Dramatic Response To French Election

The results of the first round of the French election spurred a dramatic response in the capital markets. Our thesis that there is no populist-nationalist wave sweeping the world is supported by the previous results in Austria, the Netherlands, and now France. The AfD in Germany is wilting in the polls, and there too the center will hold. The populist-nationalist wave seems a result of the Anglo-American two-party system in which the center-right party adopted part of the populist-nationalist platform.  

The euro gapped higher in pre-Pacific trading. It had finished the week in North America a little below $1.0730 and jumped to almost $1.0860 on its way to nearly $1.0940. However, it drifted lower in Asia and steadied in Europe around $1.0850. The gap is found between $1.0738 (Friday’s high) and $1.0821 (today’s low). The immediate issue is what kind of gap it is? The longer it is unfilled, the more bullish are the implications.  

There are some events that are the week that could challenge it. The ECB meeting stands out as a risk. The March meeting was seen as hawkish, and this does not seem to be Draghi’s intent. Draghi’s comments before the weekend reiterated the line about rates being this low or lower. The ECB’s Nowotny explained that policy for 2017 has already been set, and a decision about 2018 will be made in the second half.    

Meanwhile, as President Trump’s 100-day in office approaches, there seems to be a push to make something happen, but this could be a dangerous game if the inflated expectations are not satisfied. In particular, there has been the suggestion that a vote on health care reform could be held this week, but it does not look ready. Trump reportedly will make an announcement on tax reform (Wednesday), but this is likely more of a wish list that detailed proposals. Reports suggest that it will not include the controversial border adjustment tax.