Pendulum Swings

• Both the S&P 500 and the Dow Jones were around the flatline on Thursday while the Nasdaq added 0.2%, as traders digest a batch of weak economic data that reinforced bets the Fed has room to cut interest rates this year.

• Initial claims fell for a second week but continuing claims rose to 2021-highs, suggesting a cool down in the labour market.

• GDP growth however, was revised slightly higher to 1.4% from 1.3%.

• Financials were the biggest laggard while communication services and energy recorded the biggest gains.

• On the corporate front, Micron Technology lost 5.6% after its revenue forecast failed to impress investors.

Yesterday we talked about the potential for pain in sovereign bond markets if the government policy pendulum swings, from the globally coordinated climate agenda, to a more nationalist agenda (under leadership change) - given that trillions of dollars of deficit-funded investment in the climate agenda could be abandoned.

In France, with the threat to Macron's power, French bond yields are widening against the anchor bond yield in the eurozone, the 10-year German yield (chart below).

*In my note yesterday I referred to the vote in France over the week-end as a referendum. It is not (officially) a referendum on Macron but a general election aiming to renew the main chamber of the Parliament. The correction was flagged up by

Julien I 2nd Brain VC

- he has a great VC focussed stack.

And it just so happens that the European Commission has chosen now as the right time to "rebuke" France for its fiscal profligacy.

The result: Higher French bond yields.

It conjures up memories of the past 15-years, when bond yields in both Italy and Spain (in 2011-2012) skyrocketed above 7% (unsustainable levels), which put two of the biggest countries in the eurozone on default watch.

This memory-jostling looks to be by design of the European bureaucrats, as a shot across the bow to French voters. However any spike in French bond yields would likely be countered by the European Central Bank.

Two years ago, just weeks after announcing an end to QE, the ECB had to effectively restart it. They had to step in and curtail rising yields in the fiscally vulnerable constituents of the euro zone, by promising to be the backstop (they are the unapologetic buyer of last resort, to preserve stability ... and solvency).

We should expect the Fed to behave in a similar way, if U.S. yields were to spike (on prospects of U.S. regime change). They would be back in the QE game (managing bond yields), as they did in response to the bank shock in March of last year.

With all of the above said, if these central banks were to withhold their intervention power in these scenarios, they could have significant influence on a political outcome.