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From the Floor: France's tense 'affaire de coeur' looms — #SaxoStrats

   • French/German 10-year spread out to 71 basis points
   • 'All eyes' on first round of French election on April 23 — Boye
   • Gold rally pauses as geopolitical tensions taken down a notch — Hansen
   • Short-term correction for WTI to $52.17/b area likely — Hansen
   • Disappointment with Trump trade likely to dominate forex sentiment — Hardy
   • Netflix mixed Q1 should not affect long-term plans — Garnry 
   • Earnings season starts with Q1 expected to continue Q4's strong show — Garnry 
   • Follow our Europe Divided page here as we build into Sunday's election


By Martin O'Rourke

Four seasons

France's four-way race for a berth in the final round of the presidential election has all the makings of a cliffhanger with Sunday's first round looking equally split between Emmanuel Macron, the Front National's Marine Le Pen, the far-left Jean-Luc Melenchon, and the Conservative Francois Fillon.

That has, not surprisingly, taken its toll on European spreads with the French/German 10-year spread out to 71 basis points having come back into around 55 points at the end of March.

"The French election build up will be a tense affair this week," says John J Hardy, Saxo Bank's head of forex strategy. "The market is very nervous and not at all inclined to take any kind of strong direction."

"All eyes are on France," agrees fixed income trader, Michael Boye. "The 10-year spread may have come back from around 75 at the end of last week, but it is still quite wide."

How will France vote? Will it be heart over head? Expect some dramatic electioneering over the next five days as the four rivals jockey for position and, they hope, a place in the run off on May 7.

French/German 10-year spreads reflect the drama unfolding ahead of Sunday 


Source: Bloomberg

Impatient patience

The spread widening is not only down to the domestic arena as frighteningly elevated levels of geopolitical tensions around the globe threaten to spill over into markets at any time. North Korea remains in a state of high alert as US president Donald Trump sets in place the foundations of a "strategic impatience" foreign policy that has Pyongyang firmly in his sights.

While the threat might not seem quite so present as many had feared at the weekend, the positioning of warships off the Korean peninsula has done little for the peace of mind of all those in the locality, not least Beijing which might not appreciate being bullied into forcing its troublesome neighbour to tone down its bellicosity.

Trump's own testosterone-fuelled interventions in the international sphere of the last seven days might not just be about trying to douse the fire of enemies in North Korea and Syria, of course. The admission overnight from secretary of the treasury Steve Mnuchin that Trump's tax reform plans might not see the light of day until much later in the year will only further undermine belief in the Trump trade that has elevated markets since November 8.

"In general, this week is all about disappointment over the Trump trade coupled with the general geopolitical arena," says Hardy. "Mnuchin may say that dollar strength in the long term is positive but the health care debacle has delayed the tax reform."

Trump's trigger-happy intervention in the international arena is beginning to look like a classic diversion tactic but with alarm bells sounding through many of the globe's major capitals, the gung-ho approach could do considerably more damage than the president intends.

A rush to safe-haven territory has forced USDJPY below 109.0 in the first hour of European trading (108.81 at 0803 GMT)  and, even with tensions easing a little, that is unlikely to change much in the near future.

US 10-year Treasury yields are also at 2.24% having touched a low of 2.20% over the weekend.

USDJPY going ever lower

Source: SaxoTraderGO

Gold has been another big gainer on the back of the standoff in the Korean space pushing to within a whisker of $1,290/oz and rising some 14% from its mid-March low.

"We might be seeing, if not the end, then at least a pause in this for now as we see some easing of geopolitical tensions," Ole Hansen, Saxo Bank's head of commodities strategy, says. "The bias on gold remains to the upside but we might see a short-term retracement to $1,267/oz or even $1,261/oz."

"There has been a two-week buying spree driven by short covering of 50,000 lots against just 19,000 lots in longs," says the commodities chief.

Gold was at $1,282.93/oz at 0655 GMT.

Oil too has been on quite a run since early April but, while we are moving towards that time of year when refinery demand typically ramps up, Hansen expects a bit of short-term retracement for US benchmark WTI.

"Oil looks like it will be higher than we had originally thought going into Easter and back to the Jan/Feb highs, but we are looking at support levels in WTI of $52.17/barrel and $51.20/b," says Hansen.

WTI looking over its shoulder at $52/b


Source. Bloomberg

Earnings season begins in earnest this week with the likes of Bank of America, IBM, Visa, American Express, and Schlumberger just some of the heavyweights on the roster.

"We're expecting to see Q1 earnings continue the strong performance of Q4, especially led by Europe which lagged the US a little in the last set of earnings," says Saxo Bank's head of equities strategy, Peter Garnry. "Expect Europe this time to fuel the earnings season."

And finally...

Media disruptor Netflix may have had a mixed Q1, beating expectations on earnings but disappointing slightly on the number of new subscribers, but Garnry likes what he sees from the content downstreaming platform.

"There are lots of encouraging signs with Netflix and it is still on track to deliver growth," he says.


What will happen in France on Sunday? Photo: Shutterstock

Martin O'Rourke is managing editor at Saxo Bank


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