It’s a Bank Holiday Monday in the UK so analysis is pretty thin on the ground. But here’s the best of what we have so far. A quick recap: François Hollande won the French election, while the Greeks rejected the country’s main austerity focused parties, opening the country to political uncertainty.
From Kit Juckes at Societe Generale:
The outcomes of the French and Greek elections were as expected, and hence bearish for risk but not surprising. The SG sentiment indicator is at 0.38, so at the bottom end of neutral. Less risk-off than risk-angst! €/$ has tested the bottom of its range but not broken free. Where now?
The economics team have published a roadmap for the first hundred days of the Hollande Presidency. All assume he will open the debate with Merkel about slowing the austerity drive, most assume his policy bite won’t be as bad as his electioneering bark. Personally, I think we need to distinguish between the direction of policy and the macro impact of policy. What bothers many about French fiscal policy is the sheer size of the government in the economy overall. But the structural need to nurture the private sector and limit the power of the state isn’t at all the same as needing permanent austerity and economic misery. This is only important now because to argue for more austerity in Europe is just plain silly – the sort of siliness that could bring the whole thing crashing down.
The Greek result was no more of a surprise than the French one but is is a wilder card event. At the moment, it looks as though a coalition can be formed, but how long a new government could survive isn’t clear. The Greek people have spoken, but only to say they are disillusioned and angry. My bet for today is that the US, having sold risk off after payrolls that were soft but not soft to change anything, will bounce. If that happens, we will have an edgy day in which ranges hold. The catalyst for a decisive move lower by the euro remains absent, though the move is inevitable eventually.
The pound continues to thrive by default, AUD remains the fashional global risk short so beware short covering. The euro is a challenge but it is still straightforward to conclude rates will be even lower than you thought for even longer than you can imagine. Foreign buyers of non-German European debt will be pretty few and far between and equity indices won’t get their mojo back till some European questions are answered, Preferably by a huge public show of Merkel/Hollande ‘solidarity’…. Kit Juckes
A quick note from Jens Nordvig at Nomura:
– Our Greece experts Drakopoulos/Farmakis have highlighted today that the Greek election result points to political instability and a very tense situation around the upcoming negotiations with the Troika. Moreover, the French election result poses additional risks to German-French cooperation and the ability of Eurozone leaders to make necessary compromises in coming months (a bit more detail below).
– This news has seen EURUSD break 1.30 for the first time since January, and we think there is further downside from here. We have been short EURUSD for two weeks, expecting a break of 1.30 as a function of a continued rise in Eurozone risk premia (see attached PDF: The Euro: What Now?). This break now appears to be materializing and we expect a further gradual downtrend in coming week. Our central case is a near-term move to the 1.26-1.28 range, and then some consolidation around there.
While a Hollande victory in the French presidential election was in-line with opinion polls, the actual result nevertheless raises risk in relation to eurozone cooperation. Will Hollande and Merkel be able to push through needed eurozone wide agreements in the way Merkel and Sarkozy were? Elsewhere in the eurozone, the latest polls results in Greece suggest a big loss for the main parties, which have governed Greece for decades. This will make forming a functioning government very difficult, as it will have to be based on fringe party support to some degree.
Both these developments will add to tensions in the eurozone. These have already been on the rise lately on the back of weak data (such as the latest PMIs and unemployment data), concerns about Spanish banks, and due to the waning effect of the LTROs. We have been short EURUSD for two weeks (from 1.3170), targeting a break of 1.30. This view was based on an expectation of an ongoing rise in eurozone risk premia, in part driven by event risk, and on the notion that the offset from weaker US data would be fading as the US yield curve finds support at the level of yields seen early in 2012 (before the push higher seen in Feb and Mar). This break in EURUSD is now materializing and we think we are going to continue to trade lower and perhaps consolidate in the 1.26-1.28 area within a few weeks. So far, we have traded down to 1.2960 in the early Asia open, and we expect this break to be sustained
And this from RBC Europe’s Elsa Lignos:
• Francois Hollande’s election victory on Sunday means that France’s Socialist Party has taken power for the first time in seventeen years (since Mitterand’s rule ended in 1995). This follows a string of victories for the left/centre-left at local, regional, and Senatorial elections, leaving the National Assembly (the lower house) in control of the right/centre-right.
• France will hold legislative elections next month on June 10 and 17. If the left wins, it will control all branches of government. If the right retains its majority, Hollande would be forced to appoint a PM representing the right (as the PM must have the confidence of Parliament) and France would end up with “cohabitation” whereby the President and PM come from different parties (last seen in 1997–2002 with centre-right President Chirac/centre-left PM Jospin).
• Sarkozy has announced that he will step down as leader of the UMP to allow someone else to lead the party into the June elections. For some, the election was a referendum on an unpopular President Sarkozy, so it is possible that with a new leader at the helm the UMP may get a better turnout in June.
• Our European economists note that, historically, the centre-left Socialist party and centre-right UMP tend to gain votes from the far right at legislative elections (the National Front has never managed to win more than one seat in the Assembly, despite gaining 10–18% of the vote during Presidential elections). For further details on the legislative elections/past results, please see here. • Cohabitation may lead to political paralysis or it may lead to the centre-right directing domestic policy. In his victory speech, Hollande suggested that he wants to be a President for everyone, implying appetite for consensus building. The test will be when the new Executive and Assembly are faced with negotiating and executing difficult reforms. • As we go to press, it is in Greece where the election outcome is most uncertain. New Democracy and Pasok are on course to gain their lowest ever share of the popular vote (a collapse from previous elections), raising a significant possibility that no government will emerge from these elections. The final results are due on Monday morning local time. If parties cannot form a working coalition, Greece may be forced into holding new elections within weeks. • Italy also held local elections over the weekend (the first opportunity to register a protest vote since the Monti technocrat government took power). Results are not yet out, but voter turnout looks set to be low. • Finally, the German state of Schleswig-Holstein held regional elections. Exit polls suggest no clear winner, but the centreleft opposition looks likely to form a coalition. Also worth noting is the strong rise in support for Germany’s newly formed Pirate party (quadrupling from ~2% to ~8%) and its securing seats in a regional Parliament for the first time.
We’ll have more analysis as we get it.
Risk assets shunned after eurozone votes – FT