Global Weekly: Relaxed for now

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French Elections

With the French elections behind us and the first-quarter earnings season coming to an end, financial markets now seem to have some room to relax.

Bond markets update
After their low of 2.16% in April, 10-year US Treasury yields now have returned to their trading range between 2.30% and 2.60% where they moved between November and March. For the 2-year US Treasury, pressure is building as the market is anticipating a rate hike at the meetings of the US Federal Reserve (Fed) in both June and September. This is in line with our expectations. 10-year German Bunds now trade at 0.43%, still moving in the range between 0.15 and 0.50% that was established in January.

Over the past six months, French politics have been the key driver of most eurozone peripheral government spreads, with Spanish bonds trading at a spread of 119 basis points and Italian at 185. We now expect other factors to take stage, such as macroeconomic dynamics, ECB policy and local political risks.

The market seems relatively relaxed, with peripheral spreads expected to remain low for the next few weeks. For the second half of the year, we expect wider spreads on the back of ECB tapering and political risk in Italy. Markets expect that the spread between Italian and German government bonds could widen significantly in the run-up to the Italian general election, which is currently expected to take place early 2018. 

When the ECB starts tapering its asset purchases, we expect a negative impact on Italian government bonds, which is already priced in somewhat. In general, the spreads look fair when compared with emerging markets sovereigns, but political risk could make Italian bonds look like weak emerging markets credit.

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