Were you looking for more coverage on the outcome of the first round of France’s electoral trial by fire?
Probably not. But that’s too damn bad, because it’s going to be coming fast and furious over the next 12 or so hours.
If you want a quick snapshot of Street reactions and a cautionary bit about not getting too carried away in what’s like to be a risk-on-ish Monday, you’re encouraged to check out “Crise: “Enjoy The Party Markets, But Beware The Hangover.”
We were going to leave it at that for the time being, but then we decided we’d be somewhat remiss if we didn’t give you Goldman’s take which you can find excerpted below…
Emmanuel Macron will face Marine Le Pen in the run-off of the Presidential election on May 7, according to exit polls. We maintain our view that mainstream candidate Mr. Macron will likely win the French Presidential election.
We think the equity market has already largely priced the outcome and concerns about the elections have not prevented European equities and the CAC 40 from performing well on an absolute basis since the beginning of the year (+5%YTD for both).
We expect today’s results to generate some relief for the FTSE MIB, French and Italian banks and a very minor relief for the CAC 40. That said, as this has largely been the central expectation priced into the markets, we would expect any rally to be modest. French domestic stocks and the CAC 40 have not underperformed significantly as of late, and we do not expect them to rally materially following today’s results, or after the second round of the election.
In rates space, French bonds had incorporated some political risk premium, and traded more idiosyncratically. We expect the 10-year OAT-Bund spread to narrow by as much as 15bp on short covering, to around 50-55bp — or within 1 standard standard deviation above our macro-econometric model measure of ‘fair value’. We would expect the daily correlation with German Bunds to remain somewhat below the 90% observed since the beginning of the ECB’s PSPP on account of residual uncertainties in the run-up to the second round. We would expect a similar re-pricing in intra-EMU spreads in the periphery markets, where BTPs and Bonos spreads to Bunds could go back to trading closer to a range of 170-190bp in the coming weeks (from around 200bp on Friday’s close) and 120-130bp (from around 140bp on Friday) respectively. We think that political uncertainty around the Italian political outlook will weigh on BTPs.
Our FX analysis suggests that a sizeable decrease (to close to 0 percent) in the probability that investors assign to Ms. Le Pen becoming President, or to a break-up of the Euro area, that is close to its lows in July 2014 could push the EUR higher versus the USD and the JPY, pushing EUR/USD close to 1.13.