With the outcome of the French election going according to the polls, a huge element of risk that had been hanging over global markets has been removed. Macron will now become the youngest ever President of France and the pro EU centrist is more in favour of working to build a stronger EU and working towards a fair Brexit deal for all.
Stocks across Europe rallied on the positivity and the removal of geopolitical downside risk. The VIX also known as the fear index, is an index that tracks the volatility (or lack thereof) in stocks, it has now fallen to its lowest levels since 1993. I find this somewhat concerning or at least an indication of growing complacency across markets but stocks powered ahead. The French CAC pressed to 9 year highs while the Stoxx 600, a pan European index, rose over .7%.
It was not such a positive day for the Euro however, the single currency initially rallied late Sunday and into Monday morning but a stronger USD saw EURUSD drop over 1% from 6 month highs having rallied back above the key 1.1000 area before running into selling. So much of the result was already priced into the Euro as polls suggested well over a 60% majority for Macron so it was a case of ‘buy the rumor sell the news’ once markets had all the details. The fact is the Euro was up over 3% from just before the first election and 4.5% since the beginning of April.
EURGBP also tracked lower, testing support at .8423 which marks May lows, below that is further support at .8405 while the major area of support confluence comes in just above the .8300 area. Attention for now will turn to the ECB and their QE program.
It wasn’t just a weaker Euro in trading yesterday, the USD had one of its best days in 2017 with the USD index up over .75% on the day. Friday’s labour market report saw a mixed reaction despite a good headline figure. Weaker wage growth was a concern but with several Fed speakers on tap and June still looking very much like a live meeting, the greenback had plenty of room to rally back higher, currently a 78% chance of a rate hike in June according to rate futures.
In line with the risk on environment, the JPY found itself under pressure. USDJPY rallying above 113.00 with 114 no firmly in the dollars sites. GBPUSD also faced selling as the USD was dominant across the board, 1.2987 now acts as resistance below the psychological 1.3000 level, thus far any advance has run into selling ahead of here and while we have yet to see the rally reverse just yet.
GBP remains vulnerable should it continue to fail to press higher especially with any Brexit related headline carrying risk for the pound. Support to the downside around 1.2770 provides the bull bear line for now. US indices are also interesting at these levels, they continue to trade around record highs but continue to fail top press higher, yet at the same time we have not seen a decline greater than 1% – if anything stocks need another catalyst.
The data calendar is light today, with nothing major attracting any great attention so we’ll be looking towards Fed speakers in the afternoon and broader risk sentiment throughout the day.