Risk-on mode, more of that please

And just like that, the first round of the Fresh elections are over, with Le Pen and Macron emerging as winners and are scheduled to go head-to-head in the second round of elections in a couple of weeks’ time. What has been important for the markets over recent weeks and the run up to Sunday’s election is investor sentiment, as investors have been weary and edgy to say the least, and flows into the single currency region were extremely thin.

Investors were welcomed by positive trading screens as risk-on mode moved from first gear to fifth gear in the initial minutes of the trading session, as risky assets rallied across the board. From High Yield bonds to peripheral bonds, to a strengthening euro to emerging markets, but European equities were the clear winners during yesterday’s trading session, particularly those highly exposed to France. The European banking sector was one of the key outliers, with equities and deeply subordinated bank debt rallying sharply. On the flipside, the safe haven government bonds particularly in Germany bore most of the brunt of yesterday’s risk on mode.

Markets will now be closely monitoring polls heading into next month’s second round, but what is certain is that, following the way markets have reacted so far these 2 days, investors are evidently pricing in a win by the pro-Europe faction represented by Macron’s party.

In the meantime, earnings season is closely gaining traction, across both sides of the Atlantic, but most notably in the US and by the end of the week, 40% of the companies in the S&P500 would have reported earnings, the outcome of which is expected to continue to set the tone for the week, as well as a flurry of economic data releases.

Primary markets in the European High Yield market were extremely quiet over recent weeks. We would expect the outcome of the French election, which resulted in a sharp compressions in spreads and a marked reduction in yields, to show a large number of bond issuers tapping the market once again, and take advantage of significant lower yields. We would also expect the higher beta sectors, such as AT1 CoCos, sub insurance, corporate hybrids to remain in demand with the global search for yield compressing yields gradually further from this point forth.

Also, eyes will be on the ECB on Thursday in its scheduled rate setting meeting – no surprises are expected on the rates front but more on the state of the economy and the MPC’s views on monetary policy measures and how best to communicate them to the market going forward. A week which is surely expected to keep us on our toes.