February 20, 2017

Recent economic data shows Asia and the U.S. are providing continued support to the markets despite a growing wariness about risks posed by the upcoming French presidential election.

Christian Nolting, Global CIO, Deutsche Bank Wealth Management, said, “In Asia, one factor supporting a strong start to the year for regional equity markets is export growth in the region, which has increased markedly in recent months. Meanwhile in the U.S., improving economic data has encouraged the Atlanta FedGDPNow model to forecast U.S. Q1 2017 GDP to rise 2.7% QoQ.”

Nolting added, “However, markets are watching upcoming elections in Europe carefully, with French/German bond spreads having widened on the possibility that the Front National candidate, Marine Le Pen, could win the next French presidential election, which at present still remains remote.”


Positive sentiments about Asian export growth were driven by Asian purchasing manager indices (PMI), which were relatively positive at the start of 2017. Nine out of 12 countries in the region showed positive PMIs in January, with particularly strong results from Taiwan, Japan and Singapore. This suggests that Asian growth could continue on its upward trajectory and recover from 2015-2016 lows.

Asia ex-Japan equities also started the year strongly with investor sentiment remaining positive, commodity prices improving and improving global demand for technology exports. However, these positive developments still need to be weighed against the risks posed by uncertainty, profit-taking, and anti-globalisation/anti-trade rhetoric.

Tuan Huynh, CIO APAC and Head of DPM APAC, Deutsche Bank Wealth Management, said, “In light of these risks, we remain cautiously optimistic on Asian equities, having set a 12-month target for the MSCI Asia ex-Japan of 550—a 7% increase from current levels. Our optimism stems from stable economic fundamentals, competitive valuations and relatively light current market positioning.”


Positive news from Asia and the U.S. is overshadowed by potential risks presented by upcoming elections in Europe, particularly in France.

While the Front National’s Marine Le Pen is not expected to win the second round of the French presidential election, financial markets have taken note of the possibility. The spread of French over German government bonds is up by 36% since the first week of February and has more than tripled since only eight months ago, reaching 75 basis points; the highest level since the sovereign debt crisis of 2011-2012.

In the foreign exchange market, there is an implied excess volatility of the USD/EUR exchange rate of 1.4% in the March-June and June-September maturities, suggesting a connection with developments of the election primaries. Elsewhere, equity markets also show an excess implied volatility of 5.3% in the March-June maturity, substantially above the equivalent for the German equity market.