If yesterday’s market reaction is any guide it would appear that investors have made up their minds already as to the result of the French election on 7 May.
The France CAC 40 hit its highest levels since 2008, and the DAX made another record high and banking stocks surged, while French bond yields tumbled back down as investors priced out the prospect of a Le Pen win in just under two weeks’ time.
Markets are surmising that Emmanuel Macron is a dead certainty to be French president in two weeks' time, and while this is probably the most benign outcome at a time of rising populism it completely overlooks the challenges facing the new French president when he or she takes office on 8 May.
For a start, while Mr Macron is an outsider from the established political order, he will still be viewed by the majority of the 40% of French people who voted for anti-euro candidates, as very much part of the same elite who he has helped to push to one side in this particular vote. This he will be presiding over a country very much ill at ease with itself.
He will also, in the absence of any political party backing of his own, have to create some form of consensus on both sides of the political divide that he has done so much to disrupt, in order to forge ahead with his own brand of reform. That will be no mean task in a country that has a labour code that is a bigger read than the bible, and whose vested interests are notoriously resistant to any type of reform.
The next question for markets if, as expected Macron does win in two weeks’ time is how big will the margin of victory be, and whether he will be able to bring together a country that has put forward two candidates with significantly divergent views of what France’s future should look like.
Now that we’ve had some time to assess the events of the last 48 hours attention is now likely to shift towards this week’s ECB rate decision and the economic prospects of the Eurozone that has seen some fairly decent data over the past few weeks and what that might mean for central bank policy over the rest of the year.
US markets also followed the script yesterday closing higher ahead of speculation that President Trump had ordered his staffers to put together a tax plan this week that could see US corporation tax cut to 15%.
On the currencies front while the euro hit a six month high it struggled to hold onto to its intraday peaks, slipping back ahead of this week’s ECB rate decision.
The pound which had until yesterday been performing well against a host of currencies also got caught up in the turbulence of the euro surge slipping back a touch despite manufacturing data showing optimism over future factory output at a twenty year high.
Today’s UK public finance data for March is expected to show an increase from the £1.1bn in February to about £2bn keeping the government on course to reducing its overall borrowing on an annualised basis, with the OBR forecasting that the deficit this year would come in around £51.7bn.
EURUSD – yesterday’s move to 1.0940 proved rather short lived as the euro pushed through the March peaks at 1.0905 and above its 200 day MA at 1.0840, with 1.1000 the next key resistance. We need to hold above 1.0820 or we could see a move back towards trend line support from the January lows just above the 1.0600 level.
GBPUSD – after peaking last week just above 1.2900 the pound has traded sideways with support currently around the 1.2750 area. Upside momentum towards 1.3000 and 1.3300 remains intact while above the 200 day MA as well as the break of its triangular consolidation at 1.2600.
EURGBP – the failure to move through 0.8520 has seen the euro drift back. There is a larger area of resistance behind that at near the 0.8570 level, where the 50/100 and 200 day MA’s converge. Support comes in at 0.8430, which is last week’s high.
USDJPY – the weekend move higher to 110.60 has seen the US dollar slide back. We need to hold above the 109.40/50 area to keep the prospect of a move towards 111.60 on the table. Below 109.20 argues for a move back towards 108.20.
Heightened market volatility is likely over the election period, this could result in widened spreads. We recommend that you monitor positions carefully, consider the use of appropriate risk management tools and maintain a sufficient account surplus throughout this period.
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