A Delighted Wall Street Reacts To The French Election

With European stocks on fire, and US futures moving fast to recoup recent all time highs, it is no surprise that Wall Street is feeling particularly bullish this morning.

As noted previously, the market moves suggest that traders were positioned for French pollsters to be wrong again, and yet unlike Brexit and Trump, this time the polls were spot on. The snapshot result: the French CAC 40 is up as much as 4.6%, DAX up as much as 2.9% to record high; euro-zone Stoxx banking sector index up as much as 6.9%; VStoxx volatility index down as much as 31%; France- Germany bond yield spread narrows to lowest since January; euro gains as much as 2%. Meanwhile, looking at the runoff round, polls now see Macron defeating Le Pen with a sizable margin, somewhere in the 62%-38% area.

Below is a sample of slleside analyst reaction to Sunday's outcome.

BofAML equity strategists including Ronan Carr, James Barty

  • Political uncertainty has been a headwind to global investors re-allocating to Europe; BofAML sees significant potential for European fund flows to recover further
  • Focus can shift to solid fundamentals in Europe
  • Solid macro backdrop, strong operating leverage evident in European corporates point to upside risks to BofA’s 11% EPS forecast for Stoxx 600; earnings momentum is strong with 84% of sectors enjoying upgrades

Citi strategists including Jonathan Stubbs

  • European banking sector likely to benefit from lower political risk premium and narrower sovereign spreads following “risk-on” outcome in first round of French election
  • Says French banks could outperform by ~10% in short term, broader sector likely to be key leadership group in market
  • Lower political risk could “release handbrake” across policy makers, CEOs, investors and individuals; expects international investors, particularly U.S., to return to European equities

Credit Agricole strategist Valentin Marinov

  • “Very hard” to find a euro-negative factor; risk is clearly pointing to more euro upside from here
  • Now with political risks abating, investors’ attention may turn to the certainly attractive assets denominated in euros, like euro area stocks

Natixis strategist Sylvain Goyon

  • Expects a relief rally, CAC 40 could outperform DAX by 3%-4% within a few days given French market discount
  • Among sectors which could benefit the most from relief rally: insurance, banks, financial services, autos, tech, real estate

AXA IM economist Laurent Clavel

  • What really was priced was the possibility of a very market unfriendly result; For the French economy just yet the economic policy uncertainty is not lifted
  • “The membership of France in the euro zone and in the EU, that risk, which was really the focus of markets, is almost gone”

Goldman Sachs equity strategist Peter Oppenheimer

  • Equity market has already largely priced the outcome; concerns about the vote have not prevented European equities and CAC 40 from performing well on an absolute basis in 2017
  • Expect the results to generate some relief for FTSE MIB, French and Italian banks, and a very minor relief for CAC 40
  • French domestic stocks and CAC 40 have not underperformed significantly as of late; Goldman doesn’t expect them to rally materially now, or after second round

BlackRock strategists including Richard Turnill

  • Result is positive surprise for risk assets in near term
  • Business-friendly and pro-European Macron, who has maintained large winning margin in head-to-head polls with Le Pen, can now build on his momentum
  • Result should lead to material reduction in perceived political risk in Europe; some risk premium should linger until legislative elections in June
  • If Macron becomes France’s next president, may struggle to implement his agenda without stable parliamentary majority
  • Expects Italy to be the next focus of European political risk

Credit Suisse equity strategist Pierre Bose

  • Markets are likely to react positively to the news, with the risk of an adverse presidency for the French economy and European integration now markedly lower
  • Continues to prefer European equities backed by cheap valuation and positive growth momentum; European banking stocks should also benefit in next few days; CS continues to prefer them to their U.S. counterparts

JPMorgan AM fund manager Stephen Macklow-Smith

  • Assuming Macron does win the presidency, investors will no longer have an excuse not to allocate to European equities. We hadn’t taken that much risk off the table as we were expecting a market-friendly outcome, but will marginally add cyclical exposure. In short-term sees French financials catching up with the rest of the market

Runestone Capital Fund founder and portfolio manager Rune Madsen

  • Result reduces some short-term risk. Potential negative did not transpire, there will most likely be less demand for protection
  • Still, with previous events like Brexit or U.S. election, initial reaction was not what transpired one day or a few weeks later; important to keep that in mind

Bankhaus Lampe equity strategist Ralf Zimmermann

  • Vote could mean that global stock investors are more willing to trade future positive macro surprises in Europe
  • Bigger picture is unchanged: fundamental upside for stocks is now limited, valuations have expanded notably, particularly in U.S., but also in Europe, which means that stock prices have outpaced earnings estimates

Societe Generale analysts

  • With risk of populism fading, investors should start focusing on the banks’ strong fundamentals; highlights credit and deposit growth is strong, GDP estimates have gone up and number of companies expected to be loss- making has remained flat

Kepler Cheuvreux analysts

  • Despite a number of open questions, notably whether the new president will find a governing majority, still there, French elections will reassure investors, trigger fresh capital flows into the region
  • Expects higher risk premium for pure European assets seen since Brexit vote to soften somewhat; says risky European domestic exposure should outperform over the next few months

TD Securities macro strategist Jacqui Douglas

  • Results for top candidates almost exactly in line with what polling had predicted, TD confident investors can look to a big Macron win in second round, as polls have him wining by nearly a 2:1 ratio
  • Given renewed trust in polls, markets unlikely to wait until May 7 before pricing out the risk of Frexit, and we look for a risk-on trading environment to start the week

Investec Wealth & Investment strategist John Wyn-Evans

  • Had said for a while that Europe looked attractive as an investment destination, but had been holding back from further investment owing to political concerns
  • Europe has the potential for further recovery that has already taken place in, for example, the U.S. and the U.K.
  • Europe’s stock market is calculated to be one of the most operationally geared into continued recovery and on the long view has a lot of catching up to do

Makor Capital Markets strategist Stephane Barbier de la Serre

  • Le Pen comes a close second, however the math of vote redistribution will simply not work for her and therefore expect Macron to win the run-off with a wide margin
  • It does dispel at once the risk of any kind of “Frexit” in the foreseeable future, which should lead to much reduced risk premia on French stocks and bonds and therefore boost prices of all European risk assets in the next few weeks

Source: Bloomberg

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