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The Squeeze is On

25 April 2017 by Mark Holman

Finally the pollsters got it right and markets can breathe a sigh of relief. Macron vs Le Pen was the predicted outcome and from here the polls show Macron with a 20 percentage point lead, as the two candidates contest the final Presidential vote on the 7th of May. If we assume that is how things will end up, how do we gauge yesterday’s market reaction to the news and how should we react?

The Crossover index was 16 bps tighter, French government bonds converged 19bps to Bunds, US Treasuries spiked higher in yield, and the € rallied by nearly 1.5%. Higher beta sectors such as financials or French credits had even bigger moves. In summary the magnitude of the moves were both impressive and broad based.

In a way it reminds us a little of the Italian referendum in December, which happened to be bad news but the market took it very well, with little or no downside. Our take then was that the technicals in the market were just too strong and investors stepped in on any sign of weakness or on any price dips. Our take here today is very similar, albeit on good news. There are just too many investors who want to buy on the dip, which serves to make the market very resilient to downside shocks, or in this case creating a very “squeezy” environment on a lack of bad news.

Obviously bad news can strike at any moment in unexpected ways, but in terms of what is expected on the horizon, the markets may have a short term clear run ahead which raises the possibility of participants all rushing for the door…to get in!  In short, we think we are facing a squeeze and are therefore actively putting some of our cash to work.

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