skip to global search (press enter).

skip to funds type (press enter).

skip to footer (press enter).

We are using cookies to give you the best experience on our site. Cookies are files stored in your browser and are used by most websites to help personalise your web experience. By continuing to use our website without changing the settings, you are agreeing to our use of cookies. Find out more here.

Find out more here.

Geopolitical noise

North Korea, Russia and French elections are causing market jitters but fundamentals remain intact

Treasury yields have continued to rally over the past week, as risk-off sentiment has led to market jitters in the run up to Easter. A souring of US-Russian relations following the missile strike in Syria, coupled with the decision to send the US fleet to the Korean peninsula has led to worries that President Trump is shooting from the hip on the international stage, as his domestic policy agenda fails to gain traction. Markets are very much in a mood to ‘sell Trump’ at the moment and it may be that pessimism with respect to the administration is overdone at this point. Budget discussions are likely to continue into June and we continue to believe that the Republican Party won’t want to score a monumental own goal by failing to achieve anything at a unique point when the GOP controls the Congress, Senate and the Executive Branch. In this context, we continue to take the view that some (but not all) of Trump’s agenda will eventually get done and we are hopeful, having analysed how the Administration has approached states like Mexico and China (in contrast to the rhetoric ahead of the election), that a pragmatic foreign policy approach will prevail and that military adventures should be less likely not more likely, under this particular regime.

The proximity of the French elections also added to market worries in recent days, with the first round of voting due at the end of next week. This rise of Melenchon in the polls has introduced some uncertainty into a vote, which had shaped up to deliver a Le Pen versus Macron run-off in the second round. We would note that Melenchon has performed well in opinion polls in the past, only to disappoint when votes are cast – though with support for the other socialist candidate, Hamon, in free-fall, Melenchon’s progress needs to be carefully monitored in the days ahead. In many regards, we feel that the first round of French voting promises to be more unpredictable than the second round as we remain very confident that Le Pen would be well beaten by either Macron, or Fillon were these centrist candidates to prevail. Ultimately we continue to view the risk of Le-Pen winning at no more than 20% and this probability seems fairly built into market prices, but with many investors running long of credit risk in various forms, the temptation to hedge exposures over the vote has seen some weakness in both corporate and sovereign credit spreads in the region over the past week.

We expect markets should look through some of the noise and we fully expect expectations for Fed rate hikes to be resurrected after Easter.

Economic data releases this week have been broadly robust. In the US, small business confidence continues to run close to its recent highs, jobless claims and JOLTS job openings appear to confirm the rude health of the US labour market and early retail spending reports seem to suggest that March was a solid month after a blockbuster January was followed by weaker February data. In the eurozone, the ZEW survey continues to highlight the ongoing boom underway in the German economy and Chinese data also confirmed that the economy retains substantial momentum, even if peak policy easing is now behind us. A robust outlook in China has also seen further strength in Australian data, with strong jobs gains on the month. Australia is a very cyclical economy and with data across Asia also looking strong we see plenty of evidence to believe that the global upturn in growth we have witnessed in recent months remains very much in full swing. Against this backdrop, we remain confident that the Federal Reserve (Fed) is likely to hike in June and again in the third and fourth quarters. Indeed Fed Chair Yellen’s comments this week suggesting that the economy was close to full employment and that policy should be close to neutral, and would get there following a series of rate hikes in the months ahead, were very much in line with our thinking.

Elsewhere, Trump’s comments that the US dollar may be too strong saw the greenback under pressure. It seems that the President would love to talk the US dollar down, but we suspect that his interventions may have little lasting impact. Markets will be determined by fundamentals and arguably there are lots of things which Trump might want that he is in no real position to be able to get. That said, his comments regarding policy preferences could influence his choice regarding the next Fed Chair and one wonders whether some of the forerunners for the job, such as Taylor or Warsh, who are seen as policy hawks favouring tighter monetary policy, will necessarily be in tune with the President’s liking.

Looking forward, there appears plenty going on in macro markets for the time being and with US consumer price index (CPI) due on Good Friday when European market participants are out, we may expect a continuation of short-term volatility. Notwithstanding this, we expect markets should look through some of the noise and we fully expect expectations for Fed rate hikes to be resurrected after Easter...after all we had a reminder this week when something gets overbought, you can expect to get carried out with a bloody nose.

News Analysis

Mark Dowding

Mark Dowding
Co-Head of Investment Grade Debt
Published 13 April 2017
2 minute read

Related articles
Eyes on the data

Eyes on the data

Despite policy paralysis economic data releases continue to paint an upbeat picture

By Mark Dowding, published 7 April 2017 (2 minute read)

High stakes poker

High stakes poker

The UK formally activates Article 50, beginning what is set to be a very challenging negotiation process.

By Russel Matthews, published 31 March 2017 (2 minute read)

Trump, oil and diet water

Trump, oil and diet water

Can Trump negotiations turn diet water to rich oil?

By Mark Dowding, published 24 March 2017 (2 minute read)



This document is issued in the United Kingdom (UK) by BlueBay Asset Management LLP (BlueBay), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission, the US Commodity Futures Trading Commission (CFTC) and is a member of the National Futures Association (NFA). Past performance is not indicative of future results. All data has been sourced by BlueBay. To the best of BlueBay’s knowledge and belief this document is true and accurate at the date hereof. BlueBay makes no express or implied warranties or representations with respect to the information contained in this document and hereby expressly disclaim all warranties of accuracy, completeness or fitness for a particular purpose. This document is intended for “professional clients” and “eligible counterparties” (as defined by the FCA) only and should not be relied upon by any other category of customer. Except where agreed explicitly in writing, BlueBay does not provide investment or other advice and nothing in this document constitutes any advice, nor should be interpreted as such. No BlueBay Fund will be offered, except pursuant and subject to the offering memorandum and subscription materials (the "Offering Materials"). If there is an inconsistency between this document and the Offering Materials for the BlueBay Fund, the provisions in the Offering Materials shall prevail. You should read the Offering Materials carefully before investing in any BlueBay fund. This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product in any jurisdiction and is for information purposes only. No part of this document may be reproduced in any manner without the prior written permission of BlueBay Asset Management LLP. Copyright 2017 © BlueBay, the investment manager, advisor and global distributor of the BlueBay Funds, is a wholly-owned subsidiary of Royal Bank of Canada and the BlueBay Funds may be considered to be related and/or connected issuers to Royal Bank of Canada and its other affiliates. ® Registered trademark of Royal Bank of Canada. RBC Global Asset Management is a trademark of Royal Bank of Canada. BlueBay Asset Management LLP, registered office 77 Grosvenor Street, London W1K 3JR, partnership registered in England and Wales number OC370085.

Published April 2017