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From the Floor: Markets pricing in Macron victory

   • Eurozone government bond yields continue to rise ahead of French election
   • Market is starting to price in a Macron victory in this weekend’s election: Boye
   • France-Germany yield spread has narrowed to within 70 bps 
   • Macron-Le Pen is now benchmark scenario for second round next month
   • Terror attack in Paris on Thursday evening could boost Le Pen's support
   • Champs-Elysees terror attack has triggered only modest risk-off reaction
   • Asian shares up in quiet Asian session, with slight USD selling interest
   • US stocks rose widely on Thursday with mood lifted by tax-reform hopes: Garnry
   • Favourable outcome in French vote could set new course for European stocks
   • Gold supported by French election, but increasingly at risk of correction: Hansen
   • Crude oil stuck in its range, geopolitical risks limit downside: Hansen
   • Farm commodities remain completely out of favour; supply overhang weighs

Saxo Strats banner
By John Acher

European government bond yields have risen and bond prices softened ahead of this weekend’s French presidential election, with markets increasingly pricing in a victory for the centrist candidate Emmanuel Macron, Saxo Bank’s strategy team says.

The French election has turned into the closest race in modern memory, with only narrow gaps in the opinion polls between the four front-runners.

“It looks like the market is starting to price in a Macron victory in the first round here in this weekend’s election,” says Saxo Bank’s fixed-income trader Michael Boye. “There was quite a selloff in bunds yesterday.”

A terror attack that killed one policeman and wounded two others on Paris’s Champs-Elysees boulevard on Thursday evening injected a sombre note into the election campaigning, but triggered only a muted risk-aversion response in financial markets.

“We have seen a very modest risk-off reaction to that,” Boye says. “It doesn’t seem to impact the market sentiment at this stage.”

The France-Germany yield spread has narrowed back to within 70 basis points.

France-Germany 10-year spread dips below 70 bps
French bond spreadSource: Bloomberg

The terror attack was seen possibly boosting the anti-immigration far-right candidate Marine Le Pen, who trails Macron’s 25% support by about three percentage points in the latest polls. No candidate is expected to win an outright majority in Sunday’s first round of voting, so the two top contenders would face off in a second round on May 7.

“Macron-Le Pen is now the benchmark scenario [for the second round],” says Boye. That means that there is more downside risk and less upside risk, as the upside is already being priced in.

“But if we look strictly at fixed-income markets, I still think there is quite a bit of room for yields to move on the upside, if this whole election situation in France turns out to be market-friendly,” he says, adding, however, that the final outcome will remain unknown and the market in a vacuum after this weekend’s voting, until French voters cast their second-round ballots in May.

The Islamic State claimed credit for Thursday’s shooting attack in Paris.

“People get tired of it, so it will be interesting to see only two days before the first round how the population will react to this event and whether it will help Le Pen get more votes,” says Saxo Bank’s Tareck Horchani in Singapore. “She is the only one really with radical views on how to tackle terrorist attacks and the radical Islamists.”

If Le Pen captures around 30% of the vote in Sunday’s ballot – above her polling figures of around 22% – it would cause a new wave of worry about the outcome of the second round, Horchani says.

Asian shares rose in quiet trade on Friday.

“We had a slight dollar selling bias today,” Horchani says, referring to the quiet Asian session.

US stocks rally

US stocks rose broadly overnight, with sentiment lifted by renewed hopes for US tax reform, says Saxo Bank’s equities strategy chief Peter Garnry. “We had very strong sentiment yesterday in US equities, very broad-based.”

Equity market sentiment was also boosted by comments from Bank of Japan governor Haruhiko Kuroda who said that Japan is going to keep the current pace of quantitative easing. “You saw the reaction function very strongly in EURUSD, and in the Asian session you saw Japanese equities with a full candle bar up,” says Garnry. “It seems like very strong short-term momentum here – we have definitely turned a corner.”

US treasury secretary Steven Mnuchin said on Thursday the Trump administration aims to complete an overhaul of the tax system by the end of this year, regardless of whether or not it accomplishes healthcare reform.

“Mnuchin’s comments earlier this week were definitely a line in the sand, and now Kuroda is following up, and I remain positive short term on Japanese equities on these events,” Garnry says.

Garnry on Thursday issued a trade idea to go long out-of-the-money June calls on France's CAC 40 index, with a strike at 5,200 points and a bet on a possible surprise outcome of the French vote where Macron and the other centrist candidate Francois Fillon would emerge as the two winners of the first round. 

“If that happens, we could see the CAC index move and flirt with these levels at 5,200, and if we go beyond these levels, I think we have a whole new ballgame for French and European equities,” Garnry says.

France's CAC 40 index seen flirting with 5,200 points
CAC 40 index
Source: Bloomberg 

“So much capital has been fleeing out of Europe over the past year – over $100 billion – and if we get on the other side of the French election with a good outcome, I tell you I really believe European equities will be in new action mode,” Garnry adds.

The stock markets will be taking a close look at quarterly earnings on Friday from oil-services group Schlumberger and General Electric.

Gold vulnerable

The price of the conventional safe-haven asset gold has been driven up partly by worries about the French election, so the yellow metal is now looking vulnerable.

“We are seeing gold increasingly in risk of correction,” says Saxo Bank's commodities strategy chief Ole Hansen. “The market is being supported by the French election, and if that turns out to be in line with expectations, then we could see some weakness.”

That prospect of a gold correction is also heightened by the fact that bonds and the Japanese yen, which were gold’s previous drivers, are now showing some weakness.

Fibonacci levels point towards support for gold at $1,272/oz, with the next level at $1,257/oz, Hansen says.

Agricultural commodities remain out of favour, with ample supplies around the world weighing on prices, Hansen says. “Overall it’s really a question of the weather outlook we are going to see this coming crop season, because we need to see supplies come down in order for stability to come back into these markets.”

Crude oil prices remain stuck in a range, he says.

 The centrist Emmanuel Macron is the front-runner going into this weekend's first round of the French presidential election. Photo: Shutterstock

John Acher is a consulting editor at TradingFloor.


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