From Kit Juckes at Societe Generale:
The outcomes of the French and Greek elections were as expected, and hence bearish for risk but not surprising. The SG sentiment indicator is at 0.38, so at the bottom end of neutral. Less risk-off than risk-angst! €/$ has tested the bottom of its range but not broken free. Where now?
The economics team have published a roadmap for the first hundred days of the Hollande Presidency. All assume he will open the debate with Merkel about slowing the austerity drive, most assume his policy bite won’t be as bad as his electioneering bark. Personally, I think we need to distinguish between the direction of policy and the macro impact of policy. What bothers many about French fiscal policy is the sheer size of the government in the economy overall. But the structural need to nurture the private sector and limit the power of the state isn’t at all the same as needing permanent austerity and economic misery. This is only important now because to argue for more austerity in Europe is just plain silly – the sort of siliness that could bring the whole thing crashing down.
The Greek result was no more of a surprise than the French one but is is a wilder card event. At the moment, it looks as though a coalition can be formed, but how long a new government could survive isn’t clear. The Greek people have spoken, but only to say they are disillusioned and angry. My bet for today is that the US, having sold risk off after payrolls that were soft but not soft to change anything, will bounce. If that happens, we will have an edgy day in which ranges hold. The catalyst for a decisive move lower by the euro remains absent, though the move is inevitable eventually.
The pound continues to thrive by default, AUD remains the fashional global risk short so beware short covering. The euro is a challenge but it is still straightforward to conclude rates will be even lower than you thought for even longer than you can imagine. Foreign buyers of non-German European debt will be pretty few and far between and equity indices won’t get their mojo back till some European questions are answered, Preferably by a huge public show of Merkel/Hollande ‘solidarity’