Fillon worth a second look as French election fears start to ease

This time in a week the first round of the French Presidential elections will be known. The latest polls suggest that support for the Far Right candidate Marine Le Pen is starting to slide, which has helped Francois Fillon to become the front runner to join Emmanuel Macron in the second round, which takes place on 7^th May. Of course, polls are far from reliable predictors of voter behaviour, but the Dutch elections last month also saw support for the extreme candidates start to evaporate as we got closer to election day, so the same might be true this time.

Expect a rally if Le Pen is obliterated in the first round

Since Marine Le Pen is the most euro-toxic of all of the candidates, one can assume that a first round eradication for her Front National Party could trigger a relief rally in the euro in a week from now. We mentioned in our previous note on the French election that Francois Fillon’s candidacy was worth a second look. He has a solid block of conservative voters, whose numbers may be swelled if it is a means of keeping Le Pen out of the Elysee Palace. Added to that, French voters are surprisingly immune to scandals, such as those that have plagued Fillon’s candidacy. While the latest odds still give independent Emmanuel Macron a healthy chance of winning in May, his odds have fallen as those of Fillon and Far Left candidate Melenchon have surged. If we get a Macron/ Fillon second round run-off, this is likely to be considered “market friendly”, triggering a rally in the euro, the Cac, but also in the German Dax and Eurostoxx index, which have had decent correlations with the French bond yield this year.

Is iron ore worth worrying about?

European markets are taking the lead from Asia, where inbdices were lower at the start of the week. The FTSE 100 is one of the worst performers, led lower by materials and energy prices. This is a reaction to the sharp drop in iron ore prices, which are now at their lowest level since November. It’s a supply/ demand problem; with too much iron ore getting produced and Chinese demand for steel slowing. While I have no empirical data to back this up, could weaker Chinese demand for steel suggest that growth in the Asian powerhouse has peaked? If I am correct, then strong Q1 data, China’s GDP rose by 6.9% YoY, beating estimates of 6.8%, boosted by strong retail sales and industrial production, could be the swan song before things turn ugly later in the year. Of course, iron ore demand is just one measure of Chinese growth, but Asian equities were spooked, the Hang Seng fell 1.35% on Tuesday.

Why the Turkish lira could benefit from relative values

The Turkish lira is the top performer in the EM FX space today after Erdogan’s triumph in the weekend’s referendum. Perhaps this was to be expected, after all, it probably lends a bit of political stability to Turkey in the short term, also the lira is the worst performing EM currency over the last year, having lost 23% vs. the USD. While Turkey’s political situation may be a tough sell for the currency, there could be some value in a long TRY position in the short term. Maybe it’s a case of relative values in the EM FX space right now, Russian/ US tensions could weigh on the Ruble, and South Africa also has grave political problems that could hurt the ZAR, so compared to that, perhaps the lira isn’t a bad option to go long vs. the USD in the short term, especially with 10-year US Treasury yields hovering around the 2.23% mark.

A quick word on diminishing Treasury yields

A last word on Treasury yields, their decline is surprising, even with news that the Trump administration has conceded that their tax reforms will be scaled back in the wake of their healthcare defeat. The Credit Suisse fear barometer also fell sharply at the start of this week; so what is going on? This is a critical week for Treasuries: if yields continue to fall, then it could spook investors and weigh on equities, while if they recover then all is good with the world and the rally can continue. Although the S&P 500 fell through the 50-day sma at the end of last week, it made a decent recovery at the start of the week, suggesting that full-blown selling action is not evident quite yet even if investors are once more pouring into safe havens like Treasuries.