After some sharp moves on the European open yesterday, this morning has seen a sense of calm restored as markets continue to digest the recent political events in France. The FTSE 100 has added to Monday’s gains and has now recovered most of the losses seen last week following the announcement of a snap general election in the UK. In an interesting divergence which reveals a shift in driving forces on the markets, the pound remains well supported and not far from 2017 highs seen last week against the US dollar with the inverse correlation between these two subsiding somewhat in recent trade.
Records tumble as bulls charge back
European benchmarks broke several records during Monday’s session with the German DAX rising more than 3% to post an all-time high, whilst the leading French index had its largest daily rise in 5 years. Whilst stocks on the continent were the best performing, the feel-good factor of a seemingly inevitable Macron presidency saw strong gains around the globe with Wall Street joining in the rally as the day wore on.
Up, up and away?
The question now is obviously what’s next and if these gains are sustainable. It seems hard to believe that there was a discount of this size priced into the market for the possibility that Macron, who is widely seen as the most market-friendly of all candidates, would advance to the second round, and with Le Pen also progressing it was still not the ideal outcome.
The moves appear more based on the avoidance of a worst-case scenario (Mélenchon vs Le Pen) rather than the achievement of the best case (Macron vs Fillon). The symbolic gesture of Le Pen standing down from her role as the leader of the Front National is clearly a desperate attempt to attract more moderate voters as she is well aware that her chances of victory are slim. The moves in stocks have held so far and in the absence of any reversal signals the path of least resistance remains higher and whilst there are many reasons to doubt its sustainability of the rally, at present the bulls are firmly in control of the tape.