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Looking further down field but already shaping scenarios for next year, the French presidential election. The prospect of a populist-nationalist victory is a source of anxiety. Investors are demanding a higher premium to hold French paper instead of German. On two-year money, the French premium has risen from 3-4 bp before the US election to 16 bp before the weekend, the largest since mid-2014. The 10-year differential widened from 31 bp to 55 bp, the most in a couple of years.

Meanwhile, EU tensions with Turkey have escalated following last week's European Parliament non-binding resolution to end accession talks over Erdogan's repressive response to the coup attempt. In response, Erdogan threatened to abandon the agreement to limit the immigration into Greece.  The decision on talks resides the foreign ministers, not the European Parliament, and they are reluctant to break off accession talks. Should Erdogan re-open the borders, it would likely strength the appeal of the populist-right forces.

Elsewhere, OPEC is a wildcard next week. Since the summer, the ebb and flow of speculation about OPEC's ability to reestablish some order to the oil market drove prices between roughly $42 and $52 a barrel (basis the front-month futures contract). The central problem is that Saudi Arabia cannot abide by sacrificing market share to other OPEC members, especially Iran, and Iran for its part cannot accept a freeze of output until it fully recovers from the embargo. That issue does not appear resolved, and that appears to be the reason Saudi Arabia pulled out of the meeting with Russia that was to be held on Monday (November 28). Meeting with Russia without a full agreement from OPEC members to cut output puts the cartel at a disadvantageous negotiating position. Separately, the restoration of Libyan output and the expansion of Kazakhstan's production warns that it will be difficult to reduce supply.

More broadly, the CRB Index rallied 5.2% since November 14, but the momentum was sapped by energy and the grains. The price of gold has fallen about 10% in its three-week drop that has left prices at nine-month lows.  Industrial metals have been the strongest part of the commodity complex, ostensibly on stronger US growth and a Chinese economy that is stabilizing.  

Amid the portfolio adjustments, emerging markets have fallen out of favor, particularly bonds. The sharp rise in US Treasury yields forces many emerging market rates higher too. Rising rates and a stronger dollar lifts the cost for emerging market economies to borrow funds and to service their dollar-denominated debt. The MSCI Emerging Market equity index snapped a four-week, 7.5% decline last week. The 1.3% rise was broad-based.  In contrast, major US indices, including the Russell 3000, are at record highs. Europe's Dow Jones Stoxx 600 has rallied for three consecutive weeks for about 4%. It muted performance leaves it straddling the 100-day average, which is nearly 17.5% below the record high set in the middle of last year. Japan's Topix has moved higher for eleven straight sessions coming into this week. It has advanced for three consecutive weeks (~8.5%) and in six of the past eight weeks.

Marc Chandler‚Äč
Global head of currency strategy at BBH
Brown Brothers Harriman

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