SABAH Bulletin: As the first elections are approaching in France, Frexit anxiety is growing!

Let’s welcome the week together with a short bulletin by saying a pleasant good morning to everyone upon the return of the Long Holiday break.

After French President Macron riskily dissolved the Parliament and decided to hold early elections after the unsuccessful European Parliament elections, the first round of elections will be held this weekend, and the second round will be held on July 7. As you may remember, France’s far-right National Rally (RN) party overwhelmingly defeated Macron’s centrist alliance (15%) in the European Union elections, receiving approximately 32% of the votes. The RN received 30% of the female vote, a 10-point increase compared to the 2019 EU elections. According to the Ipsos poll, the RN party and its allies appeared to be ahead with 35.5% of the votes in the first round of the parliamentary elections, while the New Popular Front (NPF) alliance ranked second with 29.5% of the votes, while Macron’s centrist alliance came in second with 35.5% of the votes. He ranked third with 19.5 points. There is concern that the victory of the far right could bring Frexit, just like Brexit, to the agenda.

EURUSD parity fell to 1.0680 level in parallel with the Frexit concerns and continued its downward trend for the sixth week. This week should be completed above the 1.0650 level in EUR. From a technical perspective, a close below 1.0650 could bring about a sharp decline. Let me try to reveal the extent of the concern more clearly by noting that France’s 5-year CDS risk premium, which is at the center of the concerns, has reached its peak in the last 4 years, increasing by 50% compared to last week and reaching 36 basis points.

While all eyes are on France in foreign markets, it should be noted that Prime Minister Sunak’s job is not easy in the UK, where there is a countdown for the elections. Public opinion polls indicate that the Conservative Party will lose significant votes in the elections after 14 years of power and that the Labor Party will come first in the elections. The GBPUSD party fell to 1.2640, taking its decline against the dollar to the fifth week in a similar fashion.

On the precious metals front, while gold continued its calm course around $ 2,330, we saw that silver, which followed a dynamic course on the last business day of the week, could not maintain its gains even though it rose to $ 30.80. Silver starts the new week at $ 29.55. This week, the $29.30 level below will act as support. Let’s note that investors who will try a long position should consider a weekly close below $ 29.30 as a loss. If we get rid of the noise of the short term, as we stated in the report we wrote on Thursday last week, while the reserve currency status of the dollar, which has no alternative in the fiat money world, is being questioned on a large scale, first gold, then Bitcoin and perhaps silver (if your heart is strong) are used in physical portfolios and individual retirement diversification. We continue to defend our opinion that they should be included as instruments.

On the Turkish front, the new tax package was discussed during the holiday. Some elements leaked from an old draft, Mr. We also heard that it was vetoed by the President. We will see the details of the new package when it is presented to the Parliament this week. The USDTRY exchange rate rose to 32.80 levels during the holiday, after playing a firm defense at 32.20 levels for a long time and the CBRT accumulating reserves of roughly 78.5 billion dollars in this process. While we are almost certain that TL will continue to appreciate in real terms, we will give up on playing defensively and interpret some upside movement as healthy. Let us also note that while the CBRT’s net foreign exchange position continues to improve, its net reserves excluding swaps and public currencies have increased to the level of plus 4.5 billion dollars. We expect the increase in reserves to continue. On the stock market front, with the help of the optimism that has continued for the last six business days (the clearing advantage of entering the holiday), the index rose to the highest level in the last month by 10,771 points. Although foreign investors remain cold towards Turkish stocks, we foresee the continuation of the rise with the help of local players.

While the S&P 500 and Nasdaq indices in the USA closed with a slight decline on Friday, the Dow Jones closed almost flat. A second day (~10%) drop in Nvidia share put pressure on the market. At the beginning of the new day, a selling atmosphere prevails in Asian stock markets. Except for the Tokyo stock market, which was supported by the weak yen, Taiwan and Hong Kong stock markets fell over 1%. Following the recently announced weak macroeconomic data in the USA, the markets have started to price two interest rate cuts this year, and it is certain that the first cut will be in September. Let us state in advance that the PCE inflation to be announced in the USA on Friday this week will be of critical importance.

Emre Değirmencioğlu (@emredegirmenci5), Cluster Manager

Treasury Department, Cyprus Economic Bank