28 June 2024
Weekly Market View
Political season heats up
The first Biden-Trump debate before the November US elections kicked off a packed political season. President Biden’s performance reinforced concerns about his age, likely giving Trump an early edge.
France’s two-round elections can potentially cause market volatility, especially if the far-right National Rally wins a majority, since markets are expecting a hung parliament. We believe any pullback would offer a chance to add to European government bonds.
The UK elections are probably the least interesting for markets given the Labour party’s sizeable lead in the opinion polls, although how Labour plans to fund its campaign promises remains unclear.
We believe a diversified foundation asset allocation, with a tilt towards US equities globally, a preference for Indian equities in Asia, and an allocation to gold as a hedge against political uncertainty, is a prudent strategy in the coming months. (See our H2 Outlook report for more details.)
What are the market implications of the upcoming French elections?
Where are the emerging opportunities in the US technology sector?
Do you expect further gains in USD/JPY after the pair broke above 160?
Charts of the week: Politics hits markets
President Biden needs to boost consumer confidence to get re-elected; French bonds are likely overpricing fiscal risks
Biden vs Trump poll ratings and US consumer confidence
France bond yield premium vs Germany; French 5-year CDS*
Source: RealClearPolitics, Bloomberg, Standard Chartered; *Credit Default Swaps price the risk of a bond issuer defaulting over a given period
Editorial
Political season heats up
Markets are likely to focus on four political events in the coming week. The first Biden-Trump debate before the US presidential elections in November kicked off a packed political season. President Biden’s performance reinforced concerns about his age, likely giving Trump an early edge in the campaign.
France’s two-round elections can potentially cause market volatility, especially if the far-right National Rally wins a majority, since markets are expecting a hung parliament. We believe any pullback would offer a chance to add to European government bonds. Iran is likely to elect a president aligned with the ruling authorities, sustaining Middle East tensions. The UK elections are probably the least interesting for markets given the Labour party’s sizeable lead in the opinion polls, although how Labour plans to fund its campaign promises remains unclear.
We believe a diversified foundation asset allocation, with a tilt towards US equities globally, a preference for Indian equities in Asia, and an allocation to gold as a hedge against political uncertainty, is a prudent strategy in the coming months.
Trump vs. Biden debate: Apart from the well-known issues (inflation, immigration, China/trade tariffs, abortion rights, Trump tax cuts/fiscal sustainability and the wars in Ukraine and Gaza), the focus was on the physical abilities of the two oldest major contestants to ever fight a US election. Former President Trump appeared to have come out on top after the debate as President Biden wavered at times. While the race remains tight, history suggests Biden has an edge if the US avoids a recession before the elections. However, Biden’s chances of re-election are likely to wane if he fails to lift US consumer confidence soon. Over the past 50 years, except in 2012 (when Obama was re-elected), no incumbent US party has won a re-election if the Conference Board consumer confidence index was below 100 in July (the index stood at 100.4 in June).
France’s elections have implications for EU fiscal policy. The consensus is for a hung parliament which would disrupt President Macron’s economic agenda. A victory for the far-right National Rally (or a coalition led by the party) is likely to trigger talks to ease EU fiscal policy rules. Nevertheless, Italian Prime Minister Meloni’s precedent of a far-right candidate heading a major European government for the first time since WWII suggests markets are excessively pricing EU political risks even if a far-right coalition government is formed in Paris.
Investment implications: We maintain a tilt towards US equities in our diversified global asset allocation. US PMI data for June surprised positively, while Euro area PMIs underwhelmed. Besides, US equities continue to be powered by improving earnings expectations, especially in the technology and communications services sectors, with market leadership broadening out (see page 5). Quantitative and technical models remain supportive of US equities.
We continue to prefer European government bonds (FX-hedged), especially after the dip due to French election risks. Barring an upset forcing President Macron to resign, the elections are unlikely to alter EU fiscal rules. Meanwhile, weak Euro area PMI data point to more ECB rate cuts in H2. This would be positive for Euro area government bonds.
In Asia, India remains our preferred equity and bond market. India’s political uncertainty has waned with the formation of the new government, ensuring policy continuity. In the upcoming budget (likely in the third week of July), we expect the government to boost rural consumption, infrastructure and green energy. The fiscal boost is likely to sustain India’s corporate earnings growth and Return on Equity advantage vs other EMs. We also find Indian government bonds attractive due to high real rates. The inclusion of Indian government bonds in a major global bond index, with a 10% weight, is a key milestone for the bond market.
The weekly macro balance sheet
Our weekly net assessment: On balance, we see the past week’s data and policy as neutral for risk assets in the near term
(+) factors: Robust US PMI, consumer confidence; US banks pass the Fed’s annual stress tests
(-) factors: Weaker Euro area PMI, hawkish Fed, geopolitics
US business confidence was stronger than expected in June, while Euro area business confidence underwhelmed
US and Euro area services and manufacturing PMIs
Euro area consumer confidence and money supply appear to be recovering
Euro area consumer confidence index, M3 money supply
China’s industrial sector profits are barely growing amid weak domestic demand, despite resilient exports
China’s industrial profit growth
Top client questions
What are the market implications of the upcoming French elections?
Macron’s announcement of the snap legislative elections, following the far-right National Rally’s (RN) victory in the European parliamentary elections, triggered a meaningful selloff in French financial market assets. The yield premium on French 10-year government bonds relative to their German peers has widened by 34bps since the day of announcement, while the benchmark French equity market index fell by 6.0%. While Macron’s position as the president would not be directly affected by the legislative elections, the markets are afraid that the RN will gain a majority at the National Assembly, resulting in market-unfriendly policies at a time when the fiscal outlook of the country is already under pressure.
In the table to the right, we lay out three likely scenarios that could evolve from the elections. We assess the market implications in the context of those scenarios:
1. Status quo – This scenario is likely to be the most positive for markets as fiscal concerns dissipate. French financial markets are likely to see a relief rally under this scenario, which means the gap between French and German bond yields would narrow.
2. Hung parliament – This scenario is likely neutral for markets. In this scenario, there is little prospect of the French government passing any meaningful policies. There is a heightened risk of political gridlock and repeated no-confidence votes. However, we believe this scenario is now well-priced by markets.
3. Cohabitation (Nationally Rally wins an absolute majority and forms a government, working with President Macron) – This scenario is likely negative for markets, at least in the short term. Worries about the fiscal outlook are likely to rise and the France-EU relationship is likely to deteriorate. This could result in further downside for French financial market assets in the near term. Long-term, however, this market anxiety is likely to fade. In our view, under this scenario, the policy focus is likely to be on non-excessive tax cuts, immigration and law and order, which limits the fiscal instability. A parallel here is the 2022 Italian General Elections, where right-wing leaders, once elected, focused on policies that were ultimately more centre leaning. On Euro area stability, a cohabitation limits what the Prime Minister can do externally. Moreover, the RN appears to have shifted away from its anti-euro rhetoric.
Opinion polls suggest scenario 2 is most likely. This means that the current sell-off presents an opportunity to add to European government bonds, of which approximately 23% are French government bonds.
We also see opportunities in French financial sector corporate bonds, particularly sub-financials. While the market has used French corporate bonds to express a negative macro view on recent
Of the possible French election scenarios, an absolute majority for the right wing National Rally is likely to hurt Euro area risk assets the most
French elections – three scenarios
Early French opinion polls point to a hung parliament
Projected seats based on voting intention* (26 June)
developments, we believe the fundamental impact on the sector is likely to be more minimal. French banks’ balance sheets have strengthened over the years. French banks have a low exposure to French government bonds (less than 5% of total assets or approximately 30% of Common Equity Tier-1 capital). More importantly, these banks derive the bulk of their revenue outside of France. Good access to multiple capital markets also reduces exposure to the risk of potentially higher French funding costs.
From an equity market perspective, the upside potential of the French banking sector is likely capped, in our view. Net interest income (NII) is expected to start coming under pressure as the ECB progresses with further rate cuts. We prefer a barbell approach – an Overweight in the growth-oriented Technology sector as well as the defensive Healthcare sector – within Europe equities. In addition, Europe Technology equities are expected to see strong earnings growth and benefit from AI demand.
— Zhong Liang Han, CFA, Investment Strategist
— Jason Wong, Equity Analyst
French banks derive a majority of their revenue from outside France
Average FY23 revenue split of major French banks*
Top client questions (cont’d)
Where are the emerging opportunities in the US technology sector?
We expect the AI theme to continue powering global equities in the coming months. The “Magnificent Seven” have been the “primary nucleus” of this AI revolution, but we believe there are also opportunities in sub-sectors associated with these companies, i.e., there is scope for the rally to “broaden out”. For example, companies offering cooling solutions for the machines in data centres and AI-powered personal computers (AI-PC) are potential beneficiaries associated with the AI theme. AI-PCs are especially exciting because their share of total global PC sales is expected to rise to 60% in 2027 from the current low teens. We expect a surge in sales and earnings because of (i) the demand to replace and upgrade from both corporates and households, and (ii) AI-PCs’ premium pricing.
There is also likely to be a positive feedback loop, ie, the rising demand for these AI-related sectors are likely to contribute back to the more “primary” sectors, such as those in software and semiconductors, which make up 70% of the US technology sector. Companies in these sectors have been mentioning AI as their key driver of future earnings. Thus, we remain Overweight the US technology sector and would consider adding on pullbacks.
— Daniel Lam, Head, Equity Strategy
US Technology hardware’s earnings revision surging ahead
Earnings revision of major sub-sectors within the US technology sector
Do you expect further gains in USD/JPY after the pair broke above 160?
USD/JPY surpassed the previous level at which Japan authorities intervened (160.2) to reach a 38-year high. The pair has reached our three-month target earlier than we expected. Although Japan authorities warned that they stood ready to intervene, if necessary, the pace of the currency move so far may not be enough to trigger an immediate reaction. The largest USD/JPY move from its 28-day low to intra-day high on a rolling basis over the past one-and-half years has been JPY 9.4; the latest move is around JPY 6.0. Given this history, we believe intervention risks are likely to intensify if the pair approaches 164.0. In the event of intervention, history shows it would not be unusual for the pair to move sharply within a single day. In that event, 157.7 is likely to be a potential area of support.
Meanwhile, the monthly US PCE inflation data is also a key data point for currency markets as it is likely to be a key factor in the Fed’s policy path and the USD. A softer US inflation data print is likely to keep the greenback under pressure, reducing the need for Japan’s authorities to intervene in the currency market to prop up the JPY. Having said that, on technical indicators, USD/JPY appears overbought. Thus, we believe the upside is likely limited with 164 as the key resistance in the near term.
— Iris Yuen, Investment Strategist
The largest USD/JPY move from its 28-day low to intra-day high on a rolling basis over the past one-and-half years has been at JPY 9.4
USD/JPY low-to-high in 28 day rolling basis
Market performance summary*
*Performance in USD terms unless otherwise stated, 2024 YTD performance from 31 December 2023 to 27 June 2024; 1-week period: 20 June 2024 to 27 June 2024
Our 12-month asset class views at a glance
Economic and market calendar
The S&P 500 has next interim resistance at 5,595
Technical indicators for key markets as on 27 June close
Investor diversity remains healthy across asset classes
Our proprietary market diversity indicators as of 27 June close
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As a Professional Client you will not be given the higher retail client protection and compensation rights and if you use your right to be classified as a Retail Client we will be unable to provide financial services and products to you as we do not hold the required license to undertake such activities. For Islamic transactions, we are acting under the supervision of our Shariah Supervisory Committee. Relevant information on our Shariah Supervisory Committee is currently available on the Standard Chartered Bank website in the Islamic banking section. For residents of the UAE – Standard Chartered UAE (“SC UAE”) is licensed by the Central Bank of the U.A.E. SC UAE is licensed by Securities and Commodities Authority to practice Promotion Activity. SC UAE does not provide financial analysis or consultation services in or into the UAE within the meaning of UAE Securities and Commodities Authority Decision No. 48/r of 2008 concerning financial consultation and financial analysis. Uganda: Our Investment products and services are distributed by Standard Chartered Bank Uganda Limited, which is licensed by the Capital Markets Authority as an investment adviser. United Kingdom: In the UK, Standard Chartered Bank is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. This communication has been approved by Standard Chartered Bank for the purposes of Section 21 (2) (b) of the United Kingdom’s Financial Services and Markets Act 2000 (“FSMA”) as amended in 2010 and 2012 only. Standard Chartered Bank (trading as Standard Chartered Private Bank) is also an authorised financial services provider (license number 45747) in terms of the South African Financial Advisory and Intermediary Services Act, 2002. The Materials have not been prepared in accordance with UK legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research. Vietnam: This document is being distributed in Vietnam by, and is attributable to, Standard Chartered Bank (Vietnam) Limited which is mainly regulated by State Bank of Vietnam (SBV). Recipients in Vietnam should contact Standard Chartered Bank (Vietnam) Limited for any queries regarding any content of this document. Zambia: This document is distributed by Standard Chartered Bank Zambia Plc, a company incorporated in Zambia and registered as a commercial bank and licensed by the Bank of Zambia under the Banking and Financial Services Act Chapter 387 of the Laws of Zambia.