Relief rally amid French vote
Financial markets across the planet welcomed the result of the first round of the French election, with the qualification of Le Pen and Macron for the second round. European equities rallied massively this morning with the CAC 40 jumping 3.40%. Financial stocks performed the best on Monday with Société Générale rising 8.9% and Crédit Agricole up 7.90%. Financials across Europe extended gains with Barclays, UBS and Commerzbank up 4.10%, 3.80% and 9.50% respectively.
In the FX market, the euro was better bid and gapped at opening. EUR/USD opened at 1.0859 on Monday, up 1.22% compared to Friday’s close (1.0728). The risk-on move triggered a sell-off in safe-haven assets, with the Japanese yen and gold falling 0.95% and 1% against the USD, respectively. In contrast the Swiss franc edged slightly higher as it gained 0.25% against the greenback. It may seem odd to investors that the Swiss franc did not suffered more; however it is coherent with the behaviour in the past few weeks. Indeed, the SNB was extremely active over that period as it tried to mitigate the CHF appreciation. By comparison, the JPY rose 2%, while the CHF surged 0.60% between April 1st and last Friday.
Overall, investors switched to risk-on mode and started reloading on risk. We expect the risk rally to continue gaining traction over the next few days as market participants sell US assets – especially bonds – and move towards European and emerging market assets. The hunt for yield is far from over, especially now that Trump’s reflation trade is losing traction.
Le Pen through to second round but Macron’s final victory now looms
Financial markets feared a second round between Jean-Luc Mélenchon and Marine Le Pen who was likely to trigger some volatility. Marine Le Pen’s final result below 22% is disappointing as she was expected in various polls to reach between 27% and 30%.
The failure of Le Pen or Mélenchon to sway undecided voters or unlock closely-guarded voting behaviours will come as a major relief to investors fearing uncertainty over whether the second round would bring a new set of complexities. At present, extreme volatility has been avoided. Emmanuel Macron and Le Pen will move forward to the second round run-off on May 7.
The result is very market-friendly. The failure of Marine Le Pen or Jean-Luc Mélenchon to surge on voting day should be viewed as a vote for the EU. Eventually, Emmanuel Macron is now very likely to become the new French president. Most of the runner-up such as François Fillon who scored around 19%, are calling for a Macron vote for the final vote in two weeks. Even Mélenchon, which program was very similar to Marine Le Pen’s has been calling, through his lieutenants, to vote for Emmanuel Macron.
There had not been a massive relief, if any, in financial markets tomorrow. However the single currency may appreciate slightly against the swiss franc. There’s defnitely no fear for the second round. First final results estimates are now calling for a 62% Macron’s victory for the second round. European Union seems to win a battle and attention should carefully shift towards the German’s election in August.
We anticipate no extreme volatility in the FX market, with marginal Euro buying (as markets had positioned for this outcome) as exit polls become official results. We nonetheless remain long EURCHF on a rejection of an anti-EU vote.
