While the prospect of a President Macron is getting priced into the markets on Monday, it’s worth assessing whether investors’ are getting carried away. Oddschecker puts Macron’s chances of winning the second round vote at 89%, with Le Pen’s chances plummeting after Macron received the majority of endorsements from his rival candidates. With Macron almost certain to win in two weeks’ time, market momentum could be dependent on the margin of victory. If Le Pen can tweak her campaign and narrow the margin of victory for Macron then we could see some scaling back of the Macron trade as we lead up to the second round run-off and euro and European equity market softening.
Marine Le Pen: not a spent political force yet
It is worth remembering that France also has National Assembly elections in June, and if Macron can’t get enough of his En Marche members elected, and the Front National increases its number of seats, then Marine Le Pen is likely to remain a major force in French politics as she waits for her next chance in 2022. Thus, the collective sigh of relief that the markets’ have taken this morning may be a little premature; even if Le Pen loses the Presidential election she is not a spent political force yet.
The FX market may be scaling back its Macron enthusiasm this afternoon, EUR/USD has fallen below the 1.09 level and has tested key support at 1.0838- the 200-day sma - as traders take profit after the post-election move. If we close below 1.0900 today then this could be a bearish sign, suggesting that the euro may not be able to maintain upside on the back of Macron’s expected victory on May 7th. If the ECB maintains its dovish forward guidance on Thursday and remains committed to its QE programme until at least the end of the year, then further euro upside may be harder to maintain.
France’s Obama: the saviour of Europe…
As we mentioned on Sunday, the reduction in Europe’s political risk may be reflected in the longer term in the stock market more clearly than in the FX market. Unsurprisingly, the Cac is the top performer in the European indices today, closely followed by the Italian FTSE MIB index, which is up nearly 4% so far. The broad-based gains in the European indices was reflected in the Eurostoxx index, where all 50 members saw their stocks rise for most of the morning. The bond market is also reflective of the expected reduction in political risk in Europe, as Le Pen’s expected failure on the May 7th election is viewed as a triumph for the future of the EU. The French-German yield spread, which had been as high at 130 basis points, is now at 51 basis points, as the political premium starts to recede. Italy, which is likely to face an election in the next year or so and has also favoured extreme candidates from the Five Star Movement, has also seen its bond yields retreat on Monday. Essentially, the market view is that if France votes for its own Obama figure - a centrist, pro-business, pro-EU candidate - then so will the rest of Europe. We will have to see if this proves to be the case. With emotion high after the European elections and valuations cheap compared to the US, the Macron boost to European equity markets could still have some way to go, even as it starts to fade from the euro.
Trump’s first 100 days in focus
US markets are poised to open higher today as the French election result boosts global market sentiment. This week could be key for the future of the Trump trade as Trump’s administration is expected to deliver its plans for tax cuts on Wednesday. Late last week the President talked up the prospect of a big tax cut, however, the market reaction was tame, perhaps because elements of doubt have started to creep into the market about how much Trump can actually deliver during his term of office. Trump will have been in office for 100 days this Saturday, so the pressure is on for him to prove that he can actually deliver on his election promises, after the healthcare debacle earlier this year.
Has the Trump administration turned into the Fed?
It used to be the Fed who stepped in to save financial markets when they were in trouble, remember Helicopter Ben? In recent days the Trump administration looks like it has replaced the Fed as the market’s saviour. Last week when the US stock indices looked like they might roll over and fall sharply lower Trump announced his “big” tax plan, which helped the markets to stage a (modest) recovery. This seems like a tricky strategy to maintain, if Trump doesn’t deliver on his market promises then investors will start to doubt him, which is bad news for asset prices and risk sentiment. But, if the Fed has been replaced as protector of financial asset prices, then don’t expect central bank support when the going gets tough in future…