The Daily Prophet: 'Trump Bump' Gives Way to Macron Mania
Vive les markets! It's a sign of the political times when a first-round win by a former Socialist in the French elections is enough to make global investors -- at least for one day -- forget about the seeming inability of the Trump administration to get its plan to boost growth in the world's largest economy out of the starting gate.
The MSCI All-Country World Index jumped to a new record high, surging 1.56 percent in its biggest gain since June 29. Although the cynics might say that the relatively wide margin of victory by the French independent candidate Emmanuel Macron just allowed cautious investors to unwind hedges, propelling the broader market, the optimists are saying that less polarizing political figures will allow Europe's economy to blossom and finally add to global growth.
The region’s largest economy started off the week with a surge in business confidence. That came after data Friday showed euro-area momentum accelerated to its fastest pace in six years in April. Macron "tries to represent change and yet he tries to represent moderation and how that translates into economic policy remains to be seen," Larry Hatheway, the chief economist at GAM Holding AG in London, said in an interview on Bloomberg TV. "Europe is likely to demonstrate better earnings potential over the course of the next one to two years than the United States."
THE EURO LIVES TO FIGHT ANOTHER DAY
Euro traders also were ebullient, with the Bloomberg Euro Index surging 1.38 percent in its biggest gain since March 2016. Against the dollar, Europe's shared currency strengthened to $1.0870, and Hatheway said there's potential for it to rally to $1.15 on the back of the region's strengthening economy. At the same time, the gap between German and French bond yields narrowed. Macron's margin of victory was wide enough to allow markets to dismiss concerns that he may not have the ability to translate support into effective votes, according to the strategists at Morgan Stanley. Opinion polls conducted for the second round of voting slated for May 7 show Macron defeating the euroskeptic Marine Le Pen by 62 percent to 38 percent, they note. It's not all good news for the euro zone: Fitch reduced Italy’s sovereign credit rating to BBB from BBB+ on Friday.
EVEN THE RISKIEST MARKETS GET A BOOST
The exuberance even extended to emerging markets, where the MSCI EM Currency Index jumped to its highest level since May 2015. The gains were led by the Turkish lira, Hungarian forint and Polish zloty. "Risk on should be the only game in town and conditions for an emphasized risk rally are not insignificant," the currency strategists at Morgan Stanley wrote in a research note. They note that emerging-market mutual and exchange-traded funds saw almost $20 billion of net inflows between mid-March and mid-April, with both bonds and equities benefiting. "We see no reason to stand in the way of this EM bounce, as the combination of receding global political risks and soft U.S. data are likely to encourage a continued appetite for EM and other risk assets,'' the strategist at Brown Brothers Harriman wrote in a research note.
BONDS TAKE A BEATING
As is typical in "risk on" rallies, haven investments got hit hard. U.S. Treasuries were perhaps the most visible victim, as traders started to once again price in multiple interest-rate increases by the Federal Reserve. The thinking here is that if there's less of a chance that the euro breaks up due to a Le Pen victory in the French elections, then there's less of a chance that global growth slows. The odds of a Fed rate increase in June shot up to 66.5 percent from 50.2 percent on Friday, according to data compiled by Bloomberg. "Whereas the bond market was worried late last year the Fed was behind the curve, mostly likely it is the market that is behind the Fed's curve right now," Jim Vogel, a strategist at FTN Financial, wrote in a research note.
NOT SO PRECIOUS METALS
Gold futures fell to the lowest in almost two weeks and bullion mining stocks sank as investors favored riskier assets. The metal slipped as much as 1.8 percent in New York and a Bloomberg Intelligence gauge of gold miners plunged as much as 2.7 percent. Hedge funds had recently boosted bullish gold bets and investors bought bullion through exchange-traded funds amid demand for a haven amid concerns over North Korea and other geopolitical risks, according to Bloomberg News' David Stringer, Ranjeetha Pakiam and Kevin Crowley. “Gold has benefited from geopolitical tensions this year and the market was pricing in a nasty surprise in France,” said Bernard Dahdah, an analyst at Natixis SA in London. “That has subsided with the fact that there won’t be two extreme candidates in the second round.”
This week's U.S. Treasury bond auctions may get more attention than usual for a couple of reasons. First, the $88 billion of two-, five- and seven-year notes to be sold starting tomorrow will provide a good test of whether the recent rally in bonds since March was just the result of a short-squeeze that forced bears to cover their bets or a real referendum on the weakness of the economy and capitulation on the idea that the Trump administration will be able to engineer much growth. Second, there's the potential for a partial government shutdown on Saturday when funding runs out if the Republicans and Democrats can't agree on a budget. There is an out for both sides -- a short-term spending plan that would provide another week or so for negotiations after the deadline early Saturday.
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