Can Le Pen win & could European equities start outperforming?

Mentioned products: SPX, EuroStoxx, DAX30, CAC40, IBEX35, MIB40, GREK, EURGBP

I would like to dedicate this week’s weekly overview to Europe and French election because it’s quite important event for global political and economic situation and therefore for financial markets as well.

My question this week is, can Le Pen win and what are markets telling us? We are again facing this strong polarity as we’ve seen around Brexit and the US presidential election. Either you are good or your are bad, there is nothing in between. It seems there is a consensus that Macron is the good and Le Pen is the bad and you better not be for ‘the bad’.

What does this mean for the election? Similar to Brexit or the US election, ‘the bad’ are quiet, they are not expressing their political beliefs as they’d be marked straight away. So this could lead to another surprise! I don’t know if we will see it, but I think it is not such a remote possibility as people might think.

Some people, such as dr. Pippa Malmgren, are suggesting Le Pen win wouldn’t be bad for European equities, especially for the southern markets, because she would introduce some necessary changes. And the big loser of the story could be Germany. I am not a political expert so I can’t comment this topic so let’s see..

But what are markets telling us? Even though I am planning to focus more on European equities this week, I can’t ignore and will start the S&P 500, because it’s one of the most important markets.

SPX closed at all time highs on Friday and this is not bearish. Price consolidated just below 2400 level for almost two weeks, and it seems we could be breaking higher now! spx

Not only SPX, but other markets closed strong on Friday. This is very constructive for further gains. I mentioned last week that EU equities could start outperforming US equities, please see the chart here [1]. On the next chart we can see the ratio between EuroStoxx 50 vs SPX. The ratio generated a falling wedge pattern over the years. It seems the ratio is breaking higher now and gaining an upward momentum. This is very constructive for European equities. eustoxx_vs_spx

I am not a political expert so excuse me if my understanding is not 100% correct. But my simplified understanding of French election is the following: if Macron wins we will get “strong unified” Europe or more of the same and if Le Pen wins we should expect a change in Europe.

The consensus as of now is that the likelihood of Macron winning is very high. But this puzzles me.. why, if we are getting more of the same, did southern European markets rally stronger than Germany in the past few weeks?! Has something changed already or is the market expecting something will change?

Let us start with the ratio between French CAC 40 vs German DAX 30.. it seems the ratio is bottoming and, similar to EU vs US ratio, gaining upside momentum. fr_div_de

Very similar is with Spanish Ibex 35 vs Dax 30. es_vs_de

And Italian MIB 40 vs DAX 30. it_vs_de

And… wait.. wait… Greek Global X FTSE Greece 20 ETF vs DAX30 as well?! gr_vs_de

And I’d like to finish off with EURGBP.. Another one potentially signaling there could be another winner against Germany. EURGBP broke below a few month long triangle and is now consolidating in a wedge highlighted in purple below the triangle trendline. Could EUR start losing big time against GBP as well? eurgbp

So, is the market telling us beneath the surface that we should expect a change? Let’s see..

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