- London, 09:30, April 24th

There is a clear risk-on tone to markets on Monday morning (April 24th) as stocks rally, the euro has jumped, the yen is down and gold is off by around $15 or so.

Macron’s victory in the first round of France’s presidential election was probably the best result possible for equities and the euro. The market nightmare situation – a Le Pen v Melenchon runoff – has been avoided.

MKT-5008_FrenchElections_blogimages-001 (1)

France’s CAC 40 index of leading shares is storming ahead rising 4%, or around 200 points, as the result suggests there will be no major outflows of capital from France.

The expected relief rally in French banking stocks has spread across the entire European banking sector, helping the main indices post handsome gains.

Banking stocks are flying on Monday morning after ex-banker Emmanuel Macron won the first round of the French presidential race and is a shoo-in to defeat Marine Le Pen on May 7th. Banks are doing well because there is now no major risk of significant outflows from the European banking system as investors no longer worry about the future of the euro. Until the Italian elections that is.

The Euro Stoxx Banks Index is more than 5% higher this morning and looks on course for its best daily gain in a year. The index is now trading at its best level since December 2015.

There’s a huge sigh of relief in the French banking sector - Societe Generale, Credit Agricole and BNP Paribas are up in the region of 7-9% in early trading.

German bank stocks are also jumping – Commzerbank rising 9% and Deutsche up over 5%. Italian banking stocks also like Macron. Unicredit was last rocketing 9% higher as investors have decided that the result makes a Eurozone breakup highly unlikely.

On the FTSE there are also strong gains for bank stocks, with Barclays climbing 4% and RBS and Standard Chartered close behind as the index enjoys a 100-point-plus rally.

The recovery in European banks is also a sign that with Macron anchoring French politics, it’s going to be easier for the ECB to raise rates and/or taper sooner; easier for businesses to invest and grow earnings; and that global reflation is still on. US stocks should enjoy a bump today too.

Peak populism may have been 2016, and investors are happy to place their faith in European banks again. Maybe the risk aversion heading into the vote was overdone, but clearly investors are happy with the result as a ‘Frexit’ seems to be off the table.

But watch for the risks to return – if Le Pen starts polling in the 40%+ bracket we will see nerves creep back in and some of these big lurches higher could be dialled back as profits are taken and investor reprice risk.It's also a big week for bank earnings so watch for some moves there when the likes of Credit Suisse, Standard Chartered, Deutsche Bank and Lloyds report numbers later on.

Equities are supported in tandem with a stronger euro, which is enjoying its best daily gain in almost a year as it trades around the level it was last November before the Trump election sparked dollar gains.

EURUSD broke the $1.09 level but is finding it hard to stick it at that handle. Increased odds of a Fed rate hike are dragging it back down to earth a touch. Nevertheless if EURUSD breaks the 110 level there could be further room to explore on the upside. A lot depends on what the ECB says this week and the tone it takes.

The biggest sigh of relief was seen in EURJPY, where the euro has shot up above 120 before retreating a little. The yen was broadly lower as markets took a generally risk-on tone overnight that looks set to continue into Monday.

The yield on French government debt plunged as markets repriced the risks of ‘Frexit’ and start to be able to put political risk to one side for the time being. The yield on the French 10-year OAT dived 10%, lending support to the euro.

Yet there are continued risks. Assuming Macron goes on to win the second round, he will have a tough task assembling a government and pushing through the reforms the French economy needs.

We can at least stick some of the big political risk to one side for a while, but with a major election in Italy looming there is considerable tail risk. Greece also remains a significant challenge.

or LOGIN as existing customer


Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and ETX Capital accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.