As this note is written, the election results for the EU parliament and Ukraine are not known. Nor are the results of the local elections in Greece and national election in Belgium known. We will provide some analysis when the results are announced, but for our purposes here, we assume that there will not be much impact for investors.
Yes, the anti-EU parties drew on the general frustration, but not sufficiently to wrest control from the duopoly. To fight the king, one must kill the king, or risk being marginalized. Indeed, early exit poll results in some countries, including the Netherlands and Latvia, for example, suggest the anti-EU vote may quite as large as many anticipated. In addition, some of the anti-EU vote may simply be part of a large protest effort. The UKIP vote in local elections was greater than those who favor the UK leaving the EU.
There are though a couple potential exceptions where the results could have a larger implication. Greek results do have the potential to rattle investors if it fuels speculation of snap national elections, but there are two mitigating factors. First, Greece's sovereign rating was upgraded to B by Fitch before the weekend. The rating agency recognized fiscal improvement. Second, foreign exposure may have been reduced in the recent market turmoil that pushed Greek bond yields sharply higher (~100 bp) in several sessions in the middle of the month.
It may be cynical to suggest that the outcome of Belgium's national election does not matter. However, it took more than a year and half to form a government after the last national election five years ago. Then premium over Germany widened, but that seemed to be largely a function of the broader environment at the time. A strong showing by the National Front in France may unsettle some investors, but winning a national election is a different story.
Meanwhile, it is in neither the US, Europe, Russia nor the Ukrainian people's interests to allow the electoral disruptions in the east, prevent the recognition of the legitimacy of the presidential election. The polls suggest a strong victory for Poroshenko, a seemingly pragmatic businessman with investments in Russia. Barring a significant surprise, we expect the election to begin a new and somewhat less intense phase for Ukraine.
The successful, even if not perfect, election will likely deter a new round of sanctions, but the current effort to isolate Russia, for which the sanctions are only one element, will likely continue. Meanwhile, Putin may feel emboldened by the combination of the likely "finlandization" of Ukraine and the energy deal with China (that is about 1/5 as large as EU purchases), and may look for other opportunities at near-abroad to assert his will. Moldova, for example, is a potential target for Russian trade sanctions if it pursues closer ties with the EU.
The economic data are not so interesting in the week ahead. And the week will begin off slowly with US and UK markets closed on Monday. From a historical perspective, there my be some interest in what likely will be a sharp downward revision to the first official estimate of Q1 US GDP. The Bloomberg consensus calls for a 0.5% contraction rather than a 0.1% expansion. The risk is on the downside. The chief culprit is inventory growth was weaker than had been initially anticipated. A larger trade deficit and slower non-residential investment also took a toll. They likely offset the better consumption spending and residential investment data.
Growth is expected to be bouncing back significantly in Q2. A soft April durable goods orders report on Tuesday will not challenge this view. Slower orders from Boeing will weigh on the headline, but the past gains in orders should help lift shipments, which are more important in GDP calculations.
The only data of note from the euro area are in the form of money supply and credit figures for April. It is unreasonable to expect much of an improvement in either money supply growth or credit conditions. The extension of credit has fallen for more than two years. There appears to have been some improvement in credit extension to households. It has nearly stopped contracting, but it is not genuinely growing. Most importantly, credit to small and medium businesses continues to fall.
It has taken Draghi a while, but he has now managed to paint the ECB into a bit of a corner. If it does not ease in a strong fashion, it risks losing some credibility in its communication. It could trigger new appreciation of the euro, which has broken below its 200-day moving average for the first time since last September. Anticipation of ECB action has helped fan the equity market. European shares have rallied for six consecutive weeks, with the Dow Jones Stoxx 600 advancing about 5%.
More important than the economic data head of the ahead of the June 5 ECB meeting may not be very important. Politics may fill the vacuum. European heads of state are due to dine together Wednesday ostensibly to discuss the results of the European parliament election. A compromise candidate for EC President is likely to be discussed. There will be some jockeying for position, but the real horse trading has yet to begin.
Japan has the most top tier data on tap in the days ahead. It includes retail sales, industrial output and CPI figures. However, broad weakness is widely expected in the real economy while the retail sales tax will likely double the pace of Japanese inflation. The BOJ will seek to look past the distortion created by the tax to discern the true inflation trends. It will be important to gauge how the economy is doing relative to the BOJ's expectations, and it will take more than a month of high frequency data.
The BOJ has leaned against widespread expectations of more stimulus. We have argued that if more stimulus is going to be forthcoming, it is unlikely to be as early as the market expects (by the end of July). Moreover, if there is some disappointment, a supplemental budget in the second half of the fiscal year is possible. In addition, we suspect there will be a growing call to delay the next year's second part of the sales tax increase.
Lastly, we note that with growing confidence that low core policy rates will be sustained for longer, emerging market equities have rallied. The MSCI Emerging Markets equity index has risen about 4.5% this month and 14% from the early February lows. The much-tracked index finished last week at its best levels since last October. It has now not only caught up to the MSCI World Index (developed countries), but has exceeded it on a year-to-date basis. Emerging market shares are enjoying strong momentum and addition near-term gains are likely. It closed just below 1050. A move above there could spur a move toward 1100.