US Sector ETF Performance – March 17

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Global Risk Monitor – March 17

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COTD: The Monetary Transmission Mechanism

On  FOMC eve we thought you’d find the following chart from the IMF’s Global Financial Stability Report useful.

The traditional discussion of monetary policy transmission emphasizes how changes in interest rates affect investment and consumption decisions.  These channels operate through changes in the user cost of capital, intertemporal substitution effects, and wealth effects.  Similarly, changes in interest rates can induce exchange rate changes and therefore influence net exports.  Although important, these channels for the transmission of monetary policy do not assign a particular role to financial intermediaries and, to a large extent, do not affect banks and nonbanks differently.
IMF_Monetary Transmission
(COTD = Chart of the Day)
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French Oat-German Bund 10-year Spread

The 10-year France-German bond spread widened a couple basis points this past week, probably due to a general repricing in sovereign bonds in the euro zone on the back of Mario Draghi’s perceived hawkish statements at the ECB meeting on Thursday:

“Draghi has ever so slightly opened the door to changing their policy stance. He’s done this by saying that the Governing Council talked about changing the language about where rates are in their monthly statement, but didn’t actually change it. This is effectively him signalling that something might change in the future, just not today.

“It’s a classic Draghi technique of saying something that will move markets without actually doing anything. Due to this, and a wordy response to a question about raising rates before QE ends, markets will now start to recalibrate on the assumption that the ECB will remove accommodation towards the end of the year.”
Patrick O’Donnell, Aberdeen Asset Management

The 10-year German yield rose 13 bps on the week to .484%; France 1o-year up 15 bps to 1.114%; Italian 10-year up 27 bps to 2.367%; and the Spain 10-year up 21 bps to 1.889%.

The latest polling has Macron moving into a tie with Le Penn in first round latest polling and up 21 percent in the second round.

A new poll of French voter intentions on Saturday showed Emmanuel Macron solidifying his support and still likely to defeat candidate Marine Le Pen in the May presidential run-off.

The BVA poll, published 43 days before the 23 April opening round, showed the independent centrist Macron scoring 26%, up 2 percentage points from a week earlier and five points in the last 15 days. He is now level with the far-right Le Pen.

Both remain well ahead of conservative Francois Fillon, who is up 1 point to 20%, and appears to have stabilised after his support fell amid a scandal-tainted campaign.

…As in all other polls to date, the poll showed Le Pen losing the run-off, in this case with 39% of the vote versus 61% for Macron. – Reuters

Oat-Bund Spread


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US Sector ETF Performance – March 10

Sector ETF_DaySector ETF_WeekSector ETF_MonthSector ETF_YTD

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Global Risk Monitor – March 10

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French Oat-German Bund 10-year Spread

Notice on the chart the Oat-Bund spread coming in 25 bps in past week.  We are buyers of a French dip.  See here and here.

An apparent threat by far-right leader Marine le Pen to punish state employees who “persecute” political opponents may have eroded her support, according to a poll which found her first-round lead in France’s presidential election slipping.

The poll of voting intentions by research firm BVA found Le Pen garnering 26 percent of the votes in April’s first round, down 1.5 percent from the last BVA poll on Feb. 23.

It found independent centrist Emmanuel Macron gaining momentum, rising three points to 24 percent. (For a graphic on French presidential election click

Conservative rival Francois Fillon remained at 19 percent and would therefore be eliminated from a second-round runoff to be held in May, in which Macron was seen defeating Le Pen by 62 percent to her 38. – Reuters


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US Sector ETF Performance – March 3

sector-etf_day sector-etf_weeksector-etf_ytd

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Global Risk Monitor – March 3

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Les misérables: French people are the most pessimistic on Earth

Though we are buying the French Dip, that is the sell-off over worries of a Le Pen presidency in France,  the latest poll cited by today’s Economist does make us a little nervous.  We saw in November how unpredictable an angry electorate can be.

Don’t forget the Bradley effect when candidates such as Trump and Le Pen are on the ballot.  Voters are embarrassed to admit in public, to pollsters, they are voting for the pariah candidate.   In the private of the polling booth, however,  they throw the “Molotov cocktail” at the system that angers them.

Further fuelling voters’ anger is their anguish at the state of France (see article). One poll last year found that French people are the most pessimistic on Earth, with 81% grumbling that the world is getting worse and only 3% saying that it is getting better. Much of that gloom is economic. France’s economy has long been sluggish; its vast state, which absorbs 57% of GDP, has sapped the country’s vitality. A quarter of French youths are unemployed. Of those who have jobs, few can find permanent ones of the sort their parents enjoyed. In the face of high taxes and heavy regulation those with entrepreneurial vim have long headed abroad, often to London. But the malaise goes well beyond stagnant living standards. Repeated terrorist attacks have jangled nerves, forced citizens to live under a state of emergency and exposed deep cultural rifts in the country with Europe’s largest Muslim community.  – Economist

Even with the Bradley effect,  Macron leads Le Pen in the second round polls by 15-20 percent.   That is a lot to make up.


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