Markets react bullishly to French election first round results

Apr 25th, 2017 | By | Category: ETF and Index News

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French equity markets reacted bullishly to the first round of Presidential elections with the Lyxor CAC 40 UCITS ETF (Euronext: CAC) gaining 4.2% the day after the results were announced. With polls indicating Macron, the pro-Europe centre-left candidate, has a 20-point lead over leader of the far-right National Front Le Pen in the two-way run-off, France looks set to have a pro-business, moderate president next month.

French equities, fixed income and the Euro have rallied on the back of the first round election result.

The pair will now face off in the final round on 7 May.

Jenifer Spivey, vice president, corporate communications at asset manager and ETF provider Pimco, said: “While the result was expected, the prospect of a “left tail” outcome in which Le Pen significantly outperformed expectations had been a clear overhang on European assets. As one would expect, markets are now trading in clear risk-on mode. Sectors that had been particularly weighed down by the risk of a strong Le Pen performance, such as European equities and financials, have seen a sharp relief rally – something we’d expect to play out further in coming weeks.”

 

The election result also impacted favourably on ETFs tracking French government bonds with the iShares France Govt Bond UCITS ETF (LON: IFRB) rising 0.8% on Monday. John Wyn-Evans, head of investment strategy at Investec Wealth & Investment, commented: “There are also some big moves in the sovereign bond market, with a strong bid for French bonds and for those of the riskier peripheral countries while safe havens sell off. There has been a 16 basis point reduction in the spread between the French and German 10-year bonds.”

The euro also saw strength, with the ETFS Long EUR Short USD (LON: EURP) up 1.5% on the day following the election result.

Many market commentators were bullish about the longer-term prospects of European assets. Bill Street, head of investments for EMEA at State Street Global Advisors, the company behind the SPDR ETFs line-up, said: “Le Pen will almost certainly be defeated in two weeks’ time, and equities can continue to rally going into 2018 as non-existential risks can be absorbed. The global economy might not be booming, but growth is returning. Some of the moderate risk premia in the bond market will also disappear, and this would most likely benefit lower-quality assets the most.”

Wyn-Evans stated: “Economic data in Europe continues to have positive momentum. This continues to be backed by loose monetary policy and less stringent fiscal policy, and we don’t believe that stimulus will be withdrawn prematurely, mainly because the consequences of deflation are a lot worse than those of inflation in the current environment. Europe’s stock market is calculated to be one of the most operationally geared into continued recovery and (on the long view) has a lot of catching up to do.”

However, some market watchers struck a more cautious tone, with Street adding: “There could be more surprises to come in an event-packed European calendar, however – UK elections, Greek debt talks, German elections, and the possibility of Italian elections in the not-so-distant future are enough to keep markets busy. Downside protection strategies are crucial given that the environment is likely to remain volatile,” added Street.

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