Market Reaction to the First Round of French Presidential Elections
The French presidential elections will set the tone for EUR trades in the coming weeks. The 4 candidates – the far right Marine Le Pen, the independent Emmanuel Macron, the center-right Francois Fillon and the left-leaning Jean-Luc Melenchon – couldn’t be more different for the future of France. One thing is sure – an eventual victory of Le Pen would hit the euro hard. With Le Pen building her campaign on an anti-European tone, threatening that France would leave the EU and Eurozone in case she becomes the next French president, the euro is put under enormous pressure not seen since the sovereign debt crisis in Europe.
The first round is already over, with the independent Macron and Le Pen going to the second round of elections on May 7th. Last Sunday, Macron gained 23.7 percent of vote, while Le Pen got 21.7 percent. As the exit polls indicated a victory for centrist Macron, the euro hit a five month high against the dollar when the markets opened Sunday evening in Asia. The currency gained 2 percent on that day, hitting $1.0939 in early trading. EUR/GBP also rose 1.5% to .85 pence per euro. The market is confident that Macron will easily win against Le Pen on May 7th, with voices took over from Mr Melenchon as leftwing voters are committed to prevent Le Pen from gaining power.
As Macron is known for his pro-European tone, the exit polls increased the confidence in the single currency, and increased flows in the European equity market could additionally support a stronger euro in the future.
With released market tensions and risk-on mode, French bonds are becoming increasingly popular among investors. The premium over German Bunds has narrowed to its lowest level since January 2017, at 44 basis points. The yield of a French 10-year bond is now 0.80 percent, compared to 0.36 percent of a German 10-year Bund. Gold also traded lower from a recent high of $1295, hitting $1265 as markets opened after the first round of French presidential elections.
The French stock-market benchmark index, CAC 40, also enjoyed increased market optimism. The index rose 4.1 percent, making the best trading day since 2015. European stocks also traded higher. The euro stoxx banks index, which trails the European financial stocks, gained 7.2 percent and touched a 16 months high.
“Now that the initial adjustment higher has taken place, we do not expect the French elections to have much further impact on the euro in the near-term,” said Lee Hardman, currency analyst at MUFG.
“The market’s focus will begin to shift away from political risk in Europe and more on to the improving economic fundamentals, which should begin to offer the euro more support.”
Jim Cramer, host of “Mad Money”, advised investors not to panic ahead of the French presidential elections. “Selling because of European politics has been a mistake endlessly,” Cramer insisted, stressing that recent Brexit sell-offs were largely caused by the trading of hedge funds. “No one ever made a dime panicking. But loads of money’s been made taking the other side of the panic”, he also added.
The market has already absorbed the expected win of Macron, but a definite victory in the final round would probably push the optimism even higher, continuing a risk-on investment environment. The impact of the final round, which takes place on May 7th, will also be determined by the percentage difference in exit polls. If Macron wins by a solid margin, we could potentially see the euro stabilizing at around 1.10 against the U.S. dollar.
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