French election: Has a Macron win already been priced in?












Fait accompli? Emmanuel Macron is odds-on to become the next president of France with a commanding lead in the polls the En Marche leader is very much on his way to victory.

The TV debate was the last real risk to Macron but he’s maintained his healthy lead in the polls. Polls also suggest his En Marche is set to win the most seats in parliamentary elections, which means he wouldn’t be the lame duck president feared.

The question now for traders is whether there is still some headroom for the two-week relief rally we’ve seen since the first round to push higher.

Friday’s seen a bit more bullishness with the CAC 40 driving 1% higher to fresh post-crisis highs as stocks have largely ignored the plunge in oil prices. The relative strength index suggests the CAC is overbought although it’s actually come down a little bit towards the middle range where it’s neither overbought nor oversold in recent days.

How the Euro is Responding

The euro is meanwhile trading above $1.09 at its best level since Donald Trump’s election in early November. EURUSD enters the week end on a six-month high as traders seem happy that Macron will win.

Clearly we have a lot of a Macron win priced in already, which will cap the upside to the euro and European equities, meaning perhaps less volatility after round two versus the aftermath of round two.
But there may yet be a bit further to run once the final result comes through. In particular the euro could be in for a bump if short positions that have been tenaciously held onto are at last relinquished. If anything the euro has not bounced as much as maybe was expected and hedges are still in place.



Should We Be Worried?

Can Le Pen do it? As noted, it’s unlikely with the pollinglooking decidedly in favour of Macron. But if Brexit and Trump teaches investors anything it’s not to get too complacent. Indeed the overhang of these results has probably kept euro bulls in check a touch.
So the risk of a Le Pen victory, while small, is significant in that it would spark a big selloff in risk assets. We might expect the euro to shed 5% and maybe even achieve parity with the dollar, while French stocks, having been bought up to the gunnels of late, might tank as much as 10%. The spread between French and German government debt would open up like a chasm. It would be mayhem in the markets.

Conclusions

In short the chance of a Le Pen win is more than zero and the impact so massive that investors cannot simply ignore it. This implies there is perhaps a little more support for EUR in the event of the Macron win. The last euro bears might be inclined to finally throw in the towel and another short squeeze could be on the cards if options data is anything to go by.

Fundamentals are also aligning for the euro with better growth and inflation data in recent days that helps nudge the ECB a little closer to tightening. The key is whether a Macron win coupled with improving data is enough to make the central bank think risks are no longer ‘tilted to the downside’.


On the other side of the trade there doesn’t seem to be a lot to suggest the Fed is about to turn more hawkish than is already priced in. Officials will have to work hard to raise market expectations beyond two more hikes this year. Finally, EURJPY is arguably a better indicator for the French election risk-trade. The euro is currently testing some pretty stiff resistance around 124 and could find the legs to push through if the bulls get their way.”

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