Global weekly: It’s all politics

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Politics and politicians are increasingly affecting markets. Upcoming European elections are creating uncertainty, and the policies of Donald Trump’s administration continue to be hard to predict.Politics and politicians are increasingly affecting markets. Upcoming European elections are creating uncertainty, and the policies of Donald Trump’s administration continue to be hard to predict.

Rising political risk in Europe has benefited German government bonds, as Bund yields, which move in the opposite direction from prices, fell based on safe-haven demand. In France, Ireland and the eurozone periphery, spreads widened this week, although there was some spread narrowing after Francois Bayrou backed out of the French presidential race and threw his support to Emmanuel Macron. This increases the odds that Macron will eventually become the next president of France, and reduces the possibility of a victory for nationalist Marine Le Pen. Her success in winning the election is now seen as a “tail risk” by ABN AMRO Group Economics.

In the US, the policies of Donald Trump’s administration continue to be hard to pin down. This week, the released minutes of the meeting of Federal Reserve policymakers pointed out that “Most Fed officials continue to see heightened uncertainty regarding size, composition and timing of possible changes to fiscal and other government policies.” Most Fed members have also said they would like to have more clarity on fiscal stimulus plans before hiking rates. This clarity will likely come after the March meeting of the Fed policymakers. We expect the Fed to hike rates three times in 2017, beginning in June and thereafter in September and December. The chances of an earlier move, however, have increased.

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