European, US Stocks In Eerie Calm As French Vote Looms

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Global markets were oddly calm on Friday, the last day of trading before the first round of France’s closely fought presidential election, with European stocks posting modest declines ahead of Sunday’s main event, Asian shares rising, and set for first weekly gain in the past month, while U.S. futures were unchanged. French bond yields hit three-months low even as the euro has seen some recent weakness.

The long awaited French Presidential Election is now nearly upon us with the first round taking place this Sunday. We’ll likely get exit polls soon after polls close at 7pm local time (8pm BST) with any delays caused by the fact that a few stations are open for an extra hour. In terms of the how the polls are looking, yesterday there was a lot of focus on a Harris poll which showed that support for Macron was running at 24.5% in the first round (compared to 23% ish in other polls) and support for Le Pen is at 21% (versus 22-23% in other polls). Melenchon and Fillon came in with support at 19% and 20% respectively. French assets had a strong day yesterday and outperformed other European assets on the back of that Harris poll. The CAC closed +1.48% for its best day since March 1st. That compared to a much smaller +0.22% gain for the Stoxx 600.

Trading along with the latest polls, the euro has shown little signs of anxiety days before the crucial vote as Le Pen has fallen behind centrist Emmanuel Macron in recent polls.

The fatal attack on a police officer in Paris overnight caused investors some immediate jitters, with the gap between French and German 10-year borrowing costs rising sharply in the first few minutes of trading. Traders said this was on concern the attack could sway the vote in favor of Marine Le Pen. But that move reversed as the session wore on, with the yield on 10-year French government debt hitting its weakest since mid-January and the gap between it and its German equivalent falling to its tightest in three weeks. The stated reason for the move back was that the market assumed any gains for Le Pen would come at the expense of Melenchon.

The murder of a policeman on the Champs-Elysees also forced an early end to campaigning ahead of Sunday’s vote in France. Investors are bracing for a period of uncertainty until a victor emerges on May 7.

“The need to hedge the downside risks on the euro without capping the upside potential, has mostly pushed investors toward the currency options through the week,” Ipek Ozkardeskaya, a market analyst at London Capital Group  wrote in a note. Heightened stock volatility has been spurred by investors’ need to protect against political risk into and following the first round, she said.

Despite Friday’s seeming calm, in recent weeks European stock volatility has seen a pick up, rising to the highest level since Brexit last summer.

Away from the French elections, Europe had something to cheer about with a slew of upbeat PMI reports this morning suggesting a pick up in the economy across the Eurozone. According to Markit, Eurozone PMI hit a 6 year high in April, suggesting the reflation trade is alive and well in Europe, which continues to shrug off any political uncertainties, and continues to be a headache for Mario Draghi who needs some justification to keep extra easy monetary conditions.

There was some less attractive data out of the UK, where the big data release was the March UK retail sales release, which posted the worst Q1 data since 2010, although there was little follow through in GBP selling as Cable buyers stood resolute ahead of 1.2750 and EUR/GBP buyers will find little reprieve ahead of the French elections this weekend.

Futures on the S&P 500 rose 0.1 percent as of 6:20 a.m. in New York. The cash index rose 0.8 percent Thursday, with American Express surging nearly 6 percent to pace gains in the financial group after its results topped estimates. European stocks were little changed, with the STOXX 600 index up 0.01% at 6:40am ET.

“So far markets have been pretty sanguine in the face of the (French) presidential election, which was flagged as one of the potential banana skins for markets in this year and I think that may be partly a result of political fatigue,” said Hargreaves Lansdown analyst Laith Khalaf, in London. But options markets suggested investors remain worried about strong results for Le Pen and/or hard-left challenger anti-EU Jean-Luc Melenchon that would point to the risk of another major political shock for Europe in two weeks time.

“It is kind of reminiscent of the big events last year where people know that it is a binary outcome so the best approach is to remain as cautious as possible,” said Simon Derrick, head of the global markets research team at Bank of New York Mellon in London. France’s CAC stock index fell 0.9%, though it was only around 2 percent off its highest levels since mid-2015.

French 10-year yields fell two basis points to 0.92 percent. Bunds also gained, with the yield on the benchmark due in a decade one basis point lower at 0.24 percent. U.S. government debt fell, as the yield on the 10-year note rose one basis point to 2.24 percent, climbing for a third straight day.

In Asia stocks ended the week on a positive note, unscathed by a U.S. trade probe on Chinese steel exports. MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.5 percent, but was down 0.4 percent on the week. Asian steelmakers were mostly steady or higher, as investors dismissed for now any negative impact from the launch of a U.S. trade probe against Chinese steel exporters, although Chinese companies shed some of their earlier gains. The move sent their U.S. counterparts surging over 8 percent overnight. Japan’s Nikkei advanced 1 percent, posting a weekly gain of 1.6 percent. Chinese shares in Shanghai added 0.1 percent but recorded a 2.2 percent weekly drop, their worst since mid-December.

“The U.S. accounts for a small proportion of China’s steel exports,” said Yang Kunhe, steel analyst at Northeast Securities in Beijing, adding Northeast Asia and Africa have been growing markets for Chinese steel over the past few years.   “But if Trump’s probe translates into actions, it would increase the chance of trade friction, and hurt market sentiment.”

Markets also mostly shrugged off White House comments that the U.S. may consider tit-for-tat tariffs on imports, and concerns raised by the International Monetary Fund that U.S. tax cuts could fuel financial risk-taking and increase public debt.

The Bloomberg Dollar Spot Index fell for a second week after President Donald Trump said this month the currency is getting too strong. Rebounding commodities propelled gains in European mining stocks while oil rose.

In commodities, oil prices edged lower and were on course for the biggest weekly drop in a month, over doubts that an OPEC-led production cut will restore balance to an oversupplied market. Front-month Brent futures were at $52.95 a barrel and set for a 5.2 percent weekly drop, the most since the week of March 10. Gold was flat at $1,280.91 an ounce. Meahwhile, iron ore futures climbed 5.1 percent.

Economic data include existing home sales, manufacturing PMI. GE, SunTrust are among companies scheduled to publish results.

Market Snapshot

  • S&P 500 futures up 0.1% to 2,354
  • STOXX Europe 600 down 0.2% to 377.30
  • MXAP up 0.7% to 147.03
  • MXAPJ up 0.5% to 478.58
  • Nikkei up 1% to 18,620.75
  • Topix up 1.1% to 1,488.58
  • Hang Seng Index down 0.06% to 24,042.02
  • Shanghai Composite up 0.03% to 3,173.15
  • Sensex down 0.4% to 29,307.65
  • Australia S&P/ASX 200 up 0.6% to 5,854.14
  • Kospi up 0.7% to 2,165.04
  • Brent Futures down less than 0.1% to $52.98
  • Gold spot little changed at $1,281.44
  • U.S. Dollar Index little changed at 99.79
  • German 10Y yield fell 0.6 bps to 0.238%
  • Euro up 0.03% to 1.0720 per US$
  • Brent Futures up 0.1% to $53.06/bbl
  • Italian 10Y yield fell 0.7 bps to 1.974%
  • Spanish 10Y yield rose 0.3 bps to 1.703%

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Asian equity markets traded higher across the board as the region took the impetus from the upbeat US close where stocks benefitted from optimism regarding tax and healthcare reforms. ASX 200 (+0.7%) was underpinned by outperformance in miners after increases in copper and iron ore prices as Dalian iron ore futures surged by 7% in early trade. Nikkei 225 (+1.0%) was benefitted from a weaker currency in which USD/JPY reclaimed 109.00, while Hang Seng (+0.1%) and Shanghai Comp. (+0.1%) gained after the PBoC continued to inject funds into the interbank market which resulted to a net weekly injection of CNY 170bIn vs. Prey. CNY 70bIn injection last week. 10yr JGBs traded flat with demand dampened amid a positive risk tone across the region, while the BoJ’s Rinban announcement also failed to spur demand as it was widely in line with expectations and heavily concentrated on T-bills. PBoC injected CNY 60bIn in 7-day reverse repos, CNY 20bIn in 14-day reverse repos and CNY 20bIn in 28-day reverse repos, for a net weekly injection of CNY 170bIn vs. last week’s CNY 70bIn net injection.

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Europe’s final trading day of the week has seen equities yet again struggling to find any real direction as participants prepare themselves for the 1st round results of the much-anticipated French election, subsequently volumes are on the lighter side. Europe has had something to cheer about with a slew of upbeat PMI reports this morning suggesting a pick up in the economy across the Eurozone. In fixed income markets, DE-FR spread had been wider by some 8bps at the open with reports out last night of another terror attack in France, consequently heightening tensions regarding the election, however since the open, the spread has tightened to around 65bps. While the move higher in OATs has spilled over into gilts which kicked of the session on a firmer footing, with a further move higher attributed by the weak retail sales data.

Top European News

  • Euro-Area Economic Activity Accelerates to Fastest in Six Years
  • U.K. Retail Sales Post Biggest Quarterly Drop Since Early 2010
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In currencies, The Bloomberg Dollar Spot Index was little changed and is poised for a weekly decline of 0.2 percent. The euro weakened 0.2 percent to $1.0693. Sterling also fell 0.2 percent to $1.2787. The big data release this morning was the March UK retail sales release, but despite posting the worst Q1 data since 2010, we saw little follow through in GBP selling as Cable buyers stood resolute ahead of 1.2750 and EUR/GBP buyers will find little reprieve ahead of the French elections this weekend. Trading is still relatively tight however, but the longer the Pound holds up, the more we expect this GBP revival to continue. Switching to the main event in front of us, and a number of pundits are highlighting the modest risk premium priced into Euro assets — specifically French stocks — but also as the EUR as a whole. That said, we have seen EUR/USD dip back to 1.0700 more recently, as traders throw in the towel on an intra day push lower in GBP. Most of the pre weekend positioning is said to be in place — very likely through the options market — as the prospect of a market friendly result in the first round vote could spell a strong relief rally in the EUR. From a USD perspective, it is hard to argue against a lower (EUR/USD) rate near term, with US Treasury yields recovering somewhat. 1.0600 is a key fair value point and this is a potential target for later today. USD/JPY is not getting the upside traction however, and this is likely to cross rate activity which sees EUR/JPY back in the mid 116.00’s, but less so of a retreat in GBP/JPY to highlight the resilience in the Pound noted above. The BoJ maintains that it is too early to talk about exit strategy, but to little effect on the JPY all round.

In commodities, some modest respite for the reflation trade gave base metals a modest fillip yesterday following comments from Trump’s administration over healthcare and tax reform. Copper gains have stalled north of USD2.55, but we continue to hold off USD2.50 as tight range looks set to extend into the weekend as traders all focus on the French elections, and broader risk sentiment as a result. Price action looks to be uniform across the field this morning, but Copper outperforms modestly. Precious metals have based out, with little fresh weakness to note despite a small pick up in UST yields. Naturally the risk factor dominates for now, keeping Gold above USD1280.00, but Silver has since slipped below USD18.00. WTI is back under USD51.00 again, but ahead of fresh OPEC talks which will focus on a potential extension to production cuts, we should expect some near term ‘noise’ to play out.

Looking at the day ahead, the focus in the morning session in Europe will almost certainly be the release of the flash April PMIs. Market consensus is for the composite Euro area reading to hold steady at 56.3, with the final print coming in stronger at 56.7 Away from that, this morning we will also get UK retail sales data for March. Over in the US this afternoon the flash PMIs will also be released alongside March existing home sales data. Away from the data, the Fed’s Kashkari is due to speak this afternoon while the BoE’s Saunders is also scheduled to speak. Also of note is the start of the spring meetings of the World Bank Group and IMF which will continue into the  weekend. Lagarde and Mnuchin are amongst the scheduled speakers. Earnings wise today its quiet with just 9 S&P 500 companies reporting including Schlumberger and General Electric.

US Event Calendar

  • 9:45am: Markit US Manufacturing PMI, est. 53.8, prior 53.3; Services PMI, est. 53.2, prior 52.8; Composite PMI, prior 53
  • 10am: Existing Home Sales, est. 5.6m, prior 5.48m; MoM, est. 2.19%, prior -3.7%

DB’s Jim Reid concludes the overnight wrap

The long awaited French Presidential Election is now nearly upon us with the first round taking place this Sunday. Speaking to our expert Marc De-Muizon yesterday he informed me that we’ll likely get exit polls soon after polls close at 7pm local time (8pm BST) with any delays caused by the fact that a few stations are open for an extra hour. It’s also possible we’ll get some earlier exit polls from across the border during the afternoon as they’ll be banned in France while polls are open. Marc thinks that the only way we won’t have a good idea of the rankings of the leading candidates within an hour or two is if all four main protagonists are clustered around the same mark. Quite possible.

In terms of the how the polls are looking, yesterday there was a lot of focus on a Harris poll which showed that support for Macron was running at 24.5% in the first round (compared to 23% ish in other polls) and support for Le Pen is at 21% (versus 22-23% in other polls). Melenchon and Fillon came in with support at 19% and 20% respectively. It is probably worth handicapping this poll however given that the sample size was less than 1000 people and also that the poll is also a lot less regular than some of the more reliable ones including Opinionway, Ifop and Ipsos. Indeed if we look at the last 3 polls run by those pollsters then the spread between the four candidates is at an average of 4.5%. Macron’s average is 23.3%, Le Pen 22.3%, Fillon 19.7% and Melenchon 18.8%. So as we remark earlier it’s quite possible that these 4 candidates will be clustered together given that the spread is within the margin of error from previous elections. It’s worth noting that French assets had a strong day yesterday and outperformed other European assets on the back of that Harris poll. The CAC closed +1.48% for its best day since March 1st. That compared to a much smaller +0.22% gain for the Stoxx 600. Before the day ahead we highlight that our Euro equity strategist doesn’t think too much risk premium is priced in. In bonds 10y OATs were also 2.9bps lower at 0.914% compared to a 4.0bps move higher for similar maturity Bunds.

Unfortunately just 3 days prior to Sunday’s vote Paris was home to what is being called a terror attack last night following the fatal shooting of a police officer on the Champs-Elysees. Two others have been injured. President Francois Hollande said that “we are convinced that the leads in the investigation are terror related”. Fillon and Le Pen have cancelled campaign appearances scheduled for today following the attack.

The French Election story was overshadowed a little yesterday by renewed interest in both the Healthcare bill and perhaps more importantly positive sounding rhetoric from Treasury Secretary Mnuchin on tax  reform. Specifically Mnuchin said that “we’re pretty close to being able to bring forward what is going to be major tax reform” regardless of whether or not health care reform gets done. Mnuchin also said that he hoped passing such tax overhaul will not take “till the end of the year”. President Trump separately said at a joint news conference with Italian PM Gentiloni that he hopes that the House can vote on healthcare reform again next week. Those comments seemed to bring some life back to US risk assets. The S&P 500 closed up +0.76% with Banks alone up +1.81%. Industrials also had a strong day which more than likely reflected the comment from Trump that the US was moving one step closer towards imposing tariffs on steel imports. Earnings helped at the margin with the standout being a better than expected quarterly report from American Express which sent shares up nearly 6%.

Credit markets in the US also had a decent day in line with the largely positive sentiment. CDX IG closed 1.7bps tighter for its strongest day in over a month. Meanwhile US Treasury yields inched a little bit higher with 10y yields up another 1.8bps to 2.233%. That means yields are now up some 7bps from Tuesday’s intraday lows. Meanwhile in commodities it was a decent day for base metals with the likes of iron ore (+1.18%), copper (+1.21%), aluminium (+2.10%) and zinc (+3.30%) all higher. The tumble lower for WTI Oil abated somewhat after holding just below the $51/bbl mark. Meanwhile in FX the most  notable move was that for the Yen which weakened -0.42% after BoJ Governor Kuroda said that the BoJ will continue with very accommodative monetary policy and continue with the current pace of QE for some time. He noted that this reflects the still benign inflation backdrop despite an improving economy.

This morning in Japan both the Nikkei (+0.86%) and Topix (+0.98%) are leading gains following those Kuroda comments, while a strengthening in Japan’s manufacturing PMI to 52.8 (from 52.4) is also helping sentiment. Elsewhere in Asia the Hang Seng (+0.30%), Shanghai Comp (+0.07%), Kospi (+0.91%) and ASX (+0.91) are also higher. US equity index futures are also showing modest gains.

Moving on. We have published a Credit Bite this morning which provides a brief overview of floater issuance dynamics in the EUR IG space, showing a breakdown by maturity for corporates and financials separately. The recent surge in supply comes largely on the back of investors starved for floaters amidst concerns about the direction of interest rates. It should be in your inbox, email [email protected] if not.

In terms of other news yesterday, over at the Fed we heard from Governor Powell who said that he favoured some form of reassessment around financial regulation. Meanwhile Dallas Fed President Kaplan reiterated that he thinks the median of three rate hikes this year remains an appropriate baseline. In terms of data, in the US the headline business conditions index in the Philly Fed’s manufacturing survey declined 10.8pts to 22.0 in April. Meanwhile initial jobless claims edged up a small 10k to 244k last week while the conference board’s leading index came in at +0.4% mom for March. In Europe the European Commission’s flash consumer sentiment reading for April was reported as improving 1.4pts to -3.6 and in the process equally the post-financial crisis high set in March 2015.

Before we look at today’s calendar, ahead of the first round of the French elections on Sunday, our equity strategist Sebastian Raedler notes that despite the tightening of the poll numbers among the four front-runners, European equities show little sign of pricing in a meaningful political risk premium. While equities fell 8% ahead the UK referendum last June and 4% ahead of the US elections in November, they have remained close to their recent highs this time around – and now trade around 3% above the fair-value levels suggested by our strategists’ models. European banks have also held up well despite falling bond yields, with their price relative around 5% above the level implied by the German 10-year yield. Our strategists expect only moderate upside for European equities in case of a Macron/Fillon victory in the second round on May 7th (~3%), moderate downside in case of a Mélenchon win (~3%) and significant downside in case of a Le Pen victory (~15%). Contact [email protected] for the full report.

Looking at the day ahead, the focus in the morning session in Europe will almost certainly be the release of the flash April PMIs. Market consensus is for the composite Euro area reading to hold steady at 56.4. Away from that, this morning we will also get UK retail sales data for March. Over in the US this afternoon the flash PMIs will also be released alongside March existing home sales data. Away from the data, the Fed’s Kashkari is due to speak this afternoon while the BoE’s Saunders is also scheduled to speak. Also of note is the start of the spring meetings of the World Bank Group and IMF which will continue into the  weekend. Lagarde and Mnuchin are amongst the scheduled speakers. Earnings wise today its quiet with just 9 S&P 500 companies reporting including Schlumberger and General Electric.

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