Markets turn risk (Macr)on

Markets turn risk (Macr)on

Emmanuel Macron winning the first round of the French Presidential election sent markets into ecstasy. The euro hit its highest against the dollar since Donald Trump won the US election, French bank shares soared (some by double digits) and German stocks reached a new all-time high. Markets have written off Marine Le Pen as French President in 2017 and with it the existential threat to the euro and the redenomination risk of all French assets.
   
Macron as President is not a done deal yet with the final result not known until May 7 but the way markets are reacting, it may as well be. There is some justification for the overconfidence in a Macron presidency. For the first time since before the 2015 UK general election the polls got it right in the first round of the French Presidential elections. As of Sunday night, markets are feeling a lot more confident in the polls showing an easy win for Macron in the second round.

Banks lead the way higher

Banks were the obvious high beta recipients of a more certain economic outlook for the Eurozone with Emmanuel Macron at the helm in France. Bankers look after their own so former Rothschild investment banker Macron is a win for the banks. Still we’d see this as a time to lighten up on European banking shares which still carry a lot of uncertainty and have already been one of the biggest beneficiaries of the reflation trade. Other cyclical sectors including retail maybe better placed to benefit from an improving fundamentals and a calmer political outlook moving forward.

Miners ignore Chinese stock crash

The obvious exception to the rule of jubilation in markets was to be found in China, where stocks had their worst day this year. Mining stocks jumped on the FTSE 100, alongside most other sectors but if this sell-off in Chinese stocks continues, that could easily change. The mining firms shouldn’t in theory be affected by Chinese stock prices but in times of panic (like Summer 2015) they seem to be. If data this week shows US growth slowed more than expected in the first quarter of 2017, markets could get a little more China-sensitive in the context of global growth.

Utilities don’t like May’s Miliband impression

It was a one two-punch of an election-inspired government U-turn on energy bill caps and a move out of traditional havens that sent utility company shares to the bottom of the FTSE 100. Top energy suppliers including Centrica and SEE were two of only a handful of losers on what was a very positive day for British stocks. A price cap is a direct hit to utility company profitability, but how much of one will depend on where the cap is set.

Havens pared back

With European election risk seemingly out of the picture, havens like gold and the Japanese yen were out of favour. EUR/JPY gained as much as 3%, a huge daily move by foreign exchange standards, before coming off its highs. Gold looks a little top-heavy near $1300 per oz but US policy uncertainty should put a floor under any larger sell-off.