Financial market research and analysis

The CAC 40 rallied past €5’200 at the open in Paris; French banks surged 10%, as the most feared scenarios were left out of the frame at Sunday’s French election.

The outcome of the first round of the French presidential election was remarkably in line with the opinion polls. Emmanuel Macron took the lead with 24% of the votes, Marine Le Pen came the second with 22%. François Fillon, whose support remained just shy of 20%, has been a clear victim of a scandal revealing that his wife received some €900’000 from the public money in exchange to little-to-no work. The far-left candidate Jean-Luc Mélenchon obtained 19.5% of the votes, a good performance per se yet not enough to take him to the final race to the Elysée Palace.

The run-off will be held between the independent centrist Emmanuel Macron and the far-right, anti-European Marine Le Pen.

Le Pen is given low probability of winning the second and the final round of the election. Her radical views on immigration, the European Union and the euro should see a solid resistance from the majority of the population. In this respect, François Fillon and Benoit Hamon already called their supporters to vote for Macron. According to the earlier polls, Le Pen would gather less than 40% of the voters by her side. In this context, Emmanuel Macron seems to be the closest to becoming the next President of France.

This is the first time in the modern French history that the two establishment parties are left out of the game as early as at the first round. This particular situation would, of course, raise many practical questions regarding how Mr. Macron would proceed in the government and what the new political balance would look like, given that Emmanuel Macron is not linked to the major political parties.


Euro rallies as Macron victory is highly priced in

 The euro took a deep breath on Monday, after the first round results excluded the possibility of Le Pen/Mélenchon run-off, a scenario which would have been dramatic and fundamentally detrimental for the single currency and has been broadly priced in during last week. 

The EURUSD rallied more than two figures at the Asian open, up to a five-month high of 1.0937. The 1.10 mark is the next natural target for the euro-bulls. Support is eyed at 1.0795/1.0785 (major 38.2% retrace on April 6th to April 24th surge / 200-day moving average).

Furthermore, the euro-favourable outcome will also remove a major weight off the European Central Bank’s (ECB) shoulders, which is due to meet on Thursday.

The ECB is expected to maintain the status quo at Thursday’s meeting, yet the most recent surveys hint that President Mario Draghi could review his forward guidance and hint at an earlier-than-expected policy normalization at the June meeting. This is six months prior to the previous expectation of a policy revision in September. Hence, more confident about the integrity and the future of the Eurozone, the ECB could come out more hawkish and encourage a further appreciation in the euro against its major peers.

 The EURGBP tested the 0.85 mark on the upside. The positive momentum could encourage a further rise toward 0.8570 (50 and 100-day moving average), before 0.8600 (200-day moving average).

However, the broad-based appreciation in the pound is soon expected to price out the strength of the single currency. The euro’s appreciation against the pound could remain limited as the UK is preparing for a snap election on June 8th, which is expected to consolidate the UK PM Theresa May’s power at the heart of the government and could ‘soften’ the tone in the Brexit negotiations.

The euro-pound trades 10% firmer compared to the pre-Brexit levels, suggesting that the market could easily absorb a further appreciation in the pound. As such, the 0.80 mark could be a reasonable target for the pound lovers.


Asian equities rallied, as gold, yen sold off

The market-friendly outcome of the first round of the French election set the tone for the Asian markets at the start of the week. The risk-on sentiment drove the Asian stocks higher; gold and yen were offered.

The USDJPY traded above the 110.00 mark for the first time in two weeks. In the absence of safe-haven inflows, the USDJPY is expected to resume its ascent toward 110.60 (minor 23.6% retrace on December – April decline) before 111.65 (50-day moving average) and the critical 112.13 (major 38.2% retrace).

The Bank of Japan (BoJ) is widely expected to maintain the status quo at this week’s monetary policy meeting. In an interview last week, the BoJ Governor Kuroda stated that the bank is willing to keep the monetary conditions easy until the 2% inflation target is reached. Due on Friday, the Japanese inflation data, ex-fresh food, is expected to print a steady 0.2% year-on-year rise March, comfortably far from the 2% goal. Hence, the BoJ-doves could take the control of the yen markets this week. 

Nikkei (+1.37%) and Topix (+0.98%) lead the gains in Asia. Hang Seng advanced 0.40%, ASX 200 added 0.30%. Shanghai’s Composite (-1.23%) diverged negatively on heightened regulatory inspection and restriction on leveraged trading.

Gold plunged to $1265 on French optimism. Despite the knee-jerk haven outflows from the gold, the market remains solidly invested in the yellow metal. The latest CFTC data showed that investors bought half a billion worth of gold and gold ETFs (Exchange Traded Fund) last week.

The support to the mid-term positive trend stands at $1256 (major 38.2% retracement on March – April rise). We expect consolidation between $1270/1280.


 ‘Big announcement’ on ‘major tax reforms’ in the US due on Wednesday

In the US, President Trump is preparing for a ‘big announcement’ on Wednesday to unveil the ‘phenomenal’ fiscal plans. According to the latest news, the White House would outline ‘specific governing principles’ and indication on the future tax rates.

The markets were boosted on Friday on the news, yet investors refrained from showing too much enthusiasm before actually hearing a sufficiently detailed framework on the upcoming tax reform. It could again be a make or break outcome for the US markets, given that Mr. Trump often failed to provide satisfactory details on his ‘massive’ plans during his first 100 days at the office.

The US 10-year yields recovered to 2.30% after shortly falling to 2.17% last week. The expectation of a Federal Reserve (Fed) interest rate hike is down to 50% for the June meeting.

The Dow Jones is expected to jump on the back of the bull and trade 182 points higher at $20’730 at the US open. Part of the gains could be cashed out into the Wednesday’s announcement, on rising concerns about an eventual US government shutdown.