Crise: “Enjoy The Party Markets, But Beware The Hangover”

The second round of the French elections is set. It’s Macron v. Le Pen in what’s generally considered to be a market-friendly outcome.

The idea is that there’s simply no way Le Pen can come out ahead. And although we can probably take some solace in the fact that this makes two times in a row (the other being the Dutch elections) that pollsters haven’t gotten blindsided, we aren’t out of the woods just yet in France.

And even if we are (that is, even if the polls are correct to suggest that Macron will cruise to a 62-38 victory), the market may quickly pivot to other concerns. Concerns like what’s going on (or, perhaps more appropriately, what’s “not going on”) in Washington. Or any of the other myriad geopolitical risks that have recently kept traders up at night.

So as you bask in the glow of a euro that’s surging against the dollar and the yen, setting up what looks to be a palpable risk-on move for Monday, do consider the following from Bloomberg’s Cameron Crise who thinks you should perhaps curb your enthusiasm.

Via Bloomberg

Enjoy the Party, Markets, But Beware of the Hangover

Sometimes, the pollsters get it right. The two favored candidates in the French first round vote have indeed gone through, setting up what looks like an easy victory for Emmanuel Macron in a couple of weeks. While today should be a good one for the euro and risky assets, the party may be short-lived; it won’t take long before market focus swings back to the United States and a potential government shutdown at the end of the week.

  • It will be Macron and Le Pen in the second round of the French presidential election, with each securing a share of the vote in line with what was predicted by pollsters. The accuracy of the polls will be a comfort to markets, given that they show a huge margin of victory for Macron in a head-to-head runoff with Le Pen.
  • The euro and risky assets look set to have a great day today. That being said, the initial reaction may be overdone, as I suggested on Friday. While the euro is nearly fully priced for a Macron victory, it seems likely that markets will maintain a risk premium for Le Pen, just in case.
  • While markets may choose to run with windfall gains, precedent suggests that profit-taking will emerge relatively quickly. While this time may be different, the evidence suggests that investors are already well overweight European equities. “Sell the fact” is a risk here.
  • Moreover, this week is fraught with political risk in the U.S. as Congress returns from recess. The White House apparently wants to revive the health-care vote AND unveil a tax plan this week. Oh, and there’s the small matter of passing a continuing resolution to avoid a government shutdown by next weekend. All of this sounds like a tall order for a government that has yet to deliver any meaningful policy initiatives this year.
  • By all means, markets can enjoy their French electoral party. They shouldn’t party too hard, however, lest the hangover be a vicious one.

******

Meanwhile, here’s what the Street has to say:

  • ABN Amro
    • Markets already started to price in a positive outcome in the run-up to the elections, which could limit the reaction, economist Nick Kounis said in emailed comments
    • Macron’s agenda for economic reforms and consolidating government finances is market friendly but he will still face major obstacles in passing his policies
    • Still, the outcome should be positive for French government bonds and the euro, Kounis says
  • Bank of New York Mellon
    • “A rise to $1.09/1.10 sounds like a reasonable expectation on the evening,” chief currency strategist Simon Derrick said
  • Deutsche Bank
    • “This is the perfect scenario the market was desperately looking for,” Sebastien Galy, a macro strategist says
    • Steeper Bunds, lower OAT yields give EUR/USD mechanically a boost likely in the 1 to 2% region
  • Credit Agricole
    • Depending on how constructive ECB is on Thursday and whether political risks will return to haunt President Trump ahead of the vote on the continuing resolution, EUR/USD could extend its initial bounce, head of G-10 FX research Valentin Marinov says
    • Internal model gives a level of 1.12 in the event of a mainstream party win at the second round
  • JPMorgan
    • Continues to think that Macron will be the next President, Raphael Brun-Aguerre said in emailed comments
    • It’s important to bear in mind, however, that the power of the French President largely depends on the parliamentary election in June
    • “In our view, it will be very difficult for Macron to secure a majority at the lower house. We thus expect him to try to form a cross-party coalition around a narrow set of reforms”
  • Nomura
    • “I expect we’ll likely finish at $1.0950 on the day,” Jordan Rochester, a foreign-exchange strategist said in emailed comments
    • “For now, given the wide polling lead Macron has over all other candidates, if he features in the second round, we can assume with a high conviction he’ll be the next President of France”
  • UniCredit
    • Bouts of profit taking will always emerge but the direction of travel is for a higher euro as political risk premia are priced out, London-based strategist, Vasileios Gkionakis, said in e-mailed comments
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