France election result sparks spikes in stocks and Euro as risks shift to the US

Yesterday’s first round of French Presidential voting saw the two leading candidates Centrist Macron and Euroskeptic Le Pen go through to the‎ second round. Although Macron finished ahead by a small margin in this round, the French establishment has rallied behind him early polls show him leading for the second by 62% to 38%.

Traders appear to have taken the results and polls to suggest the second round as a mere formality and anointed Macron the winner. Because he doesn’t have a formal party behind him and would have to work with the traditional parties in the legislature to pass measures, the street has taken this as a victory for the EU, stability and the status quo.

Traders rushing to get back on the EU bandwagon, however, might want to recall that we saw a similar spike in UK markets a week before the Brexit vote last June as traders got overconfident that Remain would win and we all saw how that ended. The second round vote is scheduled for Sunday May 7th.

The Euro has started the week off with a big spike upward and European indices have been following suit. The CAC is up 4.4% while the Dax is up 3.9% in what looks like a massive relief rally. There even has been chatter about the ECB possibly moving up its tapering timetable if the French vote goes as expected. We may see more monetary speculation through the week with the ECB meeting Thursday.

Although overshadowed by their neighbours, UK markets have also been performing well with a weekend poll showing the Conservatives at 50% support. The FTSE is up 1.8% while GBP is holding to recent gains against USD and GBP although it was underperformed the soaring EUR.

The stampede back into risk markets has sent defensive plays like gold and JPY plunging. It’s not a good time to get complacent, however, as political risks have moved elsewhere, not gone away. While Europeans are euphoric to start the week, other markets have posted decent but smaller gains in the range of 1.0% to 1.3% for US index futures and the Nikkei, while mainland China markets actually fell overnight.

The focus of risk now shifts to the US with a number of potential flashpoints this week. North Korea has threatened to shoot at a US aircraft carrier with the Carl Vinson scheduled to arrive in nearby waters this week. President Trump is expected to unveil his tax reform plans Wednesday and health care reform talks are ongoing.

Perhaps most significantly talks to keep the government funded beyond this week remain at an impasse over the President Trump’s demand for money to start building the Mexican wall. While politicians seem to want to kick the big battle off to September, there remains a risk that someone could miscalculate and force a government shutdown much sooner.

US Vice-President Pence is cutting his trip to Asia short to get back and help out in Washington. He’s knocked a day off an official visit to Hawaii (who does that??) suggesting the situation at home is getting pretty serious.

‎Crude oil is up 1.0% today and with President Trump’s attention shifting away from Canada toward other areas for now, CAD has been on the rebound. The loonie could remain volatile, however, until the renegotiation of NAFTA gets underway and positions become clearer.

On the earnings front, toymaker Hasbro beat the street on sales and earnings, a sign that rival Mattel’s problems are likely more internal than a sign of soft consumer spending. Later today results from Big Mining are due with Alcoa and Newmont reporting.

Chart Signals: Mixed signals from European and US indices plus EUR despite opening rallies

EUR and European indices, led by the France 40 gapped upward to start the week but as the day has progressed, it’s become increasingly unclear if this is a big breakout, a relief rally or a buying climax. New highs in European indices have been offset by negative RSI divergences, while EUR has already dropped back a big figure from its overnight peak. US indices, on the other hand are showing signs of life, with the US 30 and US SPX 500 breaking downtrend lines and moving averages to signal new upswings within broader sideways trends.

North American and European Indices

US 30 is turning back upward today, breaking out of a falling channel and regaining its 50-day average near 20,725 then advancing on 20,800 with next potential resistance near 20,875 then 21,000. RSI regaining 50 confirms an upswing underway.

US SPX 500 is breaking out today, clearing its 50-day average near 2,360 and calling off a descending triangle. RSI regaining 50 confirms an upswing underway within a sideways channel with next potential resistance possible near 2,382 then 2,400.

US NDAQ 100 is breaking out today, clearing 5,480 to signal the start of a new upleg. The index is testing 5,500 with next potential resistance near a measured 5,620. Rising RSI confirms upward momentum accelerating.

UK 100 remains below its recent breakdown points of 7,260 where it recently completed a head and shoulders top, and 50 on the RSI indicating overnight gains as a trading bounce within a bigger downtrend. Downside support possible near 7,150 then 7,100.

Germany 30 is breaking out today, clearing its recent high of 12,380 to signal the start of a new upleg. The index has advanced on 12,420 with next resistance possible near 12,500. The RSI is not confirming the new price high suggesting slowing upward momentum.

France 40 is breaking out today, blasting through 5,150 and rallying toward 5,390 before sliding back toward 5,300 where it has been testing highs set in 2015. RSI overbought and a negative divergence suggest upward momentum could be peaking.

Commodities

Gold is rolling over, dropping from $1,280 down toward $1,268. RSI falling toward 50 indicates upward momentum slowing and confirmation of a downturn pending. Resistance drops toward $1,272 with next potential support near $1,250 and the 200-day average.

Crude Oil WTI has recovered a bit from Friday’s huge takedown, but an inside day stuck below $50.00 suggests that the price is digesting losses rather than rejecting them. Next resistance near $50.55 with next support near $48.65 and the 50-day average.

FX

US Dollar Index has a big support test underway near 98.70 which could end in a double bottom or a breakdown and the start of a new downleg. The index has turned down from 100.00 following a failed breakout attempt while falling RSI confirms increasing downward pressure. Next potential support near a measured 98.25.

USDJPY is breaking out of a base, blasting up from a Fibonacci cluster clearing 109.25 then the 110.00 round number on its way toward 110.25. Next resistance possible near 110.65 then 111.60. RSI still needs to clear 50 to confirm an upturn. 

EURUSD gapped up sharply to start the week from $1.0720 soaring up toward $1.0945. It has since been backsliding falling toward a Fibonacci cluster and its 50-day average near $1.0830.  Next support near $1.0775 with next resistance near $1.0870.

EURGBP gapped up to start the week, but the rally has been contained in the 0.8460 to 0.8500 area between a Fibonacci level and round number. RSI broke out of a downtrend but needs to regain 50 to confirm an upturn. Next resistance possible near 0.8565 the 50-day average with next support near 0.8425.

GBPUSD continues to consolidate recent gains between $1.2760 and $1.2860 holding above its $1.2715 breakout point while remaining stuck below $1.2900 its recent rally high.

USDCAD is starting to roll over suggesting its recent rally has ended. The pair failed to hold above $35.00 and has dropped back toward the $1.3410 to $1.3440 area with next potential support near $1.3390.

CADUSD appears to be starting to bounce back, regaining $0.7410 a Fibonacci level after establishing $0.7400 support. Next rebound resistance possible near $0.7475 then $0.7500.

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