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French Election Takeaways

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French Election Takeaways: Start a free trial of The Sevens Report.

What’s in Today’s Report:

  • French Election Takeaways
  • ISM Manufacturing PMI – The Latest Goldilocks Report
  • Chart: S&P 500 Adjusted for Inflation

U.S. equity futures are tracking European markets lower this morning as ECB President Lagarde pushed back on the idea of another summer rate cut amid resilient labor market data and another stubbornly high inflation reading.

Economically, Eurozone Unemployment held steady at 6.4% vs. (E) 6.5% while the June Core HICP Flash (CPI equivalent) was also unchanged at 2.9% vs. (E) 2.8%.

Looking ahead to today’s session, there are two economic reports to watch: JOLTS (E: 7.9 million) and Motor Vehicle Sales (E: 15.9 million). Investors will be looking for a “cool” but not too-soft JOLTS headline to help reinforce expectations for a September Fed rate cut.

Beyond the economic data, market focus will be on Fed speak this morning as Powell is scheduled to speak at 9:30 a.m. ET. A dovish tone from the Fed chair would be well received and likely influence risk-on money flows while any hawkish surprises have the potential to spark volatility and profit taking in equities.

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French Election: The Good, Bad & Ugly. April 21, 2017

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This Sunday is the first round of voting in the French election, and the event has the potential to move markets depending on which two candidates come in first and second. Yet before getting into the expected results, I want to give some background on how the election works and who is running.

How It Works: The French election almost always has two rounds of voting. The first round, which occurs Sunday, contains all major candidates. If one candidate gets more than 50% of the vote, he or she be-comes president. However, because there are always so many candidates in the first round, this almost never happens (last time was in ’95).

So, the two top finishers from the first vote then face a run off in round two, which will take place two weeks from Sunday. Whoever wins that second vote becomes the French president. So, Sunday’s vote is important because it will determine which two candidates will advance to the second round on May 7.

Who Is Running: There are four candidates you need to be aware of: Macron, Fillon, Le Pen and Mélenchon. From a market standpoint, Macron and Fillon represent the status quo. The market would be fine with either winning the French presidency (i.e. no immediate sell-off).

That cannot be said for Le Pen and Mélenchon. To keep this simple and short, if Le Pen wins, the chances of a “Frexit” (France leaving the EU) go up considerably, as she is a far-right, anti-EU candidate. Conversely, Mélenchon is a far-left socialist. While he would keep France in the EU, his economic and social policies lie uncomfortably close to outright socialism. That clearly would not be good for the French economy, or French stocks.

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Election Results Scenario

The Good: Macron and Fillon Finish 1 & 2. Both are considered reasonably centrist, and the status quo in France would continue. Likely Market Reaction: (Withheld for subscribers. Unlock with a free trial — no credit card needed: 7sReport.com.)

The Bad: Le Pen or Mélenchon Finish 1 or 2. Based on polls, it’s likely that Le Pen will come in first or second in voting on Sunday, while Mélenchon is more of a dark horse. Likely Market Reaction: (Withheld for subscribers. Unlock with a free trial — no credit card needed: 7sReport.com.)

The Ugly: Le Pen and Mélenchon Finish 1 & 2. This is extremely unlikely based on polling, but as 2016 taught us, anything can happen. This is the market’s worst-case scenario, as it would introduce material political and economic risk into the European and global economies. We would view this result as a bearish gamechanger, and would likely exit HEDJ and EUFN longs. Likely Market Reaction: (Withheld for subscribers. Unlock with a free trial — no credit card needed: 7sReport.com.)

Bottom Line: From a macro standpoint, and for our position in HEDJ specifically, anything other than the “Ugly” scenario shouldn’t pressure markets materially. And while the “Bad” scenario will extend the possibility of political risk in France, all the indicators say that either Macron or Fillon will be the next French president—and that will only reinforce our bullish Europe thesis.

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