Merci à Nos Amis en France
The title of this morning’s market missive is, “Merci à Nos Amis en France.” Loosely translated, it means (and yes, I had to ask Google for some help here as I can barely order dinner in Chamonix without embarrassing myself!) “Thank You to Our Friends in France.”
By now, I’m fairly certain that anyone wishing to understand the driving forces behind the daily market action knows that it was the result of the first-round voting in France that triggered the 216 point joyride to the upside in the stock market on Monday. (Well, that and Mr. Trump’s insistence on announcing some sort of grandiose tax plan on Wednesday, of course.)
In addition, everybody probably knows that there were corresponding moves in currencies (the greenback went down) and bonds (yields went up). And as usual, the question is, why?
Why does anyone owning shares of GE or McDonald’s care that some guy named Emmanuel Macron is suddenly the front runner to become France’s next President? Why did bond yields suddenly reverse the downward trend that has been in place since March 13? And why would the U.S. dollar close within a whisker of the year’s low?
Cutting to the chase, both Macron and his opponent in the May 7 run-off election, Marine Le Pen, are political outsiders. In fact, Emmanuel Macron was referred to as a “political novice” by CNN Monday. The key is that the two candidates, which happen to be diametrically opposed on most issues, quickly disposed of the country’s “establishment parties” that for decades have ruled France’s political landscape.
More importantly, Macron, the guy some experts think is going to run away with the election, is pro-Eurozone and pro-growth. And as far as the markets are concerned, this is a good combination.
You see, markets don’t really want to deal with a FREXIT, an Italeave, or a Portugone. No, with the Eurozone economy apparently doing just fine, thank you (the ECB projects the Eurozone GDP growth rate will be 1.8% this year), traders would rather focus on the good stuff than fret over yet ANOTHER crisis in the Eurozone – and the corresponding worry over the global banking system.
Don’t look now fans, but unemployment in the EU continues to fall. And Markit’s Flash Composite PMI for the Eurozone hit a six-year high on Friday. Can you say, economic improvement?
So, while there is still the chance that Marine Le Pen’s populist, anti-EU message could prevail, Monday’s stock market advance was all about the reduction in political uncertainty. Or put another way, stability, economic growth, and hope.
Which, of course, is why bond yields rose. And I’m sorry to say that the projected path forward here for the bond market isn’t terribly encouraging.
Speaking of Bond Yields…
The problem here is that all the good stuff for the stock market is actually bad stuff for bonds. If you recall, the ECB has been on a QE-induced buying spree – a scheme that isn’t slated to end for some time yet. Well, unless the economy perks up, that is.
The bond experts I listen to were suggesting Monday that the ECB could announce a change to rate guidance (aka “talking taper”) as early as June 6. And we all know how bond traders hate to see a central bank reverse course, right!
Although inflation is nowhere near the ECB’s target, the fact that the European Central Bank has been running out of bonds to buy on the open market could cause Draghi and Friends to “taper” their QE program sooner than expected. In turn, this would put pressure on bond yields globally.
Think about it, if there isn’t an 800-pound gorilla buying up every bond in sight on a monthly basis, should yields in places like Italy, Portugal, and Spain REALLY be trading where they are today? So, if the bond market starts to feel the QE winds shift – by even the slightest degree – the mother of all “taper tantrums” could very well materialize across the pond. And in short, global bond yields would undoubtedly rise.
So, while the stock market certainly enjoyed a nice move on Monday – heck the NASDAQ and NDX even finished at new all-time highs – it might be a good idea to keep an eye on global bonds while you are popping the celebratory champagne. Because if Le Pen wins or the ECB starts to get antsy, the next french phrase investors may be using is “mon Dieu!”
Thought For The Day:
Being ignorant is not so much a shame, as being unwilling to learn. — Benjamin Franklin
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
T1. The State of World Politics
T1. The State of Trump Administration Policies
3. The State of the U.S. Economy
4. The State of Earning Season
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.
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