Brexit, Frexit, Nexit

The Day So Far

Brexit, Frexit, Nexit… and after yesterday’s stern warning from the IMF how long will it be before we return to Grexit. Now that the press have moved on momentarily from the Le Pen furore the FR/GE 10yr government bond yield spread has eased from the 4yr high printed earlier in the week and the CAC40 is actually the best performing index in mainland Europe this morning. However, as noted in yesterday’s report I would still expect nervousness in the long run to remain elevated as the election draws near despite the low probability of the National Front winning the second round of voting.

This then leads me to talk about the Dutch election from which I feel there has been considerable complacency in that the far-right Freedom Party (PVV) led by Geert Wilders are likely to become the largest faction in the lower house after the parliamentary elections on the 15th of March. Despite this fact and much like the situation in France, if Le Pen were to win the actual powers her party would possess are somewhat limited. This is very much the situation in the Netherlands where the PVV would not have sufficient seats to form a government which would likely lead to a coalition that could consist of up to five different parties, a scenario which would likely lead to a prolonged period of political stalemate rather than immediately issuing an executive order to “build a wall” for example.

As was the case in Brexit and with the appointment of Trump one can not underestimate the rising populist movement that has been sweeping the globe and as we discussed here yesterday I would still anticipate the two strategy approach in positioning for increasing uncertainty up to the flash points of the events only then for the market to refocus on the complexity and lack of authority that the winning parties may have. This is no more apparent then in the UK where by Theresa May’s government have already had to make severe concessions on their initial hard Brexit approach in order to appease the now legally binding process of having the deal ratified in parliament.

The Day Ahead

The strategy for today is a repeat in direction of what our view was yesterday in that our only long bias is in the S&P. With the calendar being exceptional quiet today more attention than normal maybe paid in the short-term to the release of the DoE crude oil inventory report. The reason for this is that last night’s API headline showed a build of 14.27mln, the second largest build in US history. As such today’s government report has a lot to leave up to and I feel may well disappointment the bears who are looking for a similar sized number but that doesn’t materially change the trend of lower crude in recent days.