Risk is definitely on this morning as European shares soar, led by French stocks and a new record high in Germany’s DAX, after a “French relief rally” in which the first round of the country’s presidential elections prompted investors to bet that establishment candidate Emmanuel Macron will win a runoff vote next month, and who is seen as a 61% to 39% favorite to defeat Le Pen according to the latest just released Opinionway poll.
For those who may have missed yesterday’s events, here is a quick recap from DB:
The fact that Macron and Le Pen have made it through to the second round was in line with the most likely scenario for the last several weeks and is a big market positive given their head-to-head polling numbers but make no mistake viewed over a longer-term horizon its another political shockwave as the two mainstream party’s candidates have been eliminated in the first round for the first time under the 5th Republic.
A reminder that the polls have suggested that in a run-off Macron has consistently been 20-30% ahead of Marine Le Pen. It would take a numerical shock perhaps 5-10 times larger than Brexit or Trump for Le Pen to win. It does seem that the prefirst round polls have been relatively accurate so Macron should rightly be red hot favourite now. The fact that many of the losing candidates (not Melenchon) have been throwing their support behind Macron helps reinforce this.
So this was a big anti-establishment vote but a tame one for now due to the fact that a market friendly candidate made it through and is very much expected to win. The first round polls were close enough that you couldn’t have ruled out a very market unfriendly Le Pen/Melenchon run-off but now that risk has been eliminated the second round is perhaps more straight forward. The latest numbers with 97% counted are Macron 23.9%, Le Pen 21.4%, with Fillon and Melenchon with just over 19% each.
Asian stocks also surged, expect for China, which suffered its biggest drop of the year, down 1.4%, ending the streak of losses no greater than 1% going back to December. The dollar has tumbled against the euro, while crude oil rises. In the US, S&P futures surged 1.2% to 2,374.5, again approaching an all time high, on the heels of the favorable France vote and as Trump vowed to announce tax reforms this week.
Back to Europe where French stocks led gains in European equities as traders speculated that candidate Emmanuel Macron will win the country’s presidential election after he made it through to the second round. Led by gains in French banks, the CAC 40 Index surged 4.4% at 11 a.m. in Paris, poised for its best advance since June 2012, while the Euro Stoxx 50 Index jumped 3.2 percent and the broader Stoxx Europe 600 Index rose 2 percent, both heading for their highest levels since August 2015. Banks were the biggest winners among Stoxx 600 groups. The Euro Stoxx Banks Index surged 6.7 percent, heading for its highest level since December 2015.
As shown in the chart below, the CAC 40 is poised to close at its highest level in more than nine years. It could outperform Germany’s DAX Index by 3 percent to 4 percent within a few days, Natixis strategist Sylvian Goyon said by phone. The French benchmark had advanced less than the DAX in the year through Friday’s close, before outperforming on Monday.
Commenting on the move, Andrea Tueni, a trader at Saxo Bank, said that “the result will bring some relief to the market. This confirms the ‘central scenario’ that was mostly priced in already, so I don’t expect euphoria on the markets. Banking stocks could outperform after their recent weakness.” And yet euphoria is precisely what has been unleashed looking at not only the CAC but also Germany’s DAX, which is trading at record highs this morning.
Germany’s DAX Index rallied in sympathy to a new all time high.
More on the “unexpected” euphoria: every industry group in the Europe 600 Index rose, volatility fell the most since 2005, and the cost of insuring against losses on French banks’ junior debt fell by the most in almost seven years. The VStoxx Index of euro-area volatility slumped 30%, poised for a record decline. France’s VCAC Index tumbled 36%. Gold was on course for its biggest drop in seven weeks and the yen was the worst performer among major currencies. Hinting that early euphoria may have been overdone, the euro scaled back gains after it’s best open on record.
“Macron will not only help stabilize the European Union, but also help build stronger support mechanisms,” Azad Zangana, senior economist for Europe at Schroders Plc in London, wrote in a note to clients. “The contest is not over yet, but investors are likely to take comfort and to begin to think about the more attractive valuations that European equities offer.”
The spread between German and French 10Y yields, aka “le spread” plunged by over 17 bps, and has dropped to under 50 bps as fears of a French shock evaporate. The spread was just under 80bps in February when fears of a Le Pen win peaked, and has since narrowed to the lowest level since late 2016.
While Europe and the rest of the world soared, China tumbled, and a selloff in Chinese stocks deepened after the Shanghai Composite plunged 1.4%, the most in four months, amid the previously noted concern authorities will step up measures to crack down on leveraged trading. The Composite suffered its biggest one-day loss since Dec. 12, as industrial companies and material producers led losses. The ChiNext small-cap gauge slipped 1.6 percent to 1,809.91, its lowest closing level since September 2015.
China’s authorities are taking advantage of a strengthening economy to reduce financial-system risk by tightening the screws on leverage. The banking regulator said late Friday it will strengthen a crackdown on irregularities in the financial sector, echoing comments by the securities watchdog just days earlier, while the top insurance official is being investigated on suspicion of “severe” disciplinary violations. The Shanghai Composite has slumped almost 5 percent since closing at a 15-month high on April 11, the biggest loss among global gauges.
“Market sentiment has been damped by recent tightening supervision on all fronts such as the banking commission, insurance commission, securities regulator,” said Ben Kwong, executive director of KGI Asia Ltd. in Hong Kong. “They expressed concern about bubbles and credit defaults. The deleveraging process is still in progress.”
The declines dented optimism in Hong Kong, where the Hang Seng Index rose 0.4 percent, paring an earlier gain of as much as 0.7 percent that had come amid global risk appetite on bets that pro-growth centrist Emmanuel Macron will be France’s next president. The Hang Seng China Enterprises Index climbed 0.6 percent at the close, trimming an advance of 1.1%.
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