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From the Floor: Le Pen 'fear trade' not catching on — #SaxoStrats

   • Emmanuel Macron emerges as clear winner of French presidential debate 
   • Marine Le Pen 'fear trade' not catching on as European nerves ease — Boye
   • Scope for French/German 10-year bond spreads to narrow — Boye
   • US 10-year Treasuries yields bounce off 2.3% as oil provides support — Boye
   • Oil bolstered on back of API's 1.8 million barrels draw report — Hansen
   • Gold needs USDJPY and US Treasuries catalyst for assault on $1,261/oz — Hansen
   • S&P 500 moves into ever narrower range around the 3,250 mark — Garnry
   • Implied volatilities 'dropping like a stone' in AUDUSD — Hardy
   • Malaysia exports indicate China engine may be revving up — Horchani

By Martin O'Rourke 

Not so (Le) pensive

"Don't fear the reaper" was the message from 1970s rock band Blue Oyster Cult to those of you of a certain vintage and it is beginning to look like we can add Marine Le Pen to that list after she was forced onto the back foot in the second presidential debate in France last night.

Le Pen was singled out for some stinging criticism over illegal EU payments to her staff after she used her immunity as an EU lawmaker in February to refuse a police summons, enabling principal rival Emmanuel Macron to cement his position as firm favourite for the presidency.

"France should be very competitively bid today as the Le Pen fear trade does not seem to be catching on," says Michael Boye from Saxo Bank's fixed income desk in Copenhagen. "There is plenty of scope for French/German 10-year spreads to contract further."

The 10-year spread was at 65 points having touched 80 points during February when former favourite Francois Fillon was embroiled in scandal.

Le Pen meanwhile will no doubt be hoping that the verdict on her performance proves just as inaccurate as a barometer for voter intentions as the debates between Hillary Clinton and Donald Trump in the US presidential race that the former was widely perceived to have won to no avail on election day.

Le Pen's poor performance could open path to take the French/German spread towards 60
Source: Bloomberg

It's another bond market, however, has markets exercised Wednesday morning after US 10-year Treasury yields touched the key level of 2.3% overnight before bouncing off towards the 2.35% level.

"The next move in the 10-year will probably be decided by the nonfarm payrolls which takes place Friday," says Boye.

Oil played its part in bolstering the yield after the API report Tuesday showed a 1.8 million barrels draw in inventories lighting a fuse under key benchmarks Brent and WTI.

Brent was at $54.49/barrel and WTI at $51.33/b at 0655 GMT.

"The EIA reports later today and that is also looking to a decrease, albeit a smaller one," says Saxo Bank's head of commodities strategy Ole Hansen. "WTI could see a revisit of the early-year high especially once demand starts to pick up into the summer season."

Gold bulls also have a close eye on the yield after the precious metal failed to break through the key $1,261/oz zone for a third failure in around a week.

"Gold failed to break resistance when the yield went back to 2.3%," says Hansen. "If gold is to break above that and then on to $1,273 and $1,293, then it needs either or both of the yield below 2.3% and USDJPY seriously challenging the 110.0 handle."

USDJPY was at 110.68 at 0655 GMT.

US 10-year Treasuries yields got some oil support to bounce off 2.3% Tuesday
 Source: Bloomberg

Narrower range

The US 10-year yield is one focus of attention for markets currently and the ongoing battle around the 2,350 zone in the S&P 500 index is another.

"The S&P 500 is getting over closer to that inflection point and it is creeping into ever-narrower ranges," says Saxo Bank's head of equities strategy, Peter Garnry, after the S&P 500 closed at 2,360 Tuesday. "Something will have to give and given the data points, I feel this could actually go higher."

One the single stock fronts, ChemChina is a step closer to its proposed $43 billion takeover with Syngenta after it got US approval for the deal. Only EU approval with a decision due on April 18 remains to be hurdled. Nvidia shares meanwhile had a rude awakening for a 7% plunge and the shutting of a Ralph Lauren flagship store on Fifth Avenue could be a sign of things to come in the retail space.

"Ralph Lauren is not that interesting a company itself, but this is another casualty in the ever-dying retail space," says Garnry. "The disruption from ecommerce and new brands indicate that the whole landscape is shaping and there will be a lot of turmoil."

"If you hold stock in this sector, be very selective."

China's return

China returned literally to markets Wednesday after a two-day holiday but it was the figurative return that will have had Asian economies salivating after Malaysia's trade figures for March showed a 47% rise in exports to China.

"People who were thinking China has gone and the economy was slowing down, this maybe shows that this was not the case," says Tareck Horchani, reporting from Saxo's Asia hub in Singapore. It was just one item of good news out of Asia after Singapore, Taiwan and Japan all reported significant improvements in their PMIs.

"Confidence in Japan is at a one-year high," says Horchani. "It's all private sector and new orders."

And finally...

AUDUSD strengthened overnight after some improvement in iron ore prices but Saxo Bank's head of forex strategy John J Hardy is not convinced and points to "six-month volatilities implied for AUDUSD are dropping like a stone at 10% of its historical low, in other words, 90% of the time, it is higher than this."

"The market is really looking for a catalyst here ," says Hardy. "We need to watch US policy moves, the Trump/Xi meeting and technically speaking, the 2.3% level on US 10-year Treasuries yields."

 Maybe China is not quite so down and out? Photo: Shutterstock

Martin O'Rourke is managing editor at Saxo Bank


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