French Election Fallout
Monday kicks off the week with the result of the French presidential first round, which is likely to dominate the European open. A tight four-horse race means investors won’t know for sure who is going into the May run-off until all the votes are in. We should have a flash estimate of results from 8pm local time on Sunday.
With Le Pen, Fillon, Macron and Melenchon all polling around 20% heading into Sunday’s vote, any combination is possible for the second round of the election. Indeed there is a roughly one in ten chance of a Le Pen-Melenchon tete-a-tete, the market nightmare scenario. No wonder that investors continue to price in a risk premium for French government debt and the euro. Monday could therefore see a major shift in asset allocation depending on whether the results are considered to be more or less market-friendly.
UK Snap Election Build-up
The UK’s snap General Election may look like a sideshow for global markets if we do end up with a Le Pen versus Melenchon run-off in May. Nevertheless the big market swings we saw last Tuesday when Theresa May announced the shock decision to hold a snap vote in June shows the risks for investors and the potential for considerable volatility in the coming weeks.
The pound enjoyed one of its best days in a decade, rising 2.7% to climb to a six-month high as markets took the news as a sign that the government would be able to pursue a softer, more market-friendly version of Brexit. With large swathes of traders shorting sterling the ramp produced a classic short squeeze as bears were forced to liquidate positions and buy back sterling.
Meanwhile, the FTSE 100 plunged as UK stocks and the pound carried on their inverse correlation. The drop, the worst since immediately after the EU referendum last June, wiped out gains for 2017.
On the corporate front, US earnings season is in full swing with a raft of S&P 500 and Dow components reporting Q1 numbers.
Tech Thursday sees heavyweights Alphabet (GOOGL), Amazon (AMZN) and Microsoft (MSFT) report. There is also a group of significant ‘Trump trade’ stocks due to report, including defence groups Raytheon (RTN), Northrop Grumman (NOC) and Lockheed Martin (LMT).
Ford (F), General Motors (GM), Boeing (BA), McDonald’s (MCD), Chevron (CVX) and Exxon Mobil (XOM) are among some of the other large-cap stocks reporting this week, which is sure to make for a volatile week on the big US indices.
In the UK, it’s a busy week for bank earnings, with Q1 numbers from Lloyds (LLOY), Royal Bank of Scotland (RBS) and Barclays (BARC) top of the bill for the FTSE 100. Thursday is a big day for ex-dividend factors which should clip a few points off both the blue chip index and the FTSE 250.
Friday is GDP day, with the advanced readings of the first quarter growth in the UK and US due out. Britain’s economy has proved markedly resilient since the EU Referendum, but as inflation climbs there are fears this will hit consumer spending and result in a slowdown in the economy. Estimates indicate Q1 growth should be around 0.6%. The US reading for the first quarter will be closely watched in light of expectations the Federal Reserve is moving away from hiking rates again in June. A GDP beat could put that back on the table and boost the US dollar in the process. Estimates from different regional Fed banks suggest the figure could be anywhere between 1% and 3%, which significantly raises the prospect of volatility in USD pairs.
Finally the European Central Bank (ECB) convenes again on Thursday. With French elections likely to still to be a factor and inflation having slid back, it’s unlikely that policymakers will use this meeting for any major change in direction. Nevertheless there is likely to be the usual pre- and post-press conference volatility in euro pairs, especially EURUSD.
Source: ETX Capital