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Investors focus on challenge for Macron to guide euro and shares

Relief was fleeting for French equities and the euro on Monday as investors examined the challenge facing Emmanuel Macron as the country’s incoming president.

Analysts are looking at several factors to determine the direction for markets, including the outcome of next month’s National Assembly elections, which will shape the new president’s ability to govern; eurozone economic strength; European Central Bank moves towards tapering and Federal Reserve rates policy.


The euro responded to the Macron victory by rising briefly above $1.10 for the first time in six months, before surrendering early gains. Given the euro’s rally of 2.5 per cent in the previous two weeks and reduction in bets against the currency as measured by futures positioning, the market was priced for the centrist candidate prevailing over Marine Le Pen before selling on the result.

The question now is whether the euro regains momentum.

The euro can return to the $1.10 level, said Ulrich Leuchtmann, head of FX Research, but to get there required “a better reason”. Mr Macron’s vision of a fiscal union should make monetary union more stable, but though that might sound attractive for forex traders, “they provide little reason to enter into euro-longs”, he added.

Lee Hardman, currency analyst at MUFG, said he expected the euro to be driven by economic fundamentals for the rest of 2017, but ING analysts said steering clear of political risk “should be worth something” for the euro and expect a test of $1.12 in the short term.


The yield relationship between French and German government debt benchmarks has been a closely watched barometer of political risk in recent months. After blowing out to 0.80 percentage points over the German Bund in February, France’s benchmark yield has subsequently cut that premium in half.

In trading on Monday, the 10-year French government bond was down 4 basis points to 0.73 per cent, while the equivalent German Bund was 3bp lower at 0.39 per cent, according to Reuters. The yield relationship was around 0.20 percentage points in mid-2016.

Francois Cabau, an economist at Barclays, said Mr Macron’s victory was “an important step in ascertaining the policy direction for France” but “not sufficient to gain a complete picture, given the lack of clarity on the outcome of the forthcoming parliamentary elections” where “the likelihood of a hung parliament is high”.

Bond investors will also focus on the European Central Bank’s next move towards year-end. “Most analysts on the sell side expect a tapering from €60bn per month to zero by mid-next year,” said Kenneth Orchard, portfolio manager at T Rowe Price.

“We believe the reduction in the ECB purchases will be much more gradual, with a possibility of the quantitative easing program lasting into 2019. In that case, we may see peripheral spreads staying low for longer, providing an opportunity to re-enter a long periphery position if political risks do not materialise.”


After the CAC 40 in Paris briefly touched its highest level since 2008 in opening trade on Monday, the market sagged led by banks.

Jean Boivin, head of economic and markets research, BlackRock Investment Institute, said the French result offered comfort on the broader political prospects because it “confirms our view that markets until recently had overstated European political risks”.

While the retreat of those risks has boosted French and European stocks in recent weeks, some argue the ongoing details of the French political landscape are far less important than questions about the strength of economic growth and predictions for corporate profits.

Joshi Dhaval, strategist for BCA Research, said “now the potential “tail risk” impact of France has been removed, as a driver of the world markets the French legislative election is not going to be that important.”

European stocks have risen about a fifth in value over the past year, with the CAC 40 index 25 per cent higher, and valuations require profit growth. “Europe doesn’t look cheap” according to Karen Olney, head of thematic equity strategy for UBS, who calculates European equities trade on 15.4 times estimate of prospective earnings, compared with the 14.1 long-term average multiple.

Steven Andrew, macro fund manager at M&G Investments, anticipates “significant upside surprises to market expectations for company earnings and sales during the opening period of 2017″, which, he said, “suggests that euro area equities, currently attractively priced, could deliver substantial investment returns in the period ahead”.

The pace of economic growth has remained consistent in Europe for the past two years, but some also question the outlook for stocks when the steady and moderate expansion is one of the world’s fastest.

Trevor Greetham, head of multi asset at Royal London Asset Management, said “challenges remain during the volatile summer months, with stock prices likely to dip on heightened geopolitical stress or signs that global growth is coming off the boil”.