French elections – what now?

Markets have run away with themselves following the French election first round, but what is the outlook for markets over the next few weeks?

Paris panorama
Source: Bloomberg

Call it an unwinding of hedges put in before the election, call it a relief rally, or call it the working out of strong seasonality patterns. Whatever is used to describe the bounce across all stock markets this morning, it has certainly put the gloss back on risk appetite.

The reaction seems a bit strong for a result that chimed with what everyone was apparently expecting anyway. But we had seen markets suffer steady losses over the past month, usually April is a good month, with the S&P 500, FTSE 100 and DAX all historically strong. But the recent rally had begun to look jaded, with Donald Trump failing to deliver, and geopolitical concerns on the rise. Emmanuel Macron’s win doesn’t change anything outside France, and with a second round still to be run we are not out of the woods yet.

But the polls put him well ahead of rival Marine Le Pen for round two, and French pollsters have a good record behind them. Trump appears to be promising some kind of development on tax reform this week, which could provide more bullish momentum. US yields are picking up again, after a period of weakness, which should help the US banking sector, which itself has been hit hard over the past month.

Positioning has become more bearish in the last month, although it has yet to hit the highs of late October last year. This rally is not over yet, it seems, with the chance of one more push higher now very real, before markets hit the summer period, which, if not particularly negative, doesn’t usually see a strong bullish pattern.

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