French Election results point towards ECB raising rates in the near term

Impact Analysis: Major European bond yields have moved slightly upwards post Emmanuel Macron winning the French presidential race; The Euro too has remained stable as compared to USD as well as Yen; this signals toward stabilizing markets and is a positive news for the European Union as France will go ahead with more market friendly reforms.

Impact: Positive

Emmanuel Macron, who has been elected president of France on Sunday, the 7thof May - portrays a socialist and a reform oriented stance and is a supporter of the EU. The Union has already lost a powerful member after the Brexit referendum in May, 2016 and a French exit could have significantly impacted the geo-political situation of the region and further weaken the already fragile macroeconomic environment. Winning of opposition leader, Marine Le Pen of the prominent Nationalist Party, on the other hand, was expected to destabilize the markets significantly.

Although his Governments stance is still not clear, Macron’s wining is expected to bring about stability in the EU. In early signs, major European bond yields (including French 10 year Bonds and German Bundesbonds) have moved slightly upwards post Macron wining the French presidential race. The Euro too has remained stable as compared to USD as well as Yen and this points towards stabilizing markets and is a positive news for the EU as France will go ahead with more market friendly reforms.

SMERA believes that this event comes as an anticlimax to the Brexit rhetoric and will help shore up confidence in the EU, as an economic entity. As mentioned earlier, bond yields have gone up by 400-500 bps and this symbolizes the markets expectations of interest rates going up in the near term. In other words, the ECBs expansionary monetary policy will ease a bit as the bank will get confidence that enough liquidity has been created in the system and reformist governments will now take over. With German economy performing well, thanks to its encouraging capital good and luxury good exports, the EU economy has been maintaining its 0.5% growth. Now that there is a higher chance of France playing a lead role (along with Germany), in the EU, we expect stability will prevail. This is good for both the Euro, as a currency and the EU as the world’s second largest trading bloc.

 

10-Year Bond Yields

5th May 2017

9th May 2017

Percent Change

France Government Bond

0.76

0.80

4.16%

Germany Bundesbond

0.41

0.43

5.54%

UK Gilt

1.17

1.18

5.73%

Source: Investing.com; SMERA Research

 

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