Lessons from the French Election

The way to become a better trader is to learn from experience.  Usually the memories last much longer if money is on the line.  The stock index futures and the euro rocketed higher on the news of the expected, Macron 1st, Le Pen 2nd.  On the surface, that makes no sense.  Isn't the market supposed to price in the expected outcome?  Yes, if the other outcomes are such low probability or low impact that they don't factor into the overall positioning ahead of the big bad event.  But this time, the fear of a Le Pen Melenchon 2nd round battle was enough to get investors hedged up by either selling index futures, buying bond and gold futures, selling the euro, or selling the French OATs.

The Brexit vote and the Trump victory had a lot to do with this.  Both were considered unlikely events and they both happened.  This led to investors' distrust of the opinion polls leading up to the French election and the fear of Frexit under Le Pen or Melenchon, who was surging in the final days.  And with the general propensity to sell the supposedly risky asset ahead of the event (a.l.a. Treasuries ahead of a FOMC rate hike announcement, stocks ahead of French election), most of the time, there is pent up buying demand after the event is over, regardless of the outcome.  It is only logical that those who already sold ahead of the event, probably don't have much to sell after the event.

The French election has been considered a risk event for months now.  The buildup was not as great as I expected, with Syria and North Korean distractions, but it did heat up in the past several days.  That in itself told me enough that there was a decent discount being built into stocks due to that uncertainty.  Now that most of the uncertainty is over, although there is still round 2, the markets aren't dumb. Macron is an extremely heavy favorite over Le Pen in the next round because the lead is so sizeable and well beyond the margin of polling error.

It gets harder now.  The easier trade was to get long ahead of the event.  Now it is more even, although I would still favor the long side.  I am not expecting much from Trump's tax announcement on Wednesday.  It will be very general, at best.