Europe is playing with fire - SocGen

Research Team at Societe Generale suggests that the European political agenda looks busy in 2017, but they think 2018 will be a more decisive year.

Key Quotes

“It is only after the German election (autumn 2017) that we can see a stronger impulse towards integration – or not. The immigration crisis, the failure to deepen integration (which itself is dependent on southern countries delivering more aggressive reforms) and deliver stronger growth and a quicker fall in the unemployment rate have threatened the very integrity of the EU. For now, the focus is the fallout of the Italian referendum – including banking ructions – and on the French election.” 

“We Prefer the SEK and NOK. Those uncertainties will leave the euro initially weak in 2017. Within the European bloc, we prefer the SEK and NOK, which are best positioned to benefit from the reflation theme. It is the global disinflation pressure, and the related depressed CPI trends in Sweden, that has kept the Ribsbank so dovish despite the strong economic growth. With SEK inflation breakevens now fast recovering, the policy stance should change and support a recovery in the SEK. NOK forward interest rates are also rising fast relative to EUR, and along with the recovery in oil prices, that should also support a NOK rally.”

“Spring revival. Eventually, a Marine Le Pen victory in France looks highly unlikely, even if she grabs the first position in the first round. Reassurance on that front in spring (presidential elections on 23 April and 7 May), if it coincides with ECB tapering, could mark the low in EUR/USD (close to parity). Of course, further political uncertainty – e.g. potentially an early election in Italy in the summer – would delay or limit the bounce.”