Keep calm and carry on

The Day So Far

Yesterday I spoke about France in depth following the campaign rallies held in France over the weekend and with Fillon fire fighting the latest allegations put in his direction. Having seen the EUR weaken and European equities falter in yesterday’s session I thought some more research into the Le Pen situation and what it may mean for financial markets was warranted. Luckily, thanks to the good chaps at Credit Suisse who released an extensive report on this very matter last week the summary is that the National Front manifesto, which consists of 144 commitments, seems extremely unlikely to make it through to the implementation stage. Let’s start with the here and now, FR/GE 10yr spreads are on the move again and as noted yesterday are back to multi-year highs. In the near-term I do not see this trend changing with nervousness ahead of the vote in late April and early May only likely to serve further volatility, especially in the context of political uncertainty expected in the Netherlands where a strong performance from far-right candidate Geert Wilders is anticipated. Therefore despite my opening gambit there is no denying the fanfare likely to surround a Le Pen victory which would be much to the pleasure of the mainstream media and with polls proving to be an inaccurate indicator of true underlying voting intention then the unexpected and no longer be unexpected.

So let’s deal with a hypothetical win for Marine, projections show that the National Front Party are likely to make significant headwind in terms of representation in the National Assembly (58/64 from just 2 at present). However, this still leaves them far short of governing on their own so a partnership with another party would be the outcome. Given Macron is Centre-Left and Hamon is the Socialist representative the only viable option would be a coalition government with the Centre-Right and likely Francois Fillon. In this most plausible outcome to the Le Pen win scenario it would mean she would then have limited powers at best which net “neutralises” the ability for her to deliver on the most ambitions reforms and pledges. The argument of calling for an EU referendum for example is fraught with complexity as it would require not only a sign off from the PM but also a change to the French constitution itself. So net net it’s understandable that the press are pumping the Le Pen story and I foresee this intensifying even further in the coming weeks but much like people were caught out by the ‘Trumpflation’ reaction I think that trading the French election pre-and-post event maybe two distinctly different situations.

The Day Ahead

The calendar for today is relatively light with only US trade balance at 1.30pm. With this in mind we are largely following the trend that has materialised this morning where by USD strength in combination with a key technical break in Cable has weighed on both major pairs. Elsewhere, we have a strong view that given the reaction in equities post payroll a Fed rate hike in the near-term is off the table and as such it opens up the prospect for another run to the upside. This view was further cemented yesterday when a sizeable move lower in EU indices failing to make a dent to the positive sentiment Stateside.