Connect with us

Analysis

The Risks of the French Election and How to Play Them

Published

on

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.

// -- Discuss and ask questions in our community on Workplace.

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.

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

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 money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



Feedback or Requests?

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.

You must be logged in to post a comment Login

Leave a Reply

Analysis

Bitcoin’s Record-Breaking Rally Continues as Prices Cross $8,100

Published

on

Bitcoin surged to new highs on Sunday, as the world’s largest crypto by market cap continued to generate bids following the cancellation of Segwit2x.

// -- Discuss and ask questions in our community on Workplace.

BTC/USD Price Levels

The value of a single bitcoin reached a daily high of $8,110.59, its best level on record. At press time, BTC/USD was valued at around $8,002 for a gain of 4%.

With the gain, bitcoin’s market cap now exceeds $133 billion. That’s roughly $100 billion greater than Ethereum, the market’s second most valuable cryptocurrency.

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

Bitcoin has added more than $1,100 over the past five sessions. It was down around $5,600 just one week ago.

Bitcoin Cash (BCH), a digital currency alternative that broke away from the original blockchain Aug. 1, was down 5.1% at $1,185. BTC and BCH locked horns earlier this month after the Segwit2x hard fork was abandoned.

$10,000 and Beyond?

Institutional clearing platform LedgerX has initiated its first long-term bitcoin futures option, which is set to expire Dec. 28, 2018. In setting up the option, LedgerX is assuming a price of $10,000 at the time of expiration. That’s a 25% premium on current levels.

Investors who buy the option are essentially saying they believe prices will exceed $10,000 by the time of expiration.

Bitcoin is being helped by growing institutional demand for the digital currency, as hedge funds, day traders and other mainstream investment outfits look to access this burgeoning asset class. CBOE and CME Group have each announced plans to integrate bitcoin into more conventional investment vehicles in the coming months.

The rush of institutional money into bitcoin is a sure sign that the digital asset class is becoming too big to ignore. The value of all cryptocurrencies in circulation has already exceeded $230 billion, with more than a dozen coins valued at $1 billion or more. Nine others have a market cap of $500 million or greater.

Coinbase Responds

The rise of institutional capital has also compelled Coinbase to introduce a custodial service targeted at account holders with more than $10 million in assets. This service targets hedge funds and other institutions that have remained largely on the sidelines of the crypto revolution.

In a recent blog post, Coinbase CEO Brian Armstrong announced that the new service will launch sometime next year.

“When we speak with these institutions, they tell us that the number one thing preventing them from getting started is the existence of a digital asset custodian that they can trust to store client funds securely,” Armstrong wrote.

In addition to maintaining the minimum $10 million asset requirement, institutions must pay a $100,000 setup fee to gain access tot he Custodial program. In response, institutional investors will receive assurance that their assets are secure.

The Coinbase Custody website lists broad support for bitcoin, Ethereum (ETH) and Litecoin (LTC), as well as ERC20 tokens. The ERC20 protocol has emerged as the favorite for startups launching initial coin offerings (ICOs), a controversial crowdfunding model that has already overtaken early stage venture capital.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock. 

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



Feedback or Requests?

Continue Reading

Cryptocurrencies

Is Ethereum Ready to Play Catch Up With Bitcoin?

Published

on

In mid-June of this year, the difference between the market capitalization of bitcoin and Ethereum had narrowed down to less than $8 billion. This had many market participants excited. They expected Ethereum to dethrone bitcoin as the leader, a move popularly termed as flippening.

// -- Discuss and ask questions in our community on Workplace.

Key observations

  1. Ethereum has hugely underperformed bitcoin
  2. The chart pattern suggests that Ethereum is likely to play catch up in the next few months
  3. Stay on the long side of Ethereum to benefit from the bullish setup

However, fast forward five months and the difference in the market capitalization of the top two cryptocurrencies has increased to about $96 billion. This shows that while bitcoin has raced ahead in the past few months, Ethereum has hugely lagged behind.

However, is the underperformance about to end?

The chart pattern shows that Ethereum is likely to embark on a rally of its own that can carry it to $645 to $670 levels in the next few months. Let’s see how we arrived at these levels.

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

Ethereum opened trading at $8.16 on January 1, 2017. It started its rally in March and by June 12, it reached a high of $420, an astronomical rally of about 5047%. Thereafter, it entered a period of consolidation, digesting the gains.

On the charts, Ethereum has formed a large symmetrical triangle, which usually acts as a continuation pattern. The breakout is generally in the direction of the long-term trend, or the trend that was prevailing before the pattern formed. In this case, the sharp move from January to June confirms that the cryptocurrency was in an uptrend before forming the triangle.

However, this is not a fool proof trade because sometimes the symmetrical triangle acts as a reversal pattern. Therefore, the best way to play this trade is to wait for a breakout of the triangle before initiating any trade.

Where can we take an entry?

Currently, the resistance line of the triangle is at about $378 levels, a level close to today’s intraday highs. The bears are likely to strongly defend this level. However, if the bulls breakout of $378 and manage to close above the resistance line, the trade on the long side will set up.

Different traders use different methods to confirm whether the breakout is valid or not. Some wait until price moves 3% above the breakout level, others wait for three consecutive closes above the resistance level.

However, we have observed that the best breakouts never look back, hence, waiting for three days may lead to a missed opportunity. Therefore, we can wait for a closing above the resistance line of the triangle and initiate the long positions on the following day.

The breakout can face resistance at $400 and $420. However, we expect the virtual currency to scale both these resistances and rally towards its pattern target zone of $645 to $670.

Notwithstanding, even the most reliable patterns can fail. Therefore, our stop loss will be kept at $340. We don’t want to hang on to the trade if it falls back into the triangle. We shall raise our stops to breakeven as soon as Ethereum breaks out to new lifetime highs. From thereon, we shall trail the stops higher to protect our paper profits.

Note

The chart pattern suggests a resumption of the long-term uptrend in Ethereum. However, this will not get confirmed until the cryptocurrency breaks out and sustains above $380. Therefore, please initiate positions only on a breakout and close above the triangle. Entering presumptive trades may result in losses.

Featured image courtesy of Shutterstock. 

 

 

 

 

 

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



Feedback or Requests?

Continue Reading

Analysis

Long-Term Cryptocurrency Analysis: Bitcoin Flirts with $8000 as Altcoin Bull Persists

Published

on

Bitcoin’s swift recovery was the main topic of the week, as the most valuable coin not just regained its steep losses, but hit a marginal new high towards the end of the period. The entire segment is experiencing capital inflows as the total value of the coins climbed above $230 billion for the first time ever after finally leaving the vicinity of the $200 billion mark.

// -- Discuss and ask questions in our community on Workplace.

BTC breached the $8000 level before turning slightly lower on Friday, but despite the severely overbought daily chart, it is still trading near its all-time highs. As the long-term picture still suggests a deeper correction, investors should wait with opening new positions and traders should also control position sizes here. Key support levels are found at $7700, $7000, and $6700, while the recent key break-out level at $5000 still hasn’t been re-tested.

BTC/USD, Daily Chart Analysis

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

Dash is still the most bullish altcoin from a technical standpoint, despite this week’s short-term correction, as the coin is trading above its prior all-time high, and this weekend, it looks ready to test the break-out high near $500. Support levels are still found at $400, $360, and $330, and as the long-term picture is approaching overbought territory, investors should only hold on to their positions here.

DASH/USD, Daily Chart Analysis

The other major altcoins are also mostly in bullish setups, with some of them already in the latter stages of this cycle, like Monero and IOTA, but elsewhere in the segment, there are still opportunities for both traders and investors. Let’s see the detailed long-term view.

(more…)

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



Feedback or Requests?

Continue Reading

Trending