Market analysis: Global trade brisk on optimism

The Euronext index swayed green following news on Emanuel Macron and Marine Le Pen win in the first round. Eric Piermont / AFP

Risk appetite rode a wave of optimism following a favourable first round outcome in the French presidential election. With a far left vs far right scenario crisis averted, markets celebrated the positive, with the centrist Emmanuel Macron heading into the second-round face-off with a healthy lead in the polls over the nationalist Marine Le Pen.

After the exit votes were tallied through late Sunday, markets opened yesterday morning with robust volumes – more than €10 billion worth of euro contracts traded within a few hours of the Asian opening as the euro crosses opened with large gains against the US dollar and the yen. The Dubai Gold and Commodities Exchange (DGCX) euro contract was more than 1.5 per cent higher yesterday while the DGCX’s yen contract against the dollar sold off minus 0.9 per dent.

Judging by the upward traction in the euro following yesterday’s opening, markets are seemingly pricing the probability of a Le Pen victory at close to zero. With the euro testing five-month highs against the dollar, we will watch how the pair trades at 1.0850 levels, which represents the nine-month moving average. Technically, an April closing above this level could extend the euro rally towards 1.1030 levels which would then be followed by 1.13. Yesterday afternoon, the contract was trading at 1.0860.

The euro’s fundamentals could be boosted further when the ECB board convenes this Thursday. While there are likely to be no changes to the benchmark European rates and no changes in their current asset purchase programme, markets will look for clues in ECB president Mario Draghi’s comments about future ECB policy. With the recent elections seemingly cementing France and Europe’s relationship, Mr Draghi may take this opportunity to hint at revising forward guidance in a bid at monetary policy normalisation as early as June. This could bring further support to the euro going forward.

The British pound similarly tested six-month highs against the US dollar, following Theresa May’s call for a snap election on June 8. Following her announcement, the pound tested 1.29 levels against the greenback on the optimism that the snap election would usher in a unified government to tackle the upcoming Brexit negotiations. The long squeeze knocked out several week GBP/USD short positions in its run towards 1.29 and we expect consolidation to continue in the current channel between 1.2750 and 1.29 in the weeks ahead. Yesterday afternoon it was trading at 1.2810.

With the financial markets for the most part awash with so much optimism in the past week or so, the dollar index and gold remained squarely on the back foot. After peaking at 101 levels, the dollar index has been hit hard because of risk on moods and mixed signals from the US government regarding the strength of the dollar. The index is trading at a key support level and will see more volatility in the week ahead.

The US president Donald Trump has hinted at announcing some key tax plans which are expected to be revealed tomorrow. Mr Trump has delayed announcing any such details regarding his fiscal plans, and if he delivers details of his long-awaited tax reforms, this could result in a slight surge in the dollar. Mr Trump’s proposed fiscal policy will drive future Fed policy. Investors have been waiting for more clarity on a host of issues including government spending plans as well as the tax reforms.

And finally, with geopolitical tensions continuing to tick over between the US and North Korea, we wait to see how any further war games pan out in the Philippine Sea. Tension will remain elevated as today marks the Military Foundation Day in North Korea and it would not be a surprise if further provocation takes place on this occasion – or through the upcoming week. This should keep gold and dollar supported going forward.

Gaurav Kashyap is the head of futures at EGM Futures.

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