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Affinity Policy Comment 10 June 2024

Taking A Right Turn

European parliament elections surprised consensus with a more pronounced right-wing shift than expected. The new parliament is projected to display 58 per cent of seats to right-wing parties, a solid result. The biggest surprises were in Germany and France, where left-leaning ruling coalitions underperformed strongly. More extreme right-wing formations delivered solid results in France, Germany, Austria, and the Netherlands. In Italy and Greece, ruling centre-right coalitions confirmed their leads.

In France, the result was so extreme that President Macron was forced to dissolve the lower house and call new legislative elections to re-establish the political legitimacy of the current majority. New elections will be held on 30 June and 7 July, and represents a key political event for Europe, arguably more than European elections themselves.

A National Rally majority would imply larger deficits and a right-wing shift in European politics, although the impact on the EU major files, such as the Green Deals, should be relatively contained by the fact that the legislation is already passed and now in the implementation phase. More confrontation will almost certainly emerge on the next EU budget, where the spending priorities of this European Parliament are expected to be different than the prior one.

On the macro policy front, the ECB cut rates by 25 basis points to 3.75 per cent, as widely expected, but surprised with stronger projections for growth and inflation. The cut was a “hawkish” one, whereby the committee had boxed themselves in for weeks to deliver it, but guidance sounded more hawkish amid stronger wage and inflation data.

In particular, core inflation for 2024 and 2025 was raised to 2.8 per cent and 2.2 per cent, by 0.2 per cent and 0.1 per cent respectively. Lagarde had difficulties justifying the decision in the press conference, and questions were posed if this was a “one-and-done”. The ECB’s cutting path from here appears less clear amid sticky services inflation and a continued strong US outlook.

Meanwhile, in the US, Fed secretary Powell might signal no urgency in altering the Fed's current policy stance, even if ultimately the central bank appears to remain biased towards cutting rates. Markets are pricing in around an 80 per cent probability for a first cut in September, which signals that the Fed still has plenty of time to observe incoming data.

While Europe has seen signs of rebounding manufacturing activity, US data remains consistent with further cooling. May PMIs and ISM showed industrial order-inventory balances weakening, and job openings signal moderating demand for labour. Bank lending growth has stabilised below pre-pandemic levels as tight monetary policy continues to bite.

The widely followed 2024 median dot in the Fed's updated rate projections might shift 25 basis points higher, signalling two rate cuts this year instead of three. Only two of the more dovish FOMC participants need to shift their individual projections to tilt the median to the higher bracket. GDP and unemployment forecasts could see only marginal revisions, even if ultimately there could be downside risks to growth and upside risks to unemployment. Inflation forecasts are expected to remain mostly unchanged as well, as even though PCE inflation was faster than expected in Q1 as a whole, the monthly data has shown cooling momentum towards spring.

Powell should continue downplaying any speculation about further rate hikes, as there aren’t any signs that the economy is overheating. Sticky inflation could continue to push cuts further into the future, but the current level of interest rates is still seen as restrictive enough. This could again be a dovish signal for markets.

May CPI released just ahead of the rate decision could also help continue the recent downward trend in yields. Headline inflation is expected to have slowed to +0.19 per cent m-o-m, compared to April growth of +0.31 per cent. Also, core inflation is cooling to +0.25 per cent m-o-m, below April’s growth of +0.29 per cent. While services PMI showed a surprising uptick in business activity during May, price indicators remained close to pre-pandemic levels. The overall expectations are for gradual disinflation across both housing and non-housing services similar to April.

Altogether, an unchanged rate decision with slightly more hawkish dot plot should not come as a surprise to markets, but softer communication from Powell with downside risks to CPI leave risks skewed towards lower yields and weaker USD next week. For now, the market still expects the Fed to cut twice this year starting from September, followed by four cuts in 2025.

Elsewhere, three big elections in emerging markets brought volatility to global markets, led by the very strong outcome of the Morena party in Mexico. The party of new president Claudia Sheinbaum had almost 60 per cent of the votes, sparking fears of a super-majority with powers to change the constitution. The Mexican Peso weakened by more than 7 per cent last Monday, sparking an unwind of carry trades across global currency markets, according to Bloomberg. In South Africa, the incumbent ANC lost its majority, earning only 40 per cent of the votes against expectations of around 45 per cent, and fears of a coalition with extreme parties caused Rand weakness. In India, prime minister Modi’s incumbent BJP won for the third consecutive time but, with 240 seats, fell short of the 272-majority mark, and he now rules in a 15-party coalition.


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    Contact: Tom Morrison
    [email protected]
    +44(0) 20 3142 0128

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    Our ethos for operations and post-fixture is simple: these roles are as important to us as the chartering/commercial function, and we continue to apply those same principles of professional ship broking throughout the life of each fixture.

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    Affinity Valuations Limited Terms of Business

    Contact: Stuart Morrison
    [email protected]
    +44 (0)20 3142 0144

    Carbon

    Using tailored analytics platforms, we offer client-specific advisory and trading services across the global carbon markets. Contributing to hedging strategies, sustainability reporting and financing requirements, our aim is to assist clients in managing their financial exposure to the approaching energy transition.

    Contact: Hugo Wilson
    [email protected]
    +44(0)20 3142 0121

    Dry Cargo

    Our dry bulk chartering teams in Sydney, Melbourne, Perth, Santiago, Lima, Montevideo, Buenos Aires, Singapore and London are cargo-focussed and they fix voyage, COA and time charter business on behalf of their clients with a wide range of ship owners.
    For Atlantic business please contact Hans Bredrup
    For Pacific business please contact Rahul Khanna

    Contact: Hans Bredrup
    [email protected]
    +56 99 887 3036
    Contact: Rahul Khanna
    [email protected]

    LNG

    Our young and dynamic LNG team possess wide-ranging experience of spot and term charters working with all major LNG shipowners and charterers. The LNG team has close interaction with the Newbuilding and Sale & Purchase divisions with an unrivalled track record of contracting LNG newbuildings and in the sale and purchase of LNG assets.
    We maintain up-to-date knowledge and an understanding of new technologies within the LNG sector to ensure that our clients can make the most suitable and cost-effective decisions on shipping solutions.

    Contact: Joni Mackay
    [email protected]
    +44(0)20 3142 0133

    Newbuilding

    Our Newbuilding team has concluded over 500 newbuildings of all types, including LNGCs, FSRUs, drillships, crude tankers, product tankers and dry cargo vessels. We have contracted in all major newbuilding centres globally, with particular focus on the Korean Shipyards.

    Contact: Nick Wood
    [email protected]
    +44(0)20 3142 0111

    Offshore

    Affinity Offshore is based out of our Oslo and Houston offices. The Team focuses on world-wide sale & purchase of offshore support vessels, as well as chartering – particularly in the Americas and Mediterranean/MENA regions.

    Contact: Tor-Øyvind Bjørkli
    [email protected]

    Research

    Our research department combines real time market information with econometric modelling and the latest technology. 

    Contact: Sevita Kondyliou
    [email protected]
    +44(0)20 3142 0182

    S & P

    Our Sale & Purchase team has extensive experience of working with private clients, national shipping companies, major corporates, oil companies, grain houses and institutional investors. We provide a cradle to grave services across all shipping sectors. We operate from London, Singapore and Seoul to give 24-hour coverage of the markets, working for both newbuilding and second-hand buyers.

    Contact: Tom Morrison
    [email protected]
    +44(0) 20 3142 0128

    Tankers

    Our established tanker chartering teams serve the industry from London, Houston and Santiago delivering a highly proficient spot chartering service with a prime position in the fuel oil market. The team has close relationships with oil majors, national oil companies, oil traders and major ship owners and operators. 
    Our ethos for operations and post-fixture is simple: these roles are as important to us as the chartering/commercial function, and we continue to apply those same principles of professional ship broking throughout the life of each fixture.

    Contact: Tim Gurdon
    [email protected]
    +44(0)20 3142 0142

    Valuations

    We provide transparent, objective ship valuation service to major owners, banks and other financial institutions at short notice and a daily basis. We provide a retainer service for regular fleet valuations.

    Affinity Valuations Limited Terms of Business

    Contact: Stuart Morrison
    [email protected]
    +44 (0)20 3142 0144

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