Monday, April 24, 2017

Vive la République?

Fred Imbert of CNBC reports, Dow rises 200 points as French election results spark rally; Nasdaq hits all-time high:
U.S. equities soared on Monday as investors cheered the results of the first round in the French presidential election.

The Dow Jones industrial average soared more than 200 points, with Goldman Sachs and Caterpillar contributing the most gains. The S&P 500 popped about 1 percent, with financials surging more than 2 percent to lead advancers. The Nasdaq composite hit a new all-time intraday high, rising more than 1 percent.

Early results from the French election showed Emmanuel Macron and Marine Le Pen advancing to a presidential runoff. Far-right candidate Le Pen and centrist Macron were largely expected to pull ahead in the first round of the French contest. The two had led most of the polls leading up to the election.

Le Pen and Macron will face off again on May 7. Most polls show Macron easily beating Le Pen in the second round.

"While I don't believe the US stock market was worried whatsoever about the French election in terms of its pricing and recent action ... it's clear that we dodged a bullet with the high likelihood of a Macron Presidency," said Peter Boockvar, chief market analyst at The Lindsey Group, in a note.

European stock markets skyrocketed across the board, with the pan-European Stoxx 600 index popping more than 2 percent. The French CAC 40 rose more than 4 percent to hit a nine-year high.

The euro also rose sharply against most major currencies. The common currency briefly broke above $1.09 against the U.S. dollar and last traded around 1.2 percent higher at $1.0856.

Macron "is the prohibitive favorite to win the presidency in two weeks thereby leaving far too little time for his challenger to make up any significant ground," said Jeremy Klein, chief market strategist at FBN Securities. "Although the outcome hardly qualifies as a surprise, investors breathed a huge sigh of relief."

U.S. stock futures rose more than 1 percent in the premarket.

That said, investors are also staring down the barrel of a potential government shutdown. Government funding will end Friday unless Congress can agree on at least a temporary funding resolution.

The last time the government shut down was Oct. 1 through 16, 2013. During that time, the S&P 500 rose about 1.6, but not without some volatility. The index moved more than 1 percent three times in that time period.

"There's a lot of anxiety over a government shutdown. One would hope we learned from the last time we went through this," said Bruce McCain, chief investment strategist at Key Private Bank.

The possibility of a shutdown comes as President Donald Trump is about to conclude his first 100 days in office. On Friday, Trump promised to make an announcement about much-anticipated tax reform this week, but it was not immediately clear how much he would reveal or what form it would take.

Expectations of tax reform have been one of the pillars of the stock market's postelection.
Early Monday morning, investors are cheering Macron's first round victory. Bank stocks are soaring and Deutsche Bank spiked by 10%. French bonds and stocks and the euro all rallied after the French election.

It now looks like Emmanuel Macron is a shoo-in for the upcoming May 7th vote based on the first round results and second round projections (click on image):


Barring a stunning upset, it doesn't seem likely that Marie Le Pen will pull off a Donald Trump or Brexit moment in France, which is why markets are rallying so much after the first round of French elections.

But while investors are breathing a sigh of relief, nothing has really changed in terms of the global economy and markets. The next economic shoe is dropping in the US and that should be the main focus going forward.

Moreover, the truth is the reflation trade is doomed and Europe faces big challenges like Greece and Italy and low birthrates in southern Europe after years of economic hardship.

In short, even though risks of Frexit have dissipated, nothing has changed when it comes to the big deflation versus inflation theme I keep obsessing over when looking at what ails the world economy.

Also, I have to laugh when I read markets got what they anticipated. Obviously not or else you wouldn't have seen such a powerful relief rally across risks assets and the euro.

And while I wouldn't  worry too much of legendary investors warning of why we should all be very afraid of markets, I still maintain tough times lie ahead:
If the US dollar rebounds in the second half of the year, we can get that dollar crisis I warned of late last year, but it seems like the Trump Administration is well aware of this risk and trying to limit the odds of this outcome, talking down the dollar lately.

We shall see how it plays out but be careful reading too much into the US dollar's recent selloff, in my opinion, it's a temporary move due to bullish speculative positioning at the start of the year.

As far as stocks are concerned, given my views on the reflation trade being doomed, I would be actively shorting emerging markets (EEM), Chinese (FXI), Industrials (XLI), Metal & Mining (XME), Energy (XLE)  and Financial (XLF) shares on any strength here (book your profits while you still can). The only sector I trade, and it's very volatile, is biotech (XBI) but technology (XLK) is also doing well, for now.

Still, early in the second quarter, high beta stocks are losing momentum and selling off. I still maintain that if you want to sleep well, buy US long bonds (TLT) and thank me later this year. In this deflationary environment, bonds remain the ultimate diversifier.
I would also be booking profits on Euro stocks (FEZ) as they soar today to a new 52-week high and start shorting them as we move into May 7th (click on images):



Be careful here, don't get caught up in all the hoopla of the French elections, there are much bigger problems to contend with all over the world, especially in Europe.

Take advantage of any relief rally to lighten up on cyclical sectors and add to defensive sectors and US long bonds (TLT). Don't buy the nonsense that European stocks and emerging markets offer attractive valuations relative to US stocks. They are relatively cheap for a good reason, there is no better, more diversified, more liquid stock market in the world than the US stock market, and when the world is in trouble, everyone seeks refuge in US markets. Period.

Below, the results of round one of the French election are in – and the markets are taking notice. And Laurence Haim, spokeswoman for the Emmanuel Macron campaign, speaks with CNBC's Michelle Caruso-Cabrera about the second part of the French election as Macron faces off against Marine Le Pen.

I also embedded an older (2014) clip where BBC's Newsnight's Robert Peston spoke with then French Economy Minister Emmanuel Macron about his new strategy to restore the French economy and stabilize the Eurozone.

If he wins, Emmanuel Macron and Europe's other leaders have serious issues to contend with, least of which is the slowdown in the US economy and ongoing debt crises in Southern Europe.

Update: Roland Lescure, the former CIO of the Caisse, spoke with CBC's Anne-Marie Dussault on the French elections. You can watch this interview here (in French).



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