Quelle Surprise! Macron Wins, Back to Fundamentals

Monday May 8: Five things the markets are talking about

In yesterday’s second round French Presidential vote, Emmanuel Macron convincingly beat National Front leader Marine Le Pen (66% vs. 34%).

Market reaction has been relatively muted with investors now turning their focus to global growth and corporate earnings after last week’s robust U.S jobs report and the Fed’s comments encouraging optimism in their economy.

Regarding Macron, the market will be looking ahead to next month’s French Parliamentary elections and will also be questioning his ability to govern a divided populace.

This week, the Bank of England (BoE) meets Thursday and will issue its Quarterly Inflation Report. For the rest of Europe, most economic data releases center around industrial production and merchandise trade balances.

In Asia, China begins releasing last months merchandise trade balance and consumer and producer price indexes.

In the U.S, the focus will be on Friday’s inflations expectations and retail sales.

1. Global equities mixed reaction

Overnight in Japan, stocks hit 17-month highs as the yen (¥112.64) stayed weak after Macron’s win. The Nikkei share average soared +2.3%, while the broader Topix rallied +2.2%, the most since January 4.

In Hong Kong, the market also breather a sigh of relief after Macron’s victory, the Hang Seng index ended up +0.4%, while the China Enterprises Index gained +0.6%.

In China, stocks extended their fall with the benchmark Shanghai Composite Index ending at its lowest close since mid-October, as investor fears over tightening regulations deepened. The blue-chip CSI300 index fell -0.7%, while the Shanghai Composite Index lost -0.8%.

In Europe, stocks are trading largely lower on profit taking following Macron’s expected victory. The CAC leads the decliners down -0.6%, with the FTSE a tad higher.

In the U.S, stocks are set to open small down (-0.1%).

Indices: Stoxx50 -0.5% at 3642, FTSE flat at 7297, DAX -0.3% at 12676, CAC-40 -0.7% at 5393, IBEX-35 -0.4% at 11096, FTSE MIB -0.5% at 21376, SMI -0.3% at 8994, S&P 500 Futures 0%

2. Oil prices rise on hope of production cuts, gold stronger

Oil prices are better bid ahead of the U.S open after the Saudi energy minister said an OPEC-led production cut scheduled to end in June would likely be extended to cover all this year, or even into 2018. However, the possibility of another increase in U.S drilling is capping gains.

Brent crude futures are trading at +$49.48 per barrel, up +38c, or +0.75% from Friday’s close. U.S West Texas Intermediate (WTI) crude futures are at +$46.52 per barrel, up +30c, or +0.7%.

Note: A decision on whether to continue the production cuts is expected at OPEC’s next official meeting on May 25.

U.S drilling continued to pick up last week, with the rig count climbing by +6 to 703.

Gold has climbed +0.2% to +$1,230.49 an ounce, mostly on bargain hunting. The yellow metal last week saw its biggest weekly percentage fall since November, ending -3.2% lower.

Note: Prices have fallen over -5% since hitting a five-month high of +$1,295.42 in mid-April.

3. Global yields see little movement

Macron’s convincing win yesterday removes a big part of political risk in Europe, however, contained inflation expectations are expected to prevent a sell-off in Euro government bonds, particularly Bunds. German 10’s are trading at +0.41%.

It’s no surprise to see French and riskier eurozone assets slightly weaker on profit taking following Macron’s victory – both had rallied in the run up to the vote. French government bonds (OAT’s) have backed up +1 bps to +0.85%.

Elsewhere, the yield on 10-year Treasury notes are flat at +2.35%, while yields on Aussie debt have climbed +3 bps to +2.67%, extending their two-week slide in prices.

4. Euro gains are ‘short-lived’

During the Asia session the markets initial reaction to Macron’s Presidential win was “risk-on,” this pushed the EUR to test well above the psychological €1.10 handle to €1.1042, its highest reading since early November as the political uncertainties in the eurozone decreased.

However, ahead of the U.S open the single unit has given up those gains on some aggressive profit taking, currently trading €1.0937.

With commodity prices also bouncing back on the potential of an OPEC cut in oil production is helping the AUD (A$0.7408) hold steady ahead of tonight’s Aussie retail sales number. The yen is little changed at ¥112.68, near the lowest level in seven-weeks, while sterling (£1.2962) is still having difficulties making an assault on the £1.3000 handle.

5. German Manufacturing Orders Rise

Orders for Germany’s important manufacturing sector rose by more than expected in March, +1.0% vs. +0.7%e m/m. The data adds to the evidence that growth in Europe’s largest economy picked up speed in Q1.

Digging deeper, the increase in orders was led by strong foreign demand for German manufacturing goods, particularly from other eurozone countries – foreign orders jumped +4.8% in March from a month earlier. Domestic orders, however, dropped by -3.8%.

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