French First-Round Election Result: Markets Stage Relief Rally
The decision by a large proportion of the French electorate to vote for Emmanuel Macron, the centrist politician, in the first round of the French election, will be greeted with some relief by the markets. Indeed, the euro jumped to a five-month high this morning, and bond and equity markets rallied. However, Marine Le Pen’s strong showing in second place will keep investors on their toes as they nervously await the outcome of the second round on the 7th May. Socialist candidate Jean-Luc Mélenchon enjoyed a late surge, but it was only enough to push him into fourth place, behind the Conservative candidate, Francois Fillon, who came third.
As we saw in the run-up to the Dutch election, European government bonds and risky assets in Europe are potentially likely to be somewhat jumpy over the next two weeks. Currencies may also experience some volatility—at least in the short term.
More generally, our base case scenario for Europe remains positive. It has been enjoying a gradual recovery, supported by continued growth, low interest rates, an undervalued currency, and a gradual tick-up in consumer and business confidence. Overall, we are biased toward European equities over bonds and within bond markets we prefer credit over government issues. However, the risk the French and German elections pose is that any negative shift in sentiment might help to derail this recovery. Elsewhere, the recently announced UK election, which takes place on the 8th June, will also be watched closely by markets, as they look for signs of a softening in the country’s stance on Brexit.
Against this backdrop, investors may wish to consider volatility-capture strategies. These might include various currency strategies and also index option writing, which can offer limited downside protection (although with limited upside) and be used to generate income.
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