Originally published by Rivkin Securities
Centrist Emmanuel Macron will now become the next President of France as he looks set to win an overwhelming 65% of the vote defeating protectionist candidate Marine Le Pen. This victory will be seen as strengthening the Euro project with Macron looking to further integrate the Euro-zone through a common budget. The focus now shifts to the first round of French legislative elections on June 11th where forming a majority government will be key if Macron is to deliver on his campaign promises of a more efficient government, reduced government spending, lowering the tax rates and reforming the labour market to make it more flexible. Macron’s newly formed party, En Marche!, is predicted somewhere between 249-286 seats of the 577 according to Reuters, which would be just shy of the 289 required for a majority. However given Macron’s centrist policies it will be fairly easy for him to form a coalition.
The euro unsurprisingly strengthened this morning shown on the first chart below, gaining +0.24% against the US dollar, +0.46% against the yen and +0.22% against the pound. While futures markets are still closed there is the decent probability we see a risk on mentality today, although given this outcome was widely predicted Macron’s victory has already been largely priced in.
The US Dollar Index edged lower on Friday, down -0.15% as treasury yields were little changed despite stronger than anticipated non-farm payroll data. For the month of April payrolls rose 211,000 compared with estimates of 190,000 taking this year’s monthly average to 185,000. The unemployment rate dropped to a ten-year low at 4.4% from 4.5% and the broader measure known as the U6 or underemployment rate dropped to 8.6% from 8.9%.
The soft spot was wage growth which rose at +2.5% compared with estimates for +2.7%. Given the tighter labour market wage growth should be rising at a faster rate, something the FOMC has continued to draw attention to.Expectations are that as the labour market tightens further wage growth will follow and we are already seeing some signs of this in the Federal Reserve’s Beige book, which is a summary of commentary on economic conditions. Traders are now pricing in the 78.5% probability of a rate hike when the FOMC meets next in June compared with 67.5% a week earlier.
Oil prices reversed declines of up to -3.80% on Friday to close higher, shown on the second chart below, as both WTI and Brent crude finished +1.54% and +1.49% higher respectively. The move follows comments from Saudi Arabia that Russia is also willing to support the six month extension of production cuts as OPEC looks set to announce when they meet on May 25th, although any increase in the level of cuts remains unlikely. From a technical standpoint momentum indicators remain extremely overbought, and the size of the reversal on Friday suggests we may have seen capitulation by some bulls, which while sounding counter-intuitive, can often signal a reversal in the near-term.Overall prices are likely to remain range-bound with a floor around US$40 and ceiling at US$55 as the market balance OPEC cuts against rising U.S. production and inventories.
Locally the S&P/ASX 200 finished -39.81 points or -0.68% lower on Friday although we can expect a reversal this morning with ASX SPI200 futures closing +55 points higher on Friday.
Data releases:
· Australian Building Approvals (MoM & YoY Apr) 11:30am AEDT
· Australian NAB Business Confidence (MoM Apr) 11:30am AEDT
· Fed’s Bullard Speaks On Interest Rate Policy 10:35pm AEDT
Chart 1 – EUR/USD (Blue) and EUR/JPY (Purple)
Chart 2 – WTI (Blue) and Brent (Purple) Crude Oil
Source: Rivkin, RivkinTrader