Macro Insight - Political uncertainty lingers as central banks take centre stage

30 January 2017

Italy Constitutional Court ruling maintains political uncertainty; BoJ, Fed and BoE take centre stage

  • Italy Constitutional Court ruling maintains political uncertainty; BoJ, Fed and BoE take centre stage this week.
  • Constitutional Court partly rejects Italicum. Last week the Constitutional Court ruled on the Italicum reform of the electoral law for the Lower House. It deemed the two-round ballot system unconstitutional but kept the bonus for the first party (if it receives more than 40% of the votes). In our view, this ruling only provides the basis for the negotiations among parties to agree on a new electoral law. We believe they are likely to wait for the detailed ruling of the Court, which is due around 25 February. In our view, early elections are unlikely in H1 2017 but credible in H2, with reduced risk of Five Star after electoral reform.
  • Central banks take centre stage this week. On the back of encouraging consumption growth but disappointing manufacturing business surveys, we expect the BoJ to reinforce the commitment to the yield targeting introduced in September, as core inflation remains low (Tokyo CPI was even negative y-o-y in December). We expect no change at the Fed meeting on Wednesday. However the accompanying statement may be slightly  hawkish as the Committee is likely to leave its options open for a rate hike in March, if data continues to be firm. Finally, concerning the BoE’s Inflation report on Thursday, we expect them to maintain a forecast for deceleration across 2017 and maintain a neutral outlook for rates for now.
  • Global sovereign yields increase while Italy and Portugal bond spreads widen. Sovereign yields  increased last week driven by higher inflation expectations. In the US, 10 year yields rose by 10bps, despite a disappointing Q4 GDP figure (1.9%q-o-q versus 2.2% expected and 3.5% in the previous quarter).  In the Euro Area, government bonds yields rose with curves steepening. More specifically, Italy and Portugal bonds underperformed compared to the rest of the EMU  due to country specific issues. Namely, in Portugal, banking sector concerns have revived, while in Italy the Constitutional Court ruling has increased political uncertainty.  Actually, Italian auctions have probably exacerbated the pressures on BTPs, and more interestingly, political uncertainty did not spread to Italian stocks.
  • Turkish central bank  adjusts rate corridor; Fitch downgrades Turkey. The central bank of Turkey responded to recent lira weakness by raising the upper end of its rate corridor by 75bps to 9.25% and the late liquidity window rate by 100bps to 11.00%. We do not think that the rate adjustment is sufficient to stabilise the currency and instead a 100bps increase in the policy rate is required. As expected, Fitch downgraded Turkey to  non-investment grade at BB+, Stable, from BBB-. This adds to concerns over political insecurity after the failed coup and risk to the central bank’s independence. Fitch’s decision came hours after rival agency Standard & Poor's surprised investors by lowering its outlook for Turkey to Negative from Stable. The two rating actions accelerated the fall in the TRY and increased pressure to the central bank to hike its key policy rate.
Events coming up:

BoJ meeting (31 Jan)
Eurozone Q4 GDP (31 Jan): we expect +0.4% q-o-q as in Q3 2016 and in line with consensus.
Fed meeting (1 Feb)
BoE inflation report (2 Feb)

Major earnings annoucement this week include:
US: Valero Energy, Apple, Pfizer, Exxon Mobil, UPS, Facebook, Merc & Co., Amazon, Conoco Phillips and Phillips 66.
Europe: Siemens.
Japan: Sony, Toyota, Denso, Nomura, Panasonic, Hitachi, Honda, Nippon, Mitsubishi, Kawasaki, Fujifilm and Tokyo Gas.

Market and asset types measured by the following indices: Equities = MSCI. Fixed Income = JP Morgan and BofAML. 


The Research & Investment Strategy (R&IS) team at AXA Investment Managers present their views on recent developments and the factors shaping markets over the week ahead. For more information on the R&IS team or any of the above comments, please contact us or follow us on social media for updates throughout the week.



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