A Macron 'win' in the first round of the French elections has (judging by the initial reactions) allayed many fears of imminent doom. Dow futures are up around 200 points, Bond futures are down, gold is down (despite USD weakness)...
Stocks back at 3-week highs as gold sinks...
EURUSD is clinging to 1.09 as Treasury prices drop...
However, as Bloomberg's Cameron "macroman" Crise notes, "Enjoy the party, parkets; but beware of the bangover."
Sometimes, the pollsters get it right. The two favored candidates in the French first round vote have indeed gone through, setting up what looks like an easy victory for Emmanuel Macron in a couple of weeks. While today should be a good one for the euro and risky assets, the party may be short-lived; it won’t take long before market focus swings back to the United States and a potential government shutdown at the end of the week.
It will be Macron and Le Pen in the second round of the French presidential election, with each securing a share of the vote in line with what was predicted by pollsters. The accuracy of the polls will be a comfort to markets, given that they show a huge margin of victory for Macron in a head-to-head runoff with Le Pen.
The euro and risky assets look set to have a great day today. That being said, the initial reaction may be overdone, as I suggested on Friday. While the euro is nearly fully priced for a Macron victory, it seems likely that markets will maintain a risk premium for Le Pen, just in case.
While markets may choose to run with windfall gains, precedent suggests that profit-taking will emerge relatively quickly. While this time may be different, the evidence suggests that investors are already well overweight European equities.
“Sell the fact” is a risk here.
Moreover, this week is fraught with political risk in the U.S. as Congress returns from recess. The White House apparently wants to revive the health-care vote AND unveil a tax plan this week. Oh, and there’s the small matter of passing a continuing resolution to avoid a government shutdown by next weekend. All of this sounds like a tall order for a government that has yet to deliver any meaningful policy initiatives this year.
By all means, markets can enjoy their French electoral party. They shouldn’t party too hard, however, lest the hangover be a vicious one.