Weekly Markets Commentary — April 24, 2017
David Joy – Chief Market Strategist, Ameriprise Financial
A sigh of relief follows first-round French election
Investors worldwide breathed a sigh of relief following the first round of the French presidential election. Once it became clear on Sunday that at least one of the moderate centrist candidates would make it to the second round on May 7, in this case Emmanuel Macron, the euro immediately spiked, climbing from 1.07 to 1.09. In midday trading in France on Monday, the CAC 40 index was higher by a whopping 4.5 percent. The EuroStoxx 50 index was also up almost 4.0 percent. And futures in the U.S. were higher by 1.0 percent.
The election results assured that the worst-case scenario of a final election between the two candidates who wanted France to exit the Eurozone would not happen. And voter polls, which in this case were relatively accurate for once, have consistently shown Mr. Macron handily beating Marine Le Pen, the other surviving candidate. The latest polls show Macron ahead of Le Pen by a 62-38 margin. Of course, the final election is not a foregone conclusion, but it does appear that France is now far more likely to pursue a policy of stronger ties to the Eurozone and European Union, not a more nationalist policy of less engagement, and indeed, Frexit.
Bond yields moved sharply around the globe in response as well, as safe-haven trades were reversed. In midday trading, the yield on the French ten-year note was lower by 8 basis points, while in Germany it was higher by the same amount. In the peripheral countries of the Eurozone the relief was tangible as well. Greek yields declined 17 basis points, in Portugal yields fell by 10, and in Italy by 5. In the U.S., the ten-year yield was higher by 6 basis points to 2.31 percent. Gold was down $15 an ounce to 1,270. The election results in France, in which Macron captured 23.7 percent of the vote and Ms. Le pen received 21.5 percent, continue the recent string of more moderate election outcomes witnessed in the Netherlands and in regional elections in Germany, and further slows the populist momentum that was witnessed previously in the UK, U.S., and Italy.
With this hurdle out of the way, markets can focus more intently on fundamental developments. That is not to say that politics and geopolitics are no longer concerns. Far from it. But this was the most immediate threat to risk appetites, and the most immediate threat to economic recovery in both the Eurozone and beyond. Just last week the International Monetary Fund raised its forecast for global growth to 3.5 percent, but that forecast would have been subject to immediate revision had the election turned out differently.
In the U.S., it is a big week for equities, which have languished for the past month. First quarter earnings season is off to a good start. But this week the pace of reports accelerates sharply and will help determine if stocks can regain their momentum. It is also an interesting week for the economic calendar. The first estimate of first quarter GDP is scheduled for release on Friday, and is expected to be relatively soft. The Bloomberg consensus is now down to 1.1 percent. If so, it will prolong the debate between the stronger so-called soft data and the weaker hard data, despite the report itself being somewhat dated, four weeks into the new quarter.
Last week it was reported that existing home sales jumped in March, and this week we’ll see if that enthusiasm extended to new homes. We will also get the March report on durable goods orders and April consumer confidence and sentiment. We will have to wait until next week to hear from the Federal Reserve and get the all-important April jobs report. Fed officials appear to be sticking to their expectation that three rate hikes will be appropriate this year, although no change is expected at the May 3 meeting. Vice Chairman Stanley Fischer reiterated that view last week on CNBC.
As for the labor market, the Bloomberg consensus anticipates the addition of 180,000 new non-farm jobs in April, which would render the weak March reading an aberration. Lastly, the Trump administration has promised some statement regarding tax reform. While no detailed outline of an official proposal is expected, even a general statement about the direction and scope of any proposal could be welcome news to investors. Of course, the government first needs to avoid being shut down on Friday, but there appears to be little appetite in Congress to allow that to happen.