Risk on as CAC Hit Record, Dollar Awaits Trump Guidance

The global financial markets were blessed by centrist Emmanuel Macron’s win in the first round of French presidential election. CAC 40 gained 4.14% yesterday to close at 9 year high at 5268.85. DAX rose 3.37% to close at record high at 12454.98. In particular, CAC took out prior resistance at 5142.81 by a margin. DAX’s break of prior resistance at 12390.75 was also solid. US indices followed with NASDAQ closing at record high at 5983.82, up 1.24%. DJIA and S&P 500 rose 1.05% and 1.08% resistance but are both kept well below recent highs so far. Asian equities follow with Nikkei trading back above 19000 handle.

In treasury markets, French-German yield spread narrowed sharply. As yields on OATs, 10 year French government debt, dropped 7.7 basis point to 0.849%. Spread with German bund yields narrowed to 49.80 basis points, down from around 75 basis points, and hit the lowest level since December. In US, 10 year yield hit as high as 2.313 overnight but pared back much gains to close at 2.273%. There were revived expectations of Fed hike in June. Fed fund futures are now pricing in 66.1% chance of a hike in June, and it was below 50% last week. But judging from the reactions in 10 year yield, markets are still not too convinced about that yet.

Trump to corporate tax rate to 15%

The outlook of Fed rate, yields and Dollar will largely depend on what US President Donald Trump will deliver this Wednesday regarding his tax reforms. It’s reported that Trump would seek to lower corporate income tax rate to 15%, down from 35%. Meanwhile, individual tax rate could be capped at 33%. However, there are talks that such a plan would set up clashes with Republicans as some of them would oppose to raising the country’s debt. The outline of the plan itself would be the first test for Dollar. And the execution of the plan, including parliamentary approval, will be another test.

Le Pen steps down as National Front leader

Going back to Europe, far right French presidential candidate Marine Le Pen announced that she is stepping down as leader of the National Front party, just after the first round of election. This is seen by analysts as an act to reach out to non National Front supporters. Currently polls suggest that Macron will beat Le Pen in the Run off on May 7 by 62-38. The poll results has been rather steady since March.

Brexit: EU toughens stance on financial services and citizen rights

Regarding Brexit, it’s reported that in the latest draft of EU negotiation plan, financial services was split off from wordings on the trade deal. And, "any future framework should safeguard financial stability in the Union and respect its regulatory and supervisory standards regime and application." That was believed to be in response to France’s request to separate financial services with trade. Meanwhile, EU would push for reciprocal guarantees to give EU citizens in UK, and UK citizens in EU, to acquire permanent residence after a continuous period of five years. EU will approve the negotiation guidelines and plans on April 29 but will wait until UK elections in June to start formal negotiations.

On the data front

Japan corporate service price index rose 0.8% yoy in March. UK will release public sector net borrowing in European session. US will release house price indices, new home sales and consumer confidence later in the day.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.3432; (P) 1.3476; (R1) 1.3543; More….

USD/CAD’s rally extends after brief retreat and drew support from 4 hour 55 EMA. The break of 1.3543 resistance confirms resumption of rise from 1.2968. Intraday bias stays on the upside for 1.3598. Firm break there will resume whole rally from 1.2460 to next medium term fibonacci level at 1.3838. On the downside, break of 1.3410 support is needed to indicate short term topping. Otherwise, outlook will remain bullish in case of retreat.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The first leg has completed at 1.2460. The second leg from 1.2460 is likely still in progress and could target 61.8% retracement of 1.4689 to 1.2460 at 1.3838. We’d look for reversal signal there to start the third leg. However, break of 1.2968 will argue that the third leg has already started and should at least bring a retest of 1.2460 low. Meanwhile, sustained trading above 1.3838 would pave the way to retest 1.4689 high.

Economic Indicators Update