Independent centrist Emmanuel Macron won the first round of voting Sunday, edging out the right-wing nationalist Marine Le Pen. France’s election on Sunday served to highlight the fatigue felt by voters, who knocked off leftist Jean-Luc Mélenchon and conservative François Fillon from the running, in favor of relative political outsiders that have distanced themselves from the traditional political landscape. After these results, investors began pouring money into stocks and the Euro early Monday as renewed confidence by the election results served to quell concerns about the future of the Eurozone.
As a result, U.S. S&P 500 futures appreciated 1.1%, while the Dow futures picked up a modest 200 points. Though these changes don’t necessarily reflect moves following the opening bell, the swarm of optimism carried onto the opening of European markets. The Euro Stoxx 50 index, a composite index that covers blue-chip stocks within the eurozone, climbed 3.9% alongside a jump in bank shares which saw the results of the elections reinforced the assumption of continued stability within the Eurozone. Likewise, futures on the VSTOXX, the volatility index which measures European stocks, fell 15% amidst the massive buy in European equities. As John Brady, managing director at futures brokerage R.J. O’Brien stated, “we’re seeing broad-based interest, not just in large-cap stocks, but also in small-cap stocks,” later adding that the surge in European stocks and futures stands testament to the pro-Euro sentiment felt by many traders who intentionally buttressed their equity portfolios to protect against a surprise in Sunday’s French election.
Though polls largely pointed to a Macron win, investors feared the possibility of a nationalist candidate who could potentially break away from the EU as did Britain in the now notorious Brexit decision. As it stands, France’s CAC 40 index surged 4.6% on Monday trading, which has placed it on track for closing at its highest since 2015. This appreciation in the French markets was subsequently followed by rallies in the German benchmark DAX index, which generously added 3.1%. In light of pro-Euro trading, the dollar weakened Monday in conjugation with a strengthening euro, which saw an appreciation of 1.2% at $1.0856.
In addition, European banks which had placed massive hedges to curb a potential political upset, rose a staggering 6.8%, placing the sector on track for one of their best trading days since the 2008 crisis. Shares of France’s Société Générale and Crédit Agricole were up close to 10%, followed by Italian lender UniCredit which saw a substantial 11% rise in their stock price. According to Christopher Dyer, director of global equity at Eaton Vance,”European banks should be prime beneficiaries of policies that are pro-growth, pro-stimulus and not protectionist in nature,” police many see with the favorite, Emmanuel Macron, who had previously worked as a banker years prior. Germany’s Ifo institute, an economic researcher platform reported Monday that the German business climate index rose to a multi-year high in April, exhibiting signs of a revitalized economy with the potential for increased growth in the near future. As Mr. Dyer noted, “it gives a lot of confidence to the market that we have a good feel for the outlook in France and to a large extent puts to bed the Frexit prospect,” later adding that he didn’t think that we’re debating the integrity of the EU or the euro as of today.
Nonetheless, as equities and the euro rose, traditional safe bets and commodities fell as renewed optimism led to massive sell-offs in investor hedges. Gold fell 1.4% to $1,270.80 an ounce, government bonds diminished in price, while the yield on the 10-year U.S. Treasury rose to 2.296% from 2.234% on Friday. But the French-lift didn’t end there as Italy’s FTSE MIB stock index rose 4% and Spain’s IBEX gained 3.4%, while the Shanghai Composite Index fell 1.4% amid decreased risk within the market.
Though the sudden surge in markets following the election has proved quite the boom for European markets during a time of uncertainty, I wouldn’t count my chickens just yet. Given the rather shaky nature of the recent political climate throughout major world powers, I wouldn’t be surprised if Le Pen stages a surprising upset and comes back to win the majority over her centrist opponent.