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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.

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.

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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4.6 stars on average, based on 280 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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2 Comments

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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Altcoins

Crypto Markets: Bloodied But Not Broken

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As legend has it, prize fighter Jake Lamotta returns to his corner at the end of round four of one of his early boxing matches with blood all over and his face was a mess.  Trying his best, his trainer tells Jake, you’re doing great kid, they haven’t laid a glove on you. To which Lamotta replies, well you better keep an eye on the referee because somebody is beating the crap out of me.

Lately, those of us who have a passion for the world of cryptocurrencies are feeling that somebody is beating the crap out of us. Trouble is, it is hard to figure out why.  Just as we are about to land a punch with the SEC declaring that bitcoin and Ethereum are not securities, ditto that for ICOs that do not convey an equity interest in the issuer, whamo prices drop to 2018 lows.  

The Other Side Of The Coin

We read of the recent hack of a tiny South Korean crypto exchange and pundits blame this for helping to push prices lower.  However, the market seemed to completely ignore this week’s progress in the Mt. Gox litigation. There is actually a decent prospect that investors that held $450 million in bitcoin at 2014 prices will be compensated in nitcoin.  If my arithmetic is working right, this is good news considering the 2014 Blbitcoin price was less than $2.00.

Institutionalizing Crypto

While most eyes last week were fixated on falling prices, exchange giant Coinbase let it be known that it was preparing a crypto custody service.  This may appear as a boring administrative step but that is hardly the case. This move is being heralded as the final step in opening crypto to institutional buyers.

Before Coinbase’s solution the problem has been that, despite the highly secure nature of bitcoin and other cryptocurrencies, the wallets where they are stored are a regular target for hackers.

For investors, making cryptos more accessible to institutional investors is every bit as important as adding retail merchants that accept crypto for goods and services.  

Finding Crypto Support From Unexpected Places

Last Friday various media outlets point out how The U.S. Supreme Court mentioned bitcoin and cryptocurrency while issuing a ruling on a seemingly unrelated case. Here is what the U.S. Supreme Court had to say on June 21st in the case of Wisconsin Central LTD v. United States:

“What we view as money has changed over time. Cowrie shells once were such a medium but no longer are, our currency originally included gold coins and bullion, but, after 1934, gold could not be used as a medium of exchange, perhaps one day employees will be paid in Bitcoin or some other type of cryptocurrency.”

In spite of the current oversupply of naysayers, the legacy of crypto is increasing daily. Now even the Federal Reserve Bank of St. Louis is collecting and publishing prices of bitcoin, bitcoin cash, Ethereum and Litecoin. A year ago at this time, such a notion would have been absurd.    

Suspension Of Efficient Market Thinking

For those who have been kind to follow these ramblings know that I am a big believer in the theory of efficient markets.  The key to this theory is that people have all the available information about a particular investment asset and act upon is rationally.  Of course, this is not to say that everybody reads the information in the same way. That is what makes for buyers and sellers.

Lately, there has been a complete suspension of an efficient market for crypto. All coins and tokens have been dumped without regard for fundamentally positive events, some of which we mentioned above.  Since the vast majority of crypto is owned by individuals, the wisdom of the crowd (or in this case mob) psychology prevails. The last time this was the case it was bitcoin alone that lost some 80% of it’s value starting late in 2013.  But that took more than a year to play out. Since the infamous $19,000+ peak, bitcoin has lost 68% so history is getting close to repeating itself.

It may also be a sign that a bottom in prices may be getting closer. The values are clearly there to be had. Now if only those of us who have a longer term view can find other who share a similar view.

Featured image courtesy of Shutterstock. 

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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4.4 stars on average, based on 82 rated postsJames Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.




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Analysis

Crypto Update: Bitcoin Plunges Below $6500 as Heavy Selling Resumes

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The cryptocurrency segment is having another very negative day after a calmer period, as selling pressure intensified yet again. All of the major coins turned sharply lower, with the laggards of the recent period, Litecoin, Monero, and Dash confirming their downtrend and the relatively stronger coins also taking a beating.

The total capitalization of the segment dropped below $270 billion, and from a long-term technical standpoint, several currencies are in precarious positions. With no clear news catalyst behind the move, technicals are playing a very important role, and last week’s lows will likely be in focus in the coming days.

BTC/USD, 4-Hour Chart Analysis

Bitcoin is still relatively weak both on the short- and long-term time-frames, and it dropped back to the $6275-$6500 zone that has been acting as primary support during the recent leg lower. Given the importance of the long-term zone between $5850 and $6000, a break below $6275 could set up a crucial test in the coming days. For now, traders still shouldn’t enter new positions, while investors should hold on to their coins as the bullish secular trend is still intact.

No Hiding From the Selloff as Altcoins Broadly Lower

LTC/USD, 4-Hour Chart Analysis

With the weakest coins leading the way lower again, new swing lows are likely in the majority of the coins, although there is still hope for bulls that a major long-term breakdown can be avoided. Ethereum fell below $500 after touching the declining short-term trendline, and it remains in a bearish trend, even as it’s still in a much better technical position compared to BTC, holding up well above the April lows, and being further away from last week’s swing low as well.

ETH/USD, 4-Hour Chart Analysis

 That said, we remain negative regarding the short-term outlook for the second largest coin, and traders shouldn’t enter new positions here.  Above the $500 level, strong resistance is ahead between $555 and $575, while primary support is found at $450, with further zones near $400 and $480.

BNB/USDT, 4-Hour Chart Analysis

There are no real hiding places for crypto investors from the current selloff even as Binance Coin is still holding up relatively well, within a clear uptrend and above crucial technical support.  That said, as we warned before, given the broad downtrend in the segment, traders should be cautious with new short-term positions.

Featured image from Shutterstock

Disclaimer:  The analyst owns cryptocurrencies. He holds investment positions in the coins, but doesn’t engage in short-term or day-trading, nor does he hold short positions on any of the coins.

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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4.6 stars on average, based on 280 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Analysis

Italy Spooks markets Again as Stocks Remain Under Pressure

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European stocks Led the way lower today despite a bullish start in Asia, as equities gave back their gains when Daimler published a surprising profit warning, which was deeply affected by the recent trade war developments, reigniting fears of a tariff-driven downturn in global trade.

DAX, 4-Hour Chart Analysis

The Old Continent got into more trouble later on, when two anti-EU officials were named in Italy, resurrecting fears of a clash between the systematically crucial country and the core of the Eurozone. Italian yields rose in European trading, and although they are still shy of the levels hit during the May scare, the periphery could be in trouble as the ECB pledged to exit the market by the end of the year.

Nasdaq 100 Futures, 4-Hour Chart Analysis

The main European indices were smashed lower during the session, with the DAX hitting a two month low, still being very weak relatively speaking compared to its US peers. US stocks sold off heavily following the opening bell and they failed to recover, unlike two days ago, and the major benchmarks traded well below yesterday’s levels just before the close.

The Nasdaq and the Russell 2000 lost some of their recent mojo, pulling back heavily of the all-time highs during the day. All in all, the risk off shift continues to dominate across the board, as we expected and we remain negative on risk assets here, especially regarding emerging markets, even as the Dollar’s rally could be over for a while.

Dollar Pulls back as Pound Surges

USD/CAD, 4-Hour Chart Analysis

The Dollar took a beating as the Philly Fed Index came in much worse than expected, and as the Bank of England sent hawkish signals, pushing the Pound and the Euro higher. The central bank left its benchmark rate unchanged at 0.5%, but a rate hike this year got much closer, with a key member of the bank voicing inflationary concerns.

The Greenback fell more than what the events would imply, so a larger scale consolidation could have already started in the currency following the recent gains and the marginal new high yesterday. With the EUR/USD pair nearing the 1.1450-1.15 support zone, the USD/CAD hitting 1.33 and the AUD/USD touching 0.7350, a meaningful counter-trend move would be timely in the surging reserve currency.

WTI Crude Oil, 4-Hour Chart Analysis

Gold continued to drift lower before the Dollar’s reversal and it hit $1262 for the first time since lat December before bouncing back above the $1270 level in late trading. Crude oil also fell sharply in early trading, and the WTI contract traded with a $64 handle before rallying back to $66 per barrel.

The OPEC meeting, which is expected to result in a supply increase by the cartel made the crucial commodity very volatile in recent days, but we expect the bearish trend to continue, with a likely dip to the $60 level in the coming weeks.

Featured image from Shutterstock

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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