A strong decline in the oil market has increased the risk aversion. Early election in the United Kingdom doesn’t have to mean a more pragmatic attitude towards the EU. The French election risk has hardly been reflected in the market. The zloty wore-off, despite potentially positive data from the Polish economy.
Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.
- 14.00: The industrial production and construction and assembly production from Poland (estimates: positive 7.4% YOY).
- 14.00: Retail sales from Poland (estimates: positive 8.6% YOY).
- 14.00: The industrial production prices (estimates: positive 4.6% YOY).
- 14.30: Weekly jobless claims from the USA (estimates: 240k).
Oil caused changes to markets
It hasn’t been often that the oil market would impact the majority of the market assets. However, yesterday’s weekly report from the American oil market (a four-percent decline of both the WTI and Brent) has increased the global risk aversion.
Investors have been trying to estimate whether demand for oil will be larger than the oil supply. Yesterday’s readings from the EIA indicated that the oil supply decreased, but the fuel supply increased for the first time since February. Moreover, the slate oil producers have been increasing the production (by 17k barrels per day since the previous week and by 800k barrels per day since mid-October). This has clearly reduced the global effect of the OPEC actions.
As a result, oil has been overvalued by insufficient increase in demand, as well as by relatively high oil supply in the USA. This has caused a negative reaction of the Russian rouble, Mexican peso and Brazilian real. The zloty wore-off as well, but cheaper oil is favorable for the Polish economy. Nevertheless, when reduced oil prices are caused by a limited demand rather than a high supply, this may increase the anxiety over the condition of the global economy.
Would British prime minister actually be pragmatic?
A potentially more pragmatic attitude from the British Prime Minister Theresa May was one of the reasons for the pound’s strengthening subsequently to calling for early election. A higher support for the Conservative Party is expected to limit the impact of more radical Brexit supporters. However, today’s bulletin from Reuters based on an article from Daily Mail, may deny this scenario.
According to Reuters, the British prime minister will most likely make an election promise regarding the end of free migration to the United Kingdom. In addition, Daily Mail informed that Theresa May would also promise to leave the Single Market, as well as the Court of Justice of the European Union.
If this appears to be true, the optimism regarding the pound may rapidly disappear. Similar demands have been declared by the most extreme supporters of the hardcore Brexit. As a result, early election may appear negative for the British currency.
Market has not been noticing the election risk
Previously, we wrote about a relatively large risk related to the French election (Le Pen and Melenchon in the second round). However, investors haven’t noticed this so far. Even though the difference between the profitability of French and German five-year treasury bonds is at their five-year maximum (0.75 percentage points), the difference between their average level is not as significant (0.4 percentage points).
If it appears that surveys have been underestimating Melechon by 3-4 percentage points and Le Pen by 2 percentage points, Monday’s session may be marked with a significant increase in the risk aversion. This would not only harm French treasury bonds, but also the emerging market currencies.
The zloty has been relatively positive to any improvement in the global sentiment. However, its value has been decreasing each time this sentiment would deteriorate. Before noon, the EUR/PLN went above 4.26. Moreover, the PLN/HUF lost approximately 1%. This is worth taking into consideration before the forthcoming French election.
Today, we will receive the data from Polish economy. The market consensus assumes a strong increase in retail sales, as well as in the industrial production (8.6% YOY and 7.4% YOY, respectively). This year, March was one business day longer than it was in 2016. This may be significantly positive for the production index. The data regarding construction and assembly production will be significant as well. Due to a favorable calendar, this index may finally go above zero. However, this data will most likely have a limited impact on the zloty, especially taking into consideration that the sentiment towards the PLN has been relatively weak over the past few hours.