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In an unexpected July surprise that comes just days after Macron’s “La Repubblique En Marche” party got spanked by the environmentalist left in a series of local elections…

…French President Emmanuel Macron, motivated perhaps by jealousy at the increasing popularity of his prime minister, has abruptly fired PM Edouard Philippe and replaced him with another lowkey center-right “social gaulist” technocrat.

While a sacrifice was probably in order following Macron’s latest political failure, French political commentators suggested the decision was a “bid to reinvigorate” Macron’s flailing administration two years before he must run to defend his position against an increasingly popular right-wing movement, as well as a reinvigorated left.

Philippe handed in his resignation Friday morning, according to the FT.

His replacement, Jean Castex, was described by the FT as a “a low-key centre-right bureaucrat, as his new prime minister for the last two years of his term. Mr Castex, who was appointed recently by Mr Macron to organise France’s exit from its coronavirus lockdown.” Importantly, Castex is “expected to have a lower-profile than his predecessor.” Philippe has long been seen as a key player in Macron’s government; he helped the president dream up his program of economic “reforms” that was ultimately abandoned in the face of widespread public unrest (remember the gilets jaunes?)

Castex

Castex recently came to public prominence after he was tasked by Macron with organizing the country’s exit from its COVID-19 lockdown, which has gone pretty well, with France seeing fewer flare ups than neighbors like Spain and Portugal.

One senior French official described the 55-year-old Mr Castex as the ideal “Macronian” choice, because he is both a respected high-level civil servant with government experience and an elected mayor of a small town in the foothills of the Pyrenees. “He knows the arcane workings of Paris, but is also rooted locally in the countryside,” the official said. “He’s someone who comes from the right, but is a ‘social Gaullist’”. The departing Mr Philippe is also from the centre-right of French politics.

With Macron’s poll numbers hardly budging despite his arguably effective handling of the COVID-19 crisis, we suspect this won’t be the last “surprise” between now and Bastille Day.

Europe’s Stoxx 600 index opened at three-week highs only to quickly see the 4-day rally reverse, and turn negative by as much as -0.8% with banks and energy indexes leading the decline with losses of 1.5% and 1.3% respectively, after Bloomberg reported that a conflict was brewing at the ECB over its “priced in” stimulus package coupled with political upheaval in France which saw a blitz-replacement to the prime minister.

According to Bloomberg, ECB President Christine Lagarde’s signature crisis-fighting tool “is becoming the focus of disagreement among policy makers in what could amount to her first major test of discipline.”

As a result, Governing Council members face a potential rift over how much their emergency bond-purchase program should stay weighted toward weaker countries such as Italy, and while the debate remains hypothetical for now, it could crystallize as the economy emerges from the coronavirus pandemic. The danger is that such friction undermines a program unveiled at the height of the crisis to reassure investors of the ECB’s resolve in defending the integrity of the euro.

That said, the fundamental landscape remains unchanged and fresh catalysts remain light, although a modest blip lower was seen upon the French PM resigning as part of President Macron’s reshuffle – a move speculated by local press in recent days. The morning also saw come comments from German Chancellor Merkel who reaffirmed her low expectations of a smooth Recovery Fund agreement, whilst again expressing concern over the Hong Kong National Security Law as Germany takes the helm of the EU presidency for the second half of the year.

In terms of individual movers, Wirecard (+8%) opened with gains of around 15% amid source reports the group’s US arm has drawn interest from payment groups and could fetch around USD 400mln. EDF (+3.6%) hold onto gains after raising FY20 nuclear output. Associated British Foods (-1.1%) shares remain subdued amid a broker downgrade at Goldman Sachs.

Not helping Europe was the latest batch of Service PMIs, which while coming slighlty better than expected, were still in contraction territory.

Meanwhile, while the US was closed for Independence Day, equity futures accelerated the late Thursday fade, while the dollar was modestly higher.

Asian stocks gained, led by IT and health care, after rising in the last session. All markets in the region were up, with Shanghai Composite gaining 2% and Hong Kong’s Hang Seng Index rising 1%. Trading volume for MSCI Asia Pacific Index members was 66% above the monthly average for this time of the day. The Topix gained 0.6%, with YAC HD and Kusuri no Aoki HD rising the most. The Shanghai Composite Index rose 2%, with CTS International and Datong Coal posting the biggest advances. Sticking with China, tensions seem to have bumped up a notch as India’s Power Minister said India will not permit imports of power equipment from China and Pakistan – a move which prompted China to state they will take necessary measures to uphold the rights of Chinese businesses in India.

As Bloomberg notes, investors continue to weigh promised stimulus measures and upbeat economic data against relentless new outbreaks of the virus. U.S. payrolls figures Thursday fueled optimism of a V-shaped recovery in the world’s biggest economy, even as Florida reported that infections and hospitalizations jumped the most yet, and Houston had a surge in intensive-care patients.

“There’s still a general positive sentiment about how quickly we’re seeing the recovery,” said Chris Gaffney, president of world markets at TIAA Bank. “But we do think you’re going to see the recovery level off, especially if we continue to see higher case numbers on the virus.”

In FX, the Euro dipped as French President Emmanuel Macron named a new prime minister after asking his government to resign. While the dollar was modestly higher, the Bloomberg dollar index headed for its first weekly drop since early June after better-than-expected economic data damped demand for haven assets. This week’s risk-on sentiment was supported by improving U.S. labor market numbers and data signaling a turnaround in Europe’s struggling economy

In commodities, WTI and Brent front month futures continue to edge lower on the final trading session of the week with volumes light amid US’ absence in the market. However, on the OPEC front, Angola may prove to be a spanner in the works regarding the extended cuts after the oil producer, via sources yesterday, noted that it is still resisting the idea of over complying to make up for its shortfalls in the prior months. Under the terms of the OPEC+ agreement in June, the continuity of extended cuts is contingent on laggards overcompensating in July, August and September. WTI August lost its USD 40/bbl handle to the downside and loiters around session lows (vs. high 40.50/bbl) whilst the Brent September contract had multiple jabs at 42.50/bbl to the downside before breaching the psychological mark (vs high 42.99/bbl). Spot gold meanwhile sees little action on either side of USD 1775/oz amid a lack of fresh fundamental catalysts. Copper sees a session of losses as China enters a season of lower demand for the red metal, whilst Shanghai stocks also printed a build, according to the exchange.

US markets are, of course, closed for Friday’s session.

Coronavirus cases in the US hit another daily record on Thursday as Americans prepared for a distinctly joyless Fourth of July weekend that bears none of the sense of joy and revival that the country enjoyed on Memorial Day Weekend. According to JHU, the US reported 52,291 new cases, bringing its nationwide total to 2,739,879.

Source: JHU

Last night, Washington State Gov. Jay Inslee announced that he would pause the phased reopening process for all counties in the state for 2 weeks, joining NY & NJ in delaying some of its reopening plans due to the outbreak int he south and west, while dozens of states – including Texas and Florida, arguably the two hardest hit states – have taken steps to roll back or delay their reopening. He also announced a statewide directive for businesses to require face coverings of all employees and customers, just a few hours after Texas Gov Greg Abbott issued an executive order mandating mask-wearing.

Washington’s decision comes after the state reported 509 new cases yesterday, the highest single-day number since April 8.

While the resurgence of new cases in Washington State is definitely discouraging, heading into the weekend, only a handful of states in the northeast – NY, NJ, Connecticut, Mass., RI, Vermont, NH and Maine – haven’t seen the numbers backslide.

To put things in perspective….

In May, we did not break 30k cases in a day. Today, the South alone reported 32,830. pic.twitter.com/fGCEGi3o7V

— The COVID Tracking Project (@COVID19Tracking) July 2, 2020

Ukraine’s business community and investors are reeling — not to mention a presidential office eager to present itself as driving a longtime clean-up of the corrupt banking sector — over the Wednesday shock resignation of Ukraine’s highly respected central bank chief Yakiv Smolii. His tenure was supposed to go until 2025, but President Zelensky accepted the resignation Thursday.

The timing couldn’t be more suspect: the National Bank of Ukraine (NBU) governor announced he resigned due to “systematic political pressure” which many believe came directly from Zelensky and his lawmakers, but also oligarchs said to be close to the young ‘reformer’ president. 

It was only last month that Kiev secured a crucial $5 billion eighteen-month loan to help weather the economic slump due to the COVID-19 crisis, $2.9 billion of which has already been distributed. 

Smolii’s letter of resignation submitted to President Volodymyr Zelensky said as follows: “For a long time, the National Bank of Ukraine has been under systematic political pressure,” the surprise statement catching the entire nation off guard began. 

“This makes it impossible for me, as the Governor, to effectively carry out my duties as the head of the National Bank of Ukraine and interact with other government agencies,” according to the statement posted prominently on the NBU’s official site.

I’ve submitted my resignation appeal to the President. This decision has been taken as an answer to systematic political pressure that denied fulfillment of my duties as the Governor. Let it be a warning for attempts to undermine institutional independence of the central bank. pic.twitter.com/cFQuAlakrM

— Yakiv Smolii (@YSmolii) July 1, 2020

No doubt this line Smollii posted in a social media statement has raised eyebrows at the IMF:

“Let it be a warning for attempts to undermine institutional independence of the central bank.”

It also comes at a deeply vulnerable moment for Ukraine’s economy, already expected to contract 5% this year due to the pandemic. 

“Under his leadership, Ukraine has made important strides in achieving price stability, amply demonstrating that an independent central bank is a key element of modern macroeconomic policymaking,” an IMF spokesman said in a statement on Thursday.

“That is why the independence of the NBU is at the centre of Ukraine’s Fund-supported programme, and why it must be maintained under his successor.”

Zelensky’s office sought to reassure markets amid the rolling fallout: “Ensuring the central bank’s independence remains our priority,” a brief statement said. And further the finance ministry was forced to cancel $1.75 billion Eurobond sale, Bloomberg reports, and noted: “The hryvnia weakened 1.3% to its lowest level against the dollar since April and the yield on the government’s dollar bonds due 2028 jumped 33 basis points to 7.42%.”