The Market Radar

We anticipate, monitor, and comment on market moving global economic and geopolitical issues.  No dark side brooding, no wanting the world to end, no political rants.  Traders, investors, policymakers, or market observers can’t  afford to ignore us.

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Will France Launch The Molotov Cocktail?

The Oat-Bund 10-year spread came in almost 10 bps last week.  The Euro rallied a little over 1 percent.

A disillusioned and highly undecided French electorate head to the polls tomorrow to choose the two candidates (unless one wins an unprecedented 50 percent) for the May 7th second round election, which will decide the country’s next president.    The question is in the privacy of the polling booth will the disaffected marginal French voter decide to launch a political Molotov cocktail, as the Americans did in November, at the system that they deem has failed them and cast their vote for both extreme candidates –  the hard right, Marine Le Pen,  and the hard left, Jean-Luc Mélenchon?

Possible,  but unlikely, in our opinion.

However, the latest polling puts all four candidates almost within the margin of error and with 25 percent of the electorate undecided it makes for much uncertainty and sets the stage for high drama on a Sunday night in Paris.

The first round of voting is set to be a closely-fought race, with the latest poll from PrésiTrack OpinionWay / ORPI for Les Echos and Radio Classique putting the top four candidates within just four points of each other.

Emmanuel Macron, the centre-right pro-EU candidate, leads the poll with 23 per cent.  Marine Le Pen, who has vowed to freeze immigration and end the Schengen agreement, is just one point behind.

Francois Fillon is just behind on 20 per cent, with far-left firebrand Jean-Luc Mélenchon is on 19 per cent.

…With a margin of error of up to 2.2 per cent, and many French voters still undecided, it is possible that any of these four candidates could win the first round of voting.  – Sunday Express

Our sense is Le Pen will probably receive a slightly higher than expected vote due to the “Bradley Effect” and Macron will finish close behind.   This is our educated guess.   Only a guess and could cause a little volatility before French and European financial assets begin to rise — probably by a lot — as they price in a Macron victory in the second round.

Place your bets.

Oat-Bund Yield Spread

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US Sector ETF Performance – April 21

ETF_DayETF_WeekETF_MonthETF_YTD

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Global Risk Monitor – April 21

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COTD: Oil Supply Breakeven Prices

Hot from the latest International Monetary Fund’s, World Economic Outlook.   Looks like not many of the projects out there making money at $50 bbl.

IMF_WEO_Oil Breakevens_April20

(COTD = Chart of the Day)

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French Oat-German Bund 10-year Spread

The Oat-Bund yield spread widened out about 7 bps this past week.  Hard left anti-EU candidate, Jean-Luc Mélenchon,  is making a late charge turning the first round of the presidential election into a 4-way horse race.    Though  Le Penn and Macron are ahead in the polls and favored to make the second round,  their leads are just outside the margin of error.   And 33 percent of French voters are still undecided.

Mélenchon-Le Pen second round run-off would really spike volatility as the center would be up for grabs,  increasing the probability of a Le Pen or Melenchon anti-EU presidency and thus an existential threat to the Eurozone and EU.

The favourites to make the second-round runoff on 7 May remain far-right Front National candidate Marine Le Pen and the independent centrist Emmanuel Macron. But with up to one-third of France’s 47 million voters undecided, and another 30% so disillusioned with French politics that they say they will abstain, the field is still wide open.

Two months ago any suggestion that Mélenchon, head of La France Insoumise (Unbowed France), could be a serious contender for the Elysée would have been thought laughable. Now it is no joke. Mélenchon’s popularity is running level with the beleaguered, scandal-hit Fillon in some polls, higher in others.

Le Monde says France is in the unusual situation of having four presidential candidates, any one of whom could win. Like Le Pen, Mélenchon is appealing to young voters with his hologram meetings, his upbeat election messages and his entertainingly forthright approach to televised debates. – The Guardian

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Oat-Bund Yield Spread

 

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US Sector ETF Performance – April 14

ETF_DayETF_WeekETF_MonthETF_YTD

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Global Risk Monitor – April 14

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RiskMon_1RiskMon_2RiskMon_3

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Why the Equity Bull Market Must Continue

We have been busy crunching some very interesting data on pension funds from the most recent Federal Reserve’s,  Flow of Funds Accounts.    Check out the charts below.

Interestingly,  the last time Private and State & Local Government Pensions were fully funded was at the end of the stock market bubble in 2000.  Pensions were 25 percent overfunded in 1999.

However,  even with stocks making new highs,  these pensions remain $2.33 trillion, or 27 percent of their assets,  underfunded at the end of 2016.   Surprising.

One would think the slope should be headed south as stocks rise, no?  Just as it was from 1995 to 2000.   On the contrary,   unfunded entitlements are heading parabolic north.

Could be a combination of low interest rates,  an under-allocation to equities since the dot.com and financial crash (see charts) and rising pension entitlements,  mainly in state and local government retirement funds.   Probably more the result of the later.

The Upshot?   It seems the only way out of the pension mess — other than massive contributions, tax increases, or defaults — is a humungous equity bull market with pensions appropriately positioned.   In aggregate, they seem to be gun shy after the financial crisis with their average aggregate equity allocation only about 50 percent of what it was at the start and first few years of the new millennium.

One caveat is the allocation data can be distorted and deceiving as equities are measured at their market value where some of the other assets are not.

The question is:  Will Janet Yellen and President Trump do “whatever it takes to preserve” the pensions?   And will it be enough?

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How the Life Insurance Industry Invests

Life Insurance Company Investments_FoF

Life Insurance Assets_FoFLife Insurance Assets GrowthLife Insurance Equity and Bond Growth_FoF

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Major Holders of the US Corporate Bond Market

Major Holders of the Corp Bond Market

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