Optimism Before The Big Weekend: Should You Buy Into It?

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The market seems optimistic before the French elections.

The centrist pro-EU candidate seems likely to advance to the second round.

The major beneficiary would be the Euro.

The first round of the French elections this Sunday is a big deal - the implications will have global-wide reach.

What's at stake? Short-term not much, but longer-term the Euro (NYSEARCA:FXE). And, as the Euro goes, the post World-War II "system" goes with it. So, this "system" has been good to investors - globally. The radical change in this "system" would be a major systematic event.

Specifically, as I previously discussed, the German 2-year Schatz, has been implying the Euro redenomination risk, when compared to the EURIBOR. That means that some investors expect the German Bonds could be redenominated in the German Mark, as the Euro disappears.

So, I will not go into the political analysis, there is plenty information about that. But I do want to point to the specific financial indicators that any investor can monitor to determine the market opinion with the respect to the fate of the euro.

Most importantly, you have to monitor the German Schatz futures. Here is the chart:

As the chart shows, the price reached record highs around March 1, which reflected record low yield just below -1%. After the significant drop, which is the euro-positive, the price revisited the record level, after the Brexit Article 50 was triggered.

However, over the last 2 days, the Schatz sold-off, which shows the optimism right before the election.

If the Schatz sell-off continues next week, the market will be happy with the election outcome, no matter who makes it to the second round.

What else happened over the last 2 days? Gold (NYSEARCA:GLD) failed to break the 1300 resistance and sold-off; the stock market (NYSEARCA:SPY) staged a rally, after failing to break-down; and the break-out in Treasury Bond future prices was interrupted as the yields reached 2.18%.

Note, these are all optimistic signs right before the French elections. Why optimism? it looks like the most recent polls are not only showing that the pro-EU centrist candidate Macron now leads the race, but also that his numbers are reaching 25% of the electorate. In such a tight race, this is a welcomed news.

Should you buy into this optimism?

The French election polls are more reliable than the US polls as there is a simple national poll, compared to the US electoral college. In fact, the US election national polls were not really that far-off. The Brexit referendum pools were much tighter than the current French polls, where Macron leads the third candidate by at least 5%.

However, the French election would only have a major positive impact only the euro, and negative impact of German bonds. The stock market has been ignoring all negatives, including the French election, so fundamentally a positive news should not matter - except for a short relief rally.

So yes, I would buy into this optimism, and specifically buy the Euro as the major beneficiary.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.