Risk appetite tested by Macron HSBC and UK data

European equities are set to open higher today after French Presidential favourite Macron was considered to have outperformed Marine Le Pen in the final Presidential debate in France last night. This has helped to boost equity markets in Europe and we have also seen a drop in French bond yields, suggesting that political risk premia is falling sharply ahead of the second round of the French election on Sunday.

Macron battle not over yet

However, the euro’s reaction to Macron’s debate triumph has been muted, and the single currency hasn’t reacted to the demise of Marine Le Pen’s campaign, even though it makes the future of the single currency more secure. There are a couple of reasons for this: the euro is weakening as risk roars back into life, and secondly, there could be some caution in the euro as the focus shifts to the margin of victory for Macron over Le Pen 

Why Le Pen could lose, but still be a threat to the euro

Some are saying that Macron not only has to win on Sunday, but he must win more than 55% of the vote to spur a risk rally next week. If he can’t secure a decent victory over Le Pen then it could stoke fears about Macron’s En Marche! party’s chances in the National Assembly elections next month.  A good showing for Macron on Sunday could make it more likely that his party members will win multiple seats in the National Assembly, which would be a good foundation to deliver his programme of economic reform. If the election result is close then Le Pen is likely to remain a powerful voice in French politics, and her desire to ditch the euro could remain part of French political discourse for some time, triggering uncertainty in the FX market and euro weakness. 

Thus, although it looks like a win is in the bag for Macron, EUR/USD’s weak start to Thursday suggests that the focus has now shifted to the margin of his victory. If he can get 60% of the vote then we could see this pair break above 1.10, and head back towards November’s 1.1150 highs 

Is the market missing something from the Fed?

Elsewhere, there was no change in policy at last night’s Fed meeting. The statement was fairly bland: the labour market is doing well, and the Committee did not seem worried about the slowdown in growth in Q1. This has given the green light to the dollar, which is rising across the board today, with the dollar index breaking above the 200-day sma at 99.20, although the buck has retreated slightly on Thursday morning.

My reading of the Fed statement was slightly less dollar bullish than the market seemed to read it. The penultimate paragraph in the Fed statement set out the Fed’s current policy for shrinking its enormous balance sheet. In recent meetings the Fed has said it will begin to cut the size of its balance sheet, but only gradually. Yesterday, the Fed made no commitment to cutting the size of the balance sheet, instead saying that it will continue to reinvest the proceeds of the assets on the balance sheet until normalisation of the Fed Fund’s rate is “well under way”. This seems more dovish to me, and suggests that the Fed is potentially toning down its rhetoric on the balance sheet question, which could be perceived as dovish. I doubt that I am seeing something that the market has missed, however, this statement alone is unlikely to be enough to sustain a dollar surge, so we could see some weakness in the buck and stocks as the market wonders whether the Fed is doubting the future of US economic strength, which could delay its rate tightening programme.

HSBC decent results, but no buybacks

HSBC has delivered decent results today, loan growth has expanded and the bank’s capital position has strengthened. However, the bank made clear that it won’t be buying back shares in the first half of this year, although it may revisit this stance later. This is an interesting point; can the bank’s share price rally on fundamentals alone? If yes, this can give hope for a healthy extension of the stock market rally, without the need of corporate engineering like buybacks to boost stock prices. Thus, it’s worth watching where HSBC’s stock price closes the week. 

Ahead today: 

The UK service sector PMI is out later this morning. After the manufacturing PMI rose to a 3-year high, the market will want a strong number to boost the pound, which is lower on Thursday. If the service sector PMI drops for April, as expected, then we could see a bigger shake out for the pound. The big event for risky assets could be the US NFP report on Friday. Read our NFP review, and City Index’s NFP expectation, due out later today.