Volatility Eases in Global Financial Markets Post-French Election

The final round of France’s presidential election took place Sunday with a sweeping victory by centrist Emmanuel Macron.  The pro-EU candidate held a 20-point lead in the polls heading into Sunday and finished with 65% of the final tally vs. 35% for Le Pen; a loss for populist political movements, but still a renunciation of the political status quo in France.  Next month’s legislative elections in France will be crucial in determining the ease with which Macron will be able to assemble a coalition to implement his labor market reform, pro-EU, pro-immigration policies.  With one fewer point of uncertainty now outstanding for the economic outlook for Europe, further attention will likely be directed towards the timing for the tapering of the ECB’s historic stimulus program.  The euro briefly topped a six-month high following the French vote results, but reversed course throughout the Monday session and it is currently down 0.6% vs. the dollar to $1.09.

Financial markets absorbed conflicting views from two Fed officials earlier today, beginning with St. Louis Federal Reserve Bank President James Bullard who expressed his desire to pump the brakes on the near term rate hike plans.  Bullard referenced the disappointing economic climate in the first quarter of the year along with heightened concern around slowed consumption growth leading towards depressed prices.  “On inflation, the numbers were disappointing. We have been telling a story that we are trending back towards 2 percent and we went the other way,” he said in support of his preference for only one more rate hike this year.  Conversely, Federal Reserve Bank of Cleveland President Loretta Mester expressed her view that the Fed should continue on it current path in order to prevent an overheating of the economy.  More specifically, she stated that “If we delay too long in taking the next normalization step and then find ourselves in a situation where the labor market becomes unsustainably tight, price pressures become excessive and we have to move rates up steeply, we could risk a recession.”  As implied by fed funds futures contracts, the probability for a June rate hike currently stands at over 90%.  US Treasurys pulled back on the day, with yields/swap rates increasing 1-5 bps across the curve.  The yield on the 10-year note is up more than three basis points to 2.38%.  All three major stock indices closed just above even for the session, with the S&P 500 briefly touching a record high earlier on.  Overall volatility in equity markets touched its lowest level in more than ten years as measured by the CBOE Volatility Index – falling below a reading of 10.  Crude oil prices continue to fluctuate amid supply concerns, as today representatives from Russia and Saudi Arabia hinted at a willingness to extend production cuts into 2018, in addition to expanding already existing controls.  WTI crude is currently trading at $46.40/barrel while Brent crude is near $49.30/barrel.