Fundamental Analysis

CAC Quiet as Investors Cautious Ahead of French Vote


The CAC is showing little change on Friday, following strong gains in the Thursday session. Currently the CAC is trading at 5073.50. On the release front, French and Eurozone Manufacturing PMIs both beat their estimates, and the Eurozone current account surplus easily beat expectations. On Saturday, US Treasury Secretary Robert Mnuchin will speak at the International Monetary Fund meeting in Washington. On Sunday, France goes to the polls for the first round of the presidential election.

European investors are holding their breath, as France goes to the polls on Sunday, in the first round of the presidential election. The election campaign has been divisive and turbulent, in one of the tightest elections in years. The four front-runners (in a crowded field of 11) are all within a few percentage points of one another. Given the tightness and unpredictability of the race, final opinion polls have become market-movers. The CEC posted strong gains on Thursday, following an opinion poll which showed Emmanuel Macron opening a slight lead with 25% of the vote, just ahead of far-right candidate Marie Le Pen with 22%. Le Pen's platform includes sharp curbs on immigration and a referendum on France's membership in the European Union. If Le Pen does better than predicted, investor sentiment could send the stock markets lower. A shooting in Paris on Thursday which killed a policeman and a tourist have stretched taut nerves even further, as security and the terrorism threat remain one of the key issues in the campaign. The markets are expecting more volatility ahead of and following the election, and French banks will be staffed throughout Sunday night in order to respond quickly to the election results. Traders should be prepared for volatility from the CEC in the Monday session.

The eurozone economy continues to expand, and this was underscored by strong PMIs out of Europe. Eurozone, French and German PMIs all pointed to expansion in the services and manufacturing sectors. Manufacturing data was particularly encouraging, as Eurozone and French Manufacturing PMIs beat expectations. However, these strong readings failed to move the CAC, as investors are keeping low ahead of the French election on Sunday. There was more positive news as the eurozone's current account surplus jumped to EUR 37.9 billion, well above the estimate of EUR 26.3 billion.

With the US economy in good shape, the markets are expecting interest rates to continue rising in 2017. The Fed has broadly hinted that it will gradually raise rates this year, but it's unclear how many times Janet Yellen will press the rate trigger. Most analysts are expecting two more moves this year, but there have been calls from some Fed policymakers for three more hikes. However, soft retail sales and CPI numbers in March are likely to make the Fed more dovish, and on Tuesday, the Atlanta and New York Federal Reserve lowered their outlook for US economic growth for the first quarter. The Fed can point to a labor market that is close to capacity as well as strong consumer confidence, but surprisingly, this has not translated into stronger consumer spending, a key driver of economic growth. The Fed is unlikely to make a move in May, but June is a strong possibility. However, the odds of a June move are showing a surprising amount of volatility, and the latest CME Group reading shows the likelihood a 1/4 point hike have jumped to 58%, up from 51% earlier this week.

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