European, US Stocks In Eerie Calm As French Vote Looms

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Europe's final trading day of the week has seen equities yet again struggling to find any real direction as participants prepare themselves for the 1st round results of the much-anticipated French election, subsequently volumes are on the lighter side. Europe has had something to cheer about with a slew of upbeat PMI reports this morning suggesting a pick up in the economy across the Eurozone. In fixed income markets, DE-FR spread had been wider by some 8bps at the open with reports out last night of another terror attack in France, consequently heightening tensions regarding the election, however since the open, the spread has tightened to around 65bps. While the move higher in OATs has spilled over into gilts which kicked of the session on a firmer footing, with a further move higher attributed by the weak retail sales data.

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In currencies, The Bloomberg Dollar Spot Index was little changed and is poised for a weekly decline of 0.2 percent. The euro weakened 0.2 percent to $1.0693. Sterling also fell 0.2 percent to $1.2787. The big data release this morning was the March UK retail sales release, but despite posting the worst Q1 data since 2010, we saw little follow through in GBP selling as Cable buyers stood resolute ahead of 1.2750 and EUR/GBP buyers will find little reprieve ahead of the French elections this weekend. Trading is still relatively tight however, but the longer the Pound holds up, the more we expect this GBP revival to continue. Switching to the main event in front of us, and a number of pundits are highlighting the modest risk premium priced into Euro assets — specifically French stocks — but also as the EUR as a whole. That said, we have seen EUR/USD dip back to 1.0700 more recently, as traders throw in the towel on an intra day push lower in GBP. Most of the pre weekend positioning is said to be in place — very likely through the options market — as the prospect of a market friendly result in the first round vote could spell a strong relief rally in the EUR. From a USD perspective, it is hard to argue against a lower (EUR/USD) rate near term, with US Treasury yields recovering somewhat. 1.0600 is a key fair value point and this is a potential target for later today. USD/JPY is not getting the upside traction however, and this is likely to cross rate activity which sees EUR/JPY back in the mid 116.00's, but less so of a retreat in GBP/JPY to highlight the resilience in the Pound noted above. The BoJ maintains that it is too early to talk about exit strategy, but to little effect on the JPY all round.

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