With the ECB meeting looming, expectations of Trump’s tax announcement and the ongoing French elections, low volatility has the potential to rise once more.
1) Don’t Write Off Le Pen Just Yet
The polling data was accurate in the first round of the presidential election in France but that does not rule out a margin of error for the second round. This is a major threat because Le Pen’s party could always win in low turnout ratio or sympathy vote. For now, we think that investors have made up their mind and believe that it is Macron who will win the election. But we would like to remind investors the biggest moves in the market come when it is least expected. After the US elections, we have come to realize just how relevant the last-minute scandal regarding Hillary Clinton affected her campaign. A similar scenario can’t be ruled out in France, and that could result in people accepting her party’s controversial views. The polls, are currently putting Macron way ahead of Le Pen, but it could turn out to be a neck-to-neck race.
2) Buy Volatility While it is Cheap
Therefore, it may not be harmful to buy your insurance policy now. Volatility is extremely cheap and as a smart investor one should look to buy it now.
3) ECB Not Going to be Hawkish despite Macron’s Victory
Markets are anticipating that the European Central bank will change its forward guidance very rapidly if Macron wins the election. However, our own view is contrary to this and we think that Macron’s victory will not lead the EU out of the woods just yet. Yes, we may hear the ECB being more optimistic due to the positive outcome of French elections, but don’t forget that we have the UK elections only a few weeks after the French election. The person who is leading in the polls is looking for a hard Brexit. It would not be wise for the ECB to keep their eyes closed right now as a hard Brexit would also affect the Eurozone. The ECB has burned the midnight oil its attempt to revive the growth of the Eurozone and they would not like to take any aggressive approach which could result in disaster for them. Therefore, we would not bet too big on the ECB being too hawkish just because of Macron’s victory.
4) Trump’s Tax Plan Will Triumph Over Any Other Headline
Today the market is focused on one and only one factor today. Investors will be holding their breath as Donald Trump speaks about his tax reform plan. Currently, one major aspect of his plan which everyone is talking about is the corporate rate tax cut to 15% from its current rate of 35%. He can certainly cut that to 15% but that would only be good enough to produce a mammoth headline on the newswire. But, the question which you need to ask is how long it will take for that tax rate to become effective if it becomes effective at all. The market may go higher on the back of these flashy headlines but it will not take long before reality catches up with it.
5) US Government Shutdown Risk Not Factored In
Another factor is the US government shutdown. Not much has been priced in again and we are seeing many lucky safe havens. But as we move closer to Saturday, and the government starts to shut down in the case of a no-deal, we could see a last minute panic in the market once again.