The market is overestimating political risk in Europe and underestimating the chances of a U.S. recession, according to Saxo Bank A/S.
Risk premiums in the euro and European assets are likely to disappear after the French election, said the Danish bank’s chief investment officer Steen Jakobsen. The region’s economic growth can outperform the U.S. over the course of Donald Trump’s presidency as excessive expectations about his reflationary policies are fading, he added.
The risk premium on France’s debt over German bunds has doubled to 62 basis points since the end of June, partly reflecting concern that the anti-euro National Front’s Marine Le Pen could win power. The euro has fallen about 4 percent against the dollar over the same period.
ECB Governing Council member Erkki Liikanen said in an interview this weekend that President Trump’s economic policy is "still lacking facts and details.”
Since the November election, the S&P Index gained about 12 percent to a record high at the beginning of March and closed about a percent below it on Thursday. The 10-year Treasury yield rose to a two-year high of 2.64 percent in mid-December before falling back to around 2.42 percent. The Saxo Bank CIO remains bullish on U.S. fixed income.
Source: Bloomberg
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