And France have a new President. Favourite Macron got almost two-thirds of the votes in what had been expected to be a pretty straightforward race. Polls got it right. Let’s face it, heading into this weekend’s round two of French Presidential elections, Le Pen was not expected to be a real contest in Sunday’s race but put up a worthy fight as there hadn’t been such a strong showing by a French far-right political party since the end of the second world war. Newly elect President is expected to announce a prime minister as well as a new cabinet of ministers between today and tomorrow.
On the news, between Sunday evening and Monday morning, risk-on mode was prevalent. European equity future were pointing towards a positive open, credit markets too were poised for a strong start. The Euro strengthened and core European government bonds bore a large chunk of the initial flurry of those investors willing to switch out of risk-free assets to those assets which were more likely to keep on rallying on the news.
However, the euphoria was extremely short-lived. Markets had paired almost all their gains by 10 am and were trading in the red for most of yesterday’s trading session. Equity markets retreated, the German Bund was better bid, and the euro weakened from 1.102 to an intra-day low of 1.093 against the US Dollar. But credit proved its resilience yet again. Spreads in the single currency region tightened whilst high yield bonds and deeply subordinated bank debt remained well in demand.
Clearly, in the run-up to Sunday’s election and round 1 two weeks prior to that, markets had got ahead of themselves, rightly and justifiably so, if one were to consider what was at stake in these elections; either a pro-Europe Macron or Le Pen who wanted France out of Europe at all costs. So the fact that profit taking took place was expected. The largest moves came after the first round of elections in all fairness but markets have, over the past couple of weeks, been gradually positioning themselves and embracing for a Macron victory, as had been widely expected by the polls.
Valuations became toppish and given the fact that investors were sitting on large gains was a good excuse to take profits home and raise some cash. Now that the French elections are out of the way, markets can take a bit of a breather, for the time being. But that doesn’t meant that event risk in Europe is out of the way, nor does it mean that the ECB’s stance on QE and its accommodative stance is going to change sharply simply because France are going to remain within the EU. German elections are due to take place on 22 October 2017 and whether Angela Merkel embarks on another term in office is yet to be known whilst the situation in Italy is anything but rosy.
What is certain is that the ECB’s MPC meetings coupled with it strategy on QE and the way it communicates any sort of information to the market via its press releases is expected to take centre stage as the possible exit strategy, or rather additional reductions in the CSPP by the ECB is sure to be at the forefront of the investment manager’s asset allocation decision-making in the second half of 2017.
Disclaimer: This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt.The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.