A French Connection For This ETF

As is now widely known, the May 7 French runoff election will pit centrist Emmanuel Macron against far right candidate Marie Le Pen. Apparently, European assets and financial markets not only like this matchup, but are pricing in a Macron victory because French stocks and the related exchange traded funds are surging this week.

Following the first round of the French election last Sunday, the SPDR EURO STOXX 50 ETF FEZ is up 7.5 percent, bringing its year-to-date gain to over 14 percent. The $3.1 billion FEZ is, at the geographic level, dominated by two countries – Germany and France, the Eurozone's two largest economies. French stocks represent about 36 percent of the FEZ roster with Germany contributing another 33.5 percent.

By comparison, the S&P Europe 350 Index allocates less than 16 percent of its weight to French stocks. In other words, it's not a stretch to say the recent bullishness surrounding FEZ and rival Europe ETFs is attributable to expectations of a Macron victory in May.

Related: Centrist Macron, Right-Wing Populist Le Pen Advance In French Presidential Contest

“This relief rally is grounded in the fact that pollsters now forecast that Macron, the candidate with a more pro-European Union and pro-globalization world view, will win the final French presidential election,” State Street Global Advisors (SSgA) said in a recent note. “This risk on sentiment and 'Le Sigh' by the market are underscored by the rapid snapback of a euro risk reversal options trade. Prior to Sunday’s vote, this measure reached the lowest level since 2011, indicating a high cost of hedging for a decline or a 'Le Panic.'”

Le Pen is seen as the more controversial of the two candidates for, among other reasons, her anti-European Union (EU) view. There are concerns that if she wins, she will move for a Frexit, or France's departure from the EU. On the back of Brexit last year, the notion of France leaving the EU could be too much for the EU to absorb.

As a result, Le Pen is seen as euro negative, which in theory should benefit Eurozone stocks. After all, France and Germany are export-driven economies. Markets don't agree and prefer the pro-euro Macron. The lifespan of that preference could be tested if a strong euro suppresses French corporate earnings after Macron wins, assuming he does.

Still, Macron isn't a lock to win.

“Macron is a first-time candidate who has no political party and has never held an elected office,” SSgA said. “This lack of experience may be the reason for wavering voter support. Macron’s odds of securing the presidency have fluctuated wildly, while Le Pen’s odds have moved in a much tighter range.”

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Posted In: Long IdeasNewsSpecialty ETFsEurozonePoliticsEventsTop StoriesMarketsTrading IdeasETFsGeneralEmmanuel MacronFranceFrench electionFrexitMarie Le Pen
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