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The Risks of the French Election and How to Play Them

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Elections and votes have been among the worst nightmares of politicians and some investors as well. The Brexit vote last summer, the Italian constitutional referendum, the Dutch elections, and of course Donald Trump’s march to victory all stirred up markets, especially because of the huge errors made by polling companies and other forecasters in some cases. The outcomes of these votes were sometimes irrelevant for the big picture, but in the case of Brexit and the US elections, the final result defined trading in financial markets for a longer period of time.

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The Great British Pound fell to a 35-year low below the 1.20 level against the Dollar after the Brexit, even though the pair was as high as 2.10 before the credit crisis, and still breached 1.70 in 2014. Those familiar with currency markets know that this move is YUGE! Then there was the “Trump-rally” that ignited US stocks to new all-time highs towards the end of last year, especially boosting the financial sector and industry-related companies.

The Next Big Thing

We are quickly approaching the next possible political earthquake, the French presidential election. As the country’s political system is strongly centered around the President, this single vote can define the direction of the second biggest power of the EU for the coming years or even decades. The country faces several political and economic problems, which could grow into a full-blown crisis if the steam runs out of the global recovery or a populist candidate gets elected. Because of this, the elections can provide great trading opportunities in the coming weeks.

The French Election System

The election consists of two rounds (if no candidate gets 50% in the first round), with the winner and the runner-up of the first round “qualifying” to the second, decisive run-off vote. The first round will be held on the 23rd of April, while the likely second round is scheduled for the 7th of May.

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As of now, there are four candidates with a realistic chance of making the second round and winning the election. The traditional right is divided by far right candidate Marie Le Pen and more centrist Francois Fillon while the left is dominated by pro-EU and economic reformist Macron, and the rapidly rising “Trumpesque” anti-EU candidate Melenchon.

Chance of Winning Frexit possible? Trade Taxes Immigrant Policy
Macron 55% No Free Down Pro
Le Pen 25% Yes Protectionist Up Anti
Fillon 10% No Free Down? Anti
Melenchon 10% Yes Protectionist Up Pro

 

For financial markets, Macron and Fillon are the “positive” candidates, representing the establishment, with some possibly progressive economic reforms that could mitigate the economic and social problems. Le Pen and Melenchon are definitely the anti-establishment candidates, and even the hint of their election could result in “flight-to-safety” and a significant sell-off in risk assets. The Euro got under pressure lately as Melenchon gained in the polls in the past two weeks.

Under Le Pen and Fillon even a Frexit vote might be in the realm of possibilities, although given the popularity of the EU, and the French constitutional system, it is a highly unlikely outcome. The other most important differences in the candidates’ programs are also listed in the chart above.

 

French election-polling history (source: Bloomberg.com)

As there is a huge difference between the candidate’s first round and second round chances, for now the closest we can get to predict the market’s reaction is to look at the polling numbers for the candidates and the chances of the different pairings for the second round.

Candidate 1st Round Polling Average
Le Pen 23%
Macron 22%
Fillon 19%
Melenchon 18%

Currently, it’s very important to look at the chances of the different face-offs in the second round of the referendum as well:

Pairing Chance of Outcome
Macron-Le Pen 61%
Le Pen-Fillon 17%
Le Pen-Melenchon 10%
Fillon-Macron 9%
Macron-Melenchon 2%
Fillon-Melenchon 1%

 

Right now Melenchon’s rise is the most important tendency, as it makes some “horror” scenarios more likely. Melenchon is drawing in inactive voters while also attracting the voters of Hamon, making the last weeks that much unpredictable.

As for trading, the divide in the centrist field between the moderate candidates makes a tail-risk event more likely in the first round. The highest probability Le Pen-Macron and Le Pen-Fillon face-offs will probably lead to the success of the moderate candidate, but a further surge in the popularity of Melenchon could raise the chances of a Le Pen-Melenchon face off.

That said, even if one of the two most likely pairs make the run-off round, Le Pen might cause a surprise, despite her base being less flexible. We see more uncertainty regarding the first round, with plenty of room for the market to “get scared”.

Let’s take a look at the ways of betting on a shocking result:

Buying generic safe-haven and risk-off assets:

  • Gold
  • Japanese Yen, Swiss Franc
  • US Treasuries, German Bunds
  • Volatility ETFs (VIXY, or to a lesser extent VIXM)

Selling or shorting generic risk-on assets:

  • Stocks
  • Copper and other industrial metals

Event specific assets:

  • Shorting the Euro
  • Selling (shorting) French and Eurozone equities, French bonds
  • Playing the widening of the French-German government bond yield-spread
  • Playing contagion: shorting Italian equities and government bonds

Should the surprising result materialize, it is important to note that not all affected assets will produce sustainable moves. Thanks to the low-interest rate policies around the worlds, stocks are still in a global bull market and they will likely recover, at least temporarily, even if a negative outcome materializes. Stock market tops are processes not one time events, but a scary French result will be a huge blow that could trigger a major correction in equities, especially in Europe.

The long-term downtrend in the Euro/US Dollar pair, Weekly Chart analysis

On the other hand, the Euro might start another leg down in its multi-year decline, targeting at least parity with the US Dollar. Government bonds are likely to diverge in the Eurozone, as break-up fears get stronger, and trust in the monetary union deteriorate. Conversely, if Macron or Fillon wins the election, expect a healthy bounce in the Euro and European equities, although, given the recent escalation in international politics, a lot of unpredicted things might happen in the next three weeks.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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2 Comments

  1. Ershad

    April 21, 2017 at 3:48 am

    Hi mate,

    Would you recommend selling gold now or waiting to see what the first round of the elections go?
    Also can you recommend a stop loss price also?

    Thanks
    Ershad

    • Mate Cser

      April 21, 2017 at 12:26 pm

      Hi Ershad,

      Viable stop-loss levels are near the $1270, $1262, and $1240 levels, ($1278 for day-trading) depending on your size and time-frame. If you want to play a surprise on the elections, gold is a great choice, it’s in a long-term uptrend, and it’s considered the number one safe-haven asset. Still, if on of the “better” candidate-pairs goes to the second round, gold will likely fall in the short run.

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Analysis

Daily Analysis: Oil Extends Rally as Nasdaq Leads Stocks Higher

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Friday Market Recap

Asset Current Value Daily Change
S&P 500 2749 1.38%
DAX 12,483 0.18%
WTI Crude Oil 63.58 1.29%
GOLD 1330.00 -0.16%
Bitcoin 10,14 -0.09%
EUR/USD 1.2295 -0.28%

US equities built up some bullish momentum towards the end of the week, ignoring the technical damage that the volatility-crash caused, and the major US indices rallied into the close today, squeezing the shorts. The Nasdaq, which led the rally as we expected, took out the key 6850 level in late trading and added another percent to, incredibly enough, finish only a hundred point of the all-time high.

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NASDAQ 100 Futures, 4-Hour Chart Analysis

Should the tech benchmark retest the high next week, it will be amid very strong negative divergences, but hey, those divergences have been building for months now. The rally in equities was boosted by the dip in Treasury yields, especially at the long end of the curve, while Amazon continued ot lead the charge, closing right at the historic $1500 per share level.

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Russell 2000 (Small Cap) Index, 4-Hour Chart Analysis

The advance in the Dow and the S&P 500 is much less convincing and with small caps also lagging the tech-behemoth juggernaut, we remain skeptical regarding the sustainability of the move. That said, if the broader indices stay above the key levels, we will be trading the long side in equities, even as from an investment standpoint, valuations are still way above acceptable.

Forex Markets and Commodities

The lackluster performance of European and Asian stocks adds to the negative divergences, especially as the Euro stopped appreciating against the Greenback, and that should be helping stocks of the old continent. Of course, the DAX and the EuroStoxx 50 could play catch-up next week, barring another surge in the common currency.

EUR/USD, 4-Hour Chart Analysis

The most-traded forex pair remains in a short-term downtrend, as it failed to recapture the previously broken rising trendline, and the commodity related risk-on currencies also remained under pressure. The Canadian Dollar did bounce back off yesterday’s 8-week lows, boosted by the much hihger than expected inflation release and the jump in the price of crude oil.

USD/CAD, 4-Hour Chart Analysis

Oil benefited from the positive shift in sentiment, while the Syrian situation, which took a backseat in the headlines, still supports the rally. The Japanese Yen and gold were stable amid the risk-rally and that adds to our suspicions regarding the upside potential form these levels.

Cryptocurrencies

The segment started out the day with a strong bounce that carried the major coins higher by around 10%, but given the recent steep short-term pullback, even that wasn’t enough to turn the tide, and the day ended with an (almost usual) sell-off after the US close. Despite the recent volatility, the overall picture is still encouraging, with most of the majors being safely above the crash lows, likely in a new bullish cycle that has the potential to last for several more weeks or even months.

While new all-time highs are it guaranteed following the 60-70% declines among the largest coins, but even without those, plenty of upside potential is left for investors. With that in mind, investors should hold on to their coins and even add to their holdings on the short-term dips like the current one.

ETH/USD, 4-Hour Chart Analysis

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Analysis

Technical Analysis: Majors Stage Rally but Strong Levels Still Ahead

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The cryptocurrency segment has recovered from a broad correction today in early trading, with the most valuable coins all turning into green during the session, despite the bearish start to the overnight session. With bottom-to-top gains of up to 15%, the rally helped in easing the worries of bulls, especially in the case of the relatively weaker coins.

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Bitcoin and most of the largest altcoins remained stable during the selloff, and BTC recaptured the $10,000 level quickly after trading as low as $9600 overnight. The initial rally topped out near $10,400, and the coin is trading back near the $10,000 level, as the bullish momentum faded away somewhat.

BTC/USD, 4-Hour Chart Analysis

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That said, we expect the uptrend to continue even if the correction could still carry Bitcoin lower. Further strong support is found between $9000 and $9200, while targets are ahead at $11,300, $13,000, and $14,250.

ETH/USD, 4-Hour Chart Analysis

Ethereum showed strength during the bounce again after yesterday, together with the early leaders of the rally, and although the coin dipped below the $845 level in the second half of the session, the signs remain positive for bulls. Support levels are now found at $780, $740, $625 and $575, while resistance is ahead near $910 and $1000.

(more…)

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Analysis

Pre-Market: Stocks Refuse to Fall Even as China Takes Over Key Insurer

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Although it should have been a very quiet week in China, thanks to the New Year celebrations, the recent surge in volatility and the plunge in equities didn’t pass without consequences in the key market. Just shortly after effectively shutting down the Chinese version of the Volatility Index (VIX) (presumably to calm the markets…), one of the main actors of the monstrous financial web, Anbang, of the country had to be taken over to avoid a systemic event and stop the “creative” financial engineering that involved criminal activity (the shadow of 2008).

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China will likely need many more duck-tapes like this one if it wants to stop the largest credit bubble in human history to collapse, but for now, the solution could work. Equity futures edged higher since yesterday’s volatile close, and as the major US indices are holding up well, not far off last Friday’s highs, our bearish short-term view might have to be revised.

Nasdaq 100 Futures, 4-Hour Chart Analysis

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As we discussed before, the long-term uptrend is intact, and we expect at least a re-test of the highs even if we are in a large-scale top formation, but we thought that the technical damage caused by the crash three weeks ago would require more healing.

We are not turning bullish just yet, but today’s session could finally decide if we the BTFD-crowd is strong enough to turn the tide after the choppy drift lower this week. We are still focusing on the Nasdaq, as the broader market seems to be following the lead of the tech benchmark, and a move 6850 (in the Nasdaq 100 futures, and still the 2735 level in the S&P) would be a very positive sign for bulls.

DAX Index, 4-Hour Chart Analysis

The German DAX index is also showing some tentative short-term relative strength although it remains almost 10% below its all-time high, and it remains a strong negative divergence to be monitored.

Forex Markets Quiet

EUR/USD, 4-Hour Chart Analysis

The main pairs are trading in a choppy narrow range today after the strong move in the Yen and the drop in the USD yesterday. US Treasury Yields are edging lower today, helping the calm in equities and currencies, but on a bearish note, commodity currencies failed to rebound so far, and they were providing good signals since the crash. Day-traders should note that the Canadian Dollar will likely be very active again, with the Canadian CPI report coming out pre-market.

To sum the outlook up, we are still leaning on the risk-off side here regarding the short-term outlook, but we wouldn’t bet the farm on that, as there are mixed signals before the weekend.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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