, it would want to be seen as having nothing to do with Germany's AfD party either. So, indications of a probable formation of an M5S/PD coalition in the weeks ahead could be favorable for Italian bonds. Anything that resembles the prospect of NL playing a significant role in government, however, will only keep the markets uncertain for a protracted length of time and undermine the EUR.
Please download and read our global political outlook report: Political Road Map 2018
Change is happening at a lightning speed in China at the moment. The government is redirecting excess savings towards this type of industry, ramping up production fast. China's industrial plan puts it on a collision course with the Trump administration. We don't have price data for these new energy vehicles, but the step away from polluting industry seems to have been accompanied by a ramping up of downstream industry more broadly.
We have been surprised by how quickly inflation of the goods produced by these industries has evaporated. Prices of electrical machinery and equipment fell 2.2% year-over-year in February, compared with a rise of 3.4% at the peak in October. Growth in production of communication equipment and computers has been even more spectacular, at 12.1% so far this year compared with last year, down from 12.4% year-over-year in December.
We could be missing something here, but it seems that domestic demand is struggling to keep up with production growth. Chinese retail sales data imply that final demand is losing momentum, with the recent pick-up in non-core inflation and the crackdown on micro-lending both taking a toll. This means China will be more dependent on foreign demand again, after a debt-fuelled couple of years.
These developments will not play well with anybody spoiling for a trade war. The Trump administration has reported that it may impose tariffs of between $30-to-$60bn on China for alleged intellectual property theft. The tariffs would target technology and telecommunications. The measures would also include limits on visas for certain Chinese nationals and restrictions on corporate investment in the U.S. Tariffs on steel are of no direct threat to China's economy, so the authorities can afford to take the high ground, especially as they plan to continue keeping the brakes on production in any case , Q1 notwithstanding.
But tariffs on tech and telecoms sectors, which the government has now put at the center of its industrial plan, are much more likely to draw a response from China. Moreover, the breakdown of diplomatic relations is concerning. Liu He, likely to be named in a top financial role later this week, returned from Washington recently with a glass-half-full take on the meetings. But he did admit that he wasn't really sure who his point of contact in the Trump administration was supposed to be. The departure of Rex Tillerson won't help matters on this front.