Yesterday's first round of French Presidential voting saw the two leading candidates Centrist Macron and Euroskeptic Le Pen go through to the second round. Although Macron finished ahead by a small margin in this round, the French establishment has rallied behind him early polls show him leading for the second by 62% to 38%.
Traders appear to have taken the results and polls to suggest the second round as a mere formality and anointed Macron the winner. Because he doesn't have a formal party behind him and would have to work with the traditional parties in the legislature to pass measures, the street has taken this as a victory for the EU, stability and the status quo.
Traders rushing to get back on the EU bandwagon, however, might want to recall that we saw a similar spike in UK markets a week before the Brexit vote last June as traders got overconfident that Remain would win and we all saw how that ended. The second round vote is scheduled for Sunday May 7th.
The Euro has started the week off with a big spike upward and European indices have been following suit. The CAC is up 4.4% while the Dax is up 3.9% in what looks like a massive relief rally. There even has been chatter about the ECB possibly moving up its tapering timetable if the French vote goes as expected. We may see more monetary speculation through the week with the ECB meeting Thursday
Although overshadowed by their neighbours, UK markets have also been performing well with a weekend poll showing the Conservatives at 50% support. The FTSE is up 1.8% while GBP is holding to recent gains against USD and GBP although it was underperformed the soaring EUR.
The stampede back into risk markets has sent defensive plays like gold and JPY plunging. It's not a good time to get complacent, however, as political risks have moved elsewhere, not gone away. While Europeans are euphoric to start the week, other markets have posted decent but smaller gains in the range of 1.0% to 1.3% for US index futures and the Nikkei, while mainland China markets actually fell overnight.
The focus of risk now shifts to the US with a number of potential flashpoints this week. North Korea has threatened to shoot at a US aircraft carrier with the Carl Vinson scheduled to arrive in nearby waters this week. President Trump is expected to unveil his tax reform plans Wednesday and health care reform talks are ongoing.
Perhaps most significantly talks to keep the government funded beyond this week remain at an impasse over the President Trump's demand for money to start building the Mexican wall. While politicians seem to want to kick the big battle off to September, there remains a risk that someone could miscalculate and force a government shutdown much sooner.
US Vice-President Pence is cutting his trip to Asia short to get back and help out in Washington. He’s knocked a day off an official visit to Hawaii (who does that??) suggesting the situation at home is getting pretty serious.
Crude oil is up 1.0% today and with President Trump's attention shifting away from Canada toward other areas for now, CAD has been on the rebound. The loonie could remain volatile, however, until the renegotiation of NAFTA gets underway and positions become clearer.
On the earnings front, toymaker Hasbro beat the street on sales and earnings, a sign that rival Mattel’s problems are likely more internal than a sign of soft consumer spending. Later today results from Big Mining are due with Alcoa and Newmont reporting.
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.
Hasbro $0.43 vs street $0.38, sales $849M vs street $818M
Significant announcements released overnight include:
France Presidential election first round finalists Macron 23.7%, Le Pen 21.9%
Melenchon and Fillon were both about 20%
UK Rightmove house prices 2.2% vs previous 2 3%
Germany IFO business climate 112.9 vs street 112.4
Germany IFO expectations 105.2 vs street 105.9
Upcoming significant economic announcements include:
10:30 am EDT US Dallas Fed street 17.0
11:30 am EDT FOMC Kashkari speaking
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