A number of developments on the geopolitical front could affect the financial markets.
Right after UK Prime Minister Theresa May called for a general election on June 8, the sterling pound soared to the highest level since October last year. However, equity investors seem to be taking a wait and see approach.
The North Korean crisis has hogged the headlines, especially after the United States announced that it was sending a naval strike force to the waters near the Korean peninsula, although it was later learned that the “armada” was heading in another direction.
There has been an exchange of threatening words between Washington and Pyongyang. But China appears to be doing its bit to lower tensions as it urges the concerned parties to refrain from taking any action that would exacerbate the situation.
The recent meeting between Chinese President Xi Jinping and US President Donald Trump was marked by cordiality, sending a positive signal to the markets.
Trump later said he would not label China a currency manipulator, reversing his threat during the election campaign last year.
Such comments would help alleviate the risk of a trade war between world’s two largest economies in the short term.
France will hold the first round of election this weekend, and various polls show a four-way race that is too close to call.
Polls indicate Marine Le Pen, known for her anti-European Union stance, is unlikely to win. I would therefore be a buyer of the euro, maybe at around 1.06 against the US dollar.
In the upcoming earnings season for US companies, it’s widely expected for the S&P 500 constituents to post a first-quarter earnings growth of around 10 percent.
I personally favor tech firms due to the sector’s encouraging business expansion. However, I’m cautious about US banking stocks, given that slowing loan growth and a flattening yield curve could weigh on the sector’s profitability.
Meanwhile, 10-year government bond yields in the US and Germany have retreated to low levels recently. By contrast, the spread between 10-year bonds in France and Germany has started to pick up due to the uncertainty in the French election.
Nevertheless, bond yield may bounce higher later this year as the Federal Reserve may hike interest rates at least twice more for the rest of 2017.
This article appeared in the Hong Kong Economic Journal on April 20
Translation by Julie Zhu with additional reporting
[Chinese version 中文版]
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