Risk Assets Surge Following French Election

Global financial markets action today reflected a collective sense of relief following the first round of France’s presidential election held yesterday.  The advancement of centrist Emmanuel Macron and far-right nationalist Marine Le Pen into the May 7th runoff round was in-line with polls heading into Sunday, leaving the expectation that a pro-EU new leader will eventually prevail.  Initial surveys project a Macron victory in the final round, a result which would remove talk of a separation by France from the EU, along with remove momentum towards isolationist immigration policies as planned by Le Pen.  After the elections results were released, the risk-off trading trends that were observed leading up to the weekend vote over the past few weeks sharply reversed course.  European stocks increased (+2%) to their highest marks in the past 17-months while the spread between French and German 10-year bonds narrowed by 18 basis points.  The euro climbed +1.2% against the US dollar after jumping as much as 2% earlier in the day.  The next important update for the European economy will come from the ECB meeting later this week, where the timing for reduction of the existing monetary stimulus will be of particular interest.

The move away from the flight-to-safety trade spilled into the commodity markets, as most commodities traded lower on the day, including gold futures falling by as much as 1.5%.  US Treasurys correspondingly sold off as stock markets rallied.  Yield/swap rates are currently up 3-6 bps across the curve, with the yield on the 10-year note rising above 2.28%.  All three major US stock indices gained more than 1% on the session, with broad-based rises across all major sectors.  Contributing to the risk-on sentiment, on Saturday President Trump tweeted about plans to announce his administration’s “big” tax reform and reduction proposal this Wednesday.  It remains to be seen how much detail will actually be revealed, but overall timing of the release is much sooner than markets had previously anticipated.  Also on the agenda for the White House this week is the restructuring of the previously unsuccessful healthcare reform, as well as most importantly, avoiding a government budget shutdown prior to Trump’s 100th day in office (Saturday Apr. 29th).