The French election is a big deal — and it has more than one scary outcome for markets

France's presidential election is a major test for euro zone unity, and the first round Sunday could bring on intense market volatility, depending on which candidates make it to the final leg of the race.

French stocks closed down 1.6 percent Tuesday, after recovering from the worst intraday selloff since the U.K. voted to leave the European Union last June. Investors globally have been hedging ahead of the vote by piling into safe haven assets like U.S. Treasurys and gold, and buying yen against the euro.

"I think it's potentially huge, or it could be nothing, and we'll know that Sunday night before the market opens," said Andrew Brenner, global head of emerging market fixed income at National Alliance. He said the spread between French and German 10-year bonds continues to widen, a signal of market unease.

The big fear is that far-right National Front candidate Marine Le Pen will win, since she has run on a platform to divorce France from the euro — an action that could threaten the future of the entire euro zone. As it stands now, there is a good chance Le Pen will emerge from the first round pitted against one of three candidates: far-left candidate Jean-Luc Melenchon, conservative Francois Fillon and centrist Emmanuel Macron, a former economy minister.

"It is true that four candidates are coming all within a margin of error. It is impossible to know for sure whether the French electorate will look at these polls and decide to vote with their hearts or get excited by the underdogs," said Charles Lichfield, associate, Europe at Eurasia Group. "Something we can say is Mrs. Le Pen is most likely of those four candidates to make the second round. They're all between 18 and 22 percent. Ninety percent of Mrs. Le Pen's 22 percent will vote for her."

The candidate favored by markets is Macron, who is expected to beat Le Pen in the final vote. "If it appears Macron is in the race, all of this goes away for the near term," said Brenner.

The disruptive candidate not named 'Le Pen'

However, Lichfield said Melenchon also stands a chance to win. Like Le Pen, he would be considered a disruptive candidate. A fan of Venezuela's Hugo Chavez, he would like to tax individuals who earn 400,000 euros ($430,000) or more at a tax rate of 100 percent. He also would like to renegotiate France's relationship with the European Union, and if it fails, he would seek to leave the EU.

"Depending on how high [Le Pen] is, the market could react quite violently. If her runner-up is 6, 7 points behind her, many people would see that it's possible she wins," Lichfield said. The runoff election is set for May 7.

"You hear people saying if Le Pen gets elected, France pulls out of the euro and the EU collapses. That's utter nonsense. For France to pull out, there has to be a vote of Parliament and they're overwhelmingly against leaving the euro," said Robert Sinche, chief global strategist at Amherst Pierpont.

There is a parliamentary election in June, and it in fact could be the more important election. Le Pen's far-right National Front isn't seen making much in the way of inroads.

   
"I still expect Macron and Le Pen to be in the runoffs," said Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman. "A lot of people think the French election is about the presidential election. It's also about the parliamentary election in June. The president is a figurehead. The problem is none of the candidates have a strong parliamentary presence. The key to the outcome is going to be the parliamentary elections. Political risk is going to subside, but it can't go away."

Chandler said a Le Pen victory could foster other nationalist groups in Europe, but it could also be a problem for Italy. Germany also has an election later this year.

"The key would be not so much the German election, but the Italian election," he said. Italy, under Prime Minister Paolo Gentiloni, has undertaken steps to provide emergency liquidity guarantees and capital injections for its banks. Former Prime Minister Matteo Renzi resigned in December, after Italy voted down a key constitutional referendum.

Watch: The French right comes out of hiding

The views on how France's election could affect markets diverge as much as do potential outcomes.

Lichfield said he sees a 35 to 40 percent chance for Le Pen to win. He said there are very slight odds, perhaps 10 percent, that financial market chaos erupts after the election. It could be so volatile it would send French yields skyrocketing and hurt the country's banks.

The long-shot scenario could even be extended to consider a French default at which point, France could be forced to leave the euro zone, Lichfield said.

More likely is that European Economic and Monetary Union officials keep the situation under control and panic does not set in. Even so, a Le Pen win would not be a positive.

"It will be negative because there's this now complacent view that Brexit wasn't so bad. Trump hasn't been so bad, so why are we worried about Le Pen? But if you look at what she wants to do, if suddenly the market slowing into what her actual policies are and realize she's right at the center of a vulnerable monetary union, then it becomes much more troubling," said Lichfield.

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5 Stocks to Buy as Eurozone Growth Approaches 6-Year Peak

TEF TI VLKAY UN MT

On Friday, U.S. equity markets faltered in the wake of a failed attempt by the Trump administration to push through a new healthcare law. Meanwhile, early private estimates showed that economic growth was nearing a six-month low. This is in keeping with what is becoming something of a trend -- a soft GDP reading for the year’s first quarter.  

Eurozone Growth Nears 6-Year High Markets across Europe also felt the impact of events across the pond. However, in sharp contrast, estimates for the region’s economic growth closed in on its highest level in six years. Given that domestic markets could face uncertainty in the wake of Trump’s failure to push through crucial policy changes, investing in select European stocks looks like a prudent option at this point.

The latest reading of IHS Markit’s Flash PMI, considered to be an important indicator of the region’s economic prospects, closed in on its highest level in six years for the month of March. The metric increased from February’s reading of 56.0 to 56.7, the highest level experienced since Apr 2011. In doing so, it also exceeded most analyst estimates.

Additionally, flash readings for Germany and France, two of the region’s largest economies also exceeded estimates to hit near-six-year peaks. According to IHS Markit’s chief business economist, this reading implies that first quarter GDP has increased by 0.6% on a quarterly basis. Taken together, these would be the highest readings witnessed since 2011’s first quarter.

In contrast, March’s IHS Markit flash reading for the U.S. was disappointing. The metric declined from last month’s reading of 54.2 to 53.4, substantially lower than economists’ estimates of 54.8.

Could Upcoming Elections Spoil the Party?

Other indicators of economic growth are also increasing, which lends weight to the argument that the region’s economy is on a firm footing. An index of factory activity increased from 55.4 to 56.2 in March. Additionally, a key services index increased from 55.5 to 56.5. Each of these indicators are now at their highest levels in nearly six years and significantly above 50, which indicates expansion is taking place.

However, the region now faces crucial political challenges in the form of upcoming elections in major member countries. The rise of ultra-nationalistic sentiment is being viewed by many commentators as a major threat to the region’s economic prosperity.

But are these fears being overstated? In the Netherlands, the ruling People’s Party for Freedom and Democracy (VVD) won the recent parliamentary election by securing 33 seats in the House of Representatives. The VVD’s closest competitor, the Party of Freedom (PVV), secured around 20 seats in comparison. This result boosted sentiment, as PPV leader Geert Wilders had called for a Dutch referendum on the question of exiting the EU.

Our ChoicesMeanwhile a recent poll in France shows that former banker and economy minister Emmanuel Macron is leading the presidential race with 29% votes. He is now well ahead of his immediate rival, National Front party leader Marine Le Pen, who has 19% of the votes. With voter sentiment moving toward Macron ahead of the much-awaited French presidential election starting on April 23, expectations of lower corporate and housing taxes are rising. Moreover, fears of France’s exit from the EU have subdued with Le Pen’s victory appearing unlikely. (Read: 3 Mutual Funds to Buy on Europe Elections & Economic Growth)

Fresh economic indicators provide conclusive evidence that the Eurozone’s economic situation has improved significantly. Also, the political situation is not as worrying as it seems at first glance and is unlikely to impede near-term growth. In contrast, the failure to push through a new healthcare law has led to questions about whether the new U.S. administration will be able to implement its economic agenda.

Adding European stocks to your portfolio looks like a smart option at this point. However, picking winning stocks may prove to be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

ArcelorMittal (MT - Free Report) is a Luxembourg-based steel and mining company.

ArcelorMittal has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 59.9% for the current year.  Its earnings estimate for the current year has improved by 2.5% over the last 30 days. The stock has returned 32.3% over the last six months, outperforming the Zacks Steel - Producers sector, which has gained 26.3% over the same period.

Telefonica S.A. (TEF - Free Report) is a Madrid, Spain-based provider of fixed-line telephone services, wireless communications, Internet access, video and data transmission services.

Telefonica has a Zacks Rank #1 and a VGM Score of A. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 13.50, lower than the industry average of 15.01. Its earnings estimate for the current year has improved by 10.6% over the last 30 days. The stock has returned 7.1% over the last six months, outperforming the Zacks Diversified Communication Servicessector, which has lost 3.1% over the same period.

Unilever N.V. (UN - Free Report) is a Netherlands-based consumer products company.

Unilever has a VGM Score of B. The company has expected earnings growth of 7.9% for the current year. Its earnings estimate for the current year has improved by 5.4% over the last 30 days. The stock has returned 8.1% over the last six months, outperforming the Zacks Soap And Cleaning Materials sector, which has gained 2.9% over the same period. The stock has a Zacks Rank #1(Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Telecom Italia S.p.A. (TI - Free Report) is engaged principally in the communication sector and operates mainly in Europe, the Mediterranean Basin and South America. The company is based in Rome, Italy.

Telecom Italia has a Zacks Rank #2 (Buy) and a VGM Score of B. The company has expected earnings growth of 18% for the current year. The stock has a P/E (F1) of 9.11, lower than the industry average of 15.01. The stock has returned 6.3% over the last six months, outperforming the Zacks Diversified Communication Services sector, which has lost 3.1% over the same period.

Volkswagen AG (VLKAY - Free Report) is a Wolfsburg, Germany-based automobile manufacturer.

Volkswagen has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 9% for the current year. The stock has a P/E (F1) of 8.05, lower than the industry average of 8.96. The stock has returned 5.6% over the last six months, outperforming the Zacks Automotive - Foreign sector, which has lost 3% over the same period.

by Swarup Gupta 

Source:https://www.zacks.com/stock/news/254243/5-stocks-to-buy-as-eurozone-growth-approaches-6year-peak

3 European Stocks to Buy Now

PHG DEG AVG

On Tuesday, the euro experienced its largest one-day increase versus the dollar in over two months. The increase was fueled by an increase in inflation in the Eurozone as well as rising prospects of an agreement between Greece and its creditors. Other metrics also indicate that the economic environment of the bloc has improved. This increases its attractiveness of the region as an investment destination.

Euro Surges, Greenback Slips

The euro increased to $1.1195 before declining to $1.1151. At 2%, this is the highest gain on a single day in percentage terms since Mar 18. On that day, the Fed had reduced its growth, inflation and interest rate projections. Other factors also weighed on the dollar, such as dismal factory orders data.

Combined with optimism over the Greece situation, these factors propelled the euro higher. This came as a surprise to many market watchers following continual strength in the dollar.

The greenback has gained from mid-2014, following expectations of a rate hike. Following a series of weak economic reports, the dollar softened in March. However, the dollar rebounded in the second half of May, following better economic data. Over the last two weeks, the dollar has exhibited significant strength before its plunge on Tuesday.

Inflation Rises

There is no denying that economic conditions have improved in the Eurozone. Tuesday’s inflation data was further evidence of the fact. Consumer prices increased in May, the first upward movement over six months. Prices increased 0.3% after staying flat in April.

There was also evidence that this was not caused solely by an increase in energy prices. Services prices increased 1.3%. Drink and food prices gained 1.2%. More importantly, core inflation spiked 0.9%, after hitting an all-time low of 0.6% in April.

Resurgence in Economy

It is thus evident that ECB’s efforts to curb deflation are bearing fruit. Even so, inflation is far lower than the target of around 2%. This means that the central bank’s monetary easing plans remain firmly in place.

The ECB announced a 1 trillion euro bond-buying program, which started on Mar 9. ECB will buy government bonds worth 60 billion euros a month through a quantitative easing program. The QE program will continue till Sep 2016.  

Among latest data, the bloc’s unemployment rate slipped from 11.2% in March to 11.1% in April. Meanwhile, a survey conducted by Markit showed that companies in the economic union added jobs at the best pace in the last four years in May. Per the ECB’s last forecasts released in March, growth in the region is expected to touch 1.5% this year and increase to 1.9% and 2.1% in 2016 and 2017, respectively.

Situation in Greece

At this point, the singular area of concern for the region, as well as investors across the world, is the impasse over Greece’s debt. One major cause for optimism on Tuesday was news that the country’s lenders have agreed on the conditions of an offer to be made to the government in Greece.

Officials from the IMF, among others, have finished working on a draft agreement to be presented before Greece. However, the terms lay emphasis on significant structural adjustments in the economic sphere. Meanwhile, Greece has submitted its own proposal, whose fiscal targets are set far lower.

It is widely believed that Greece has the funds to pay €300 million ($327 million) to the IMF, which is due on Friday. However, without more financial assistance it may be unable to meet further repayments amounting to €1.25 billion due later this month. Several analysts believe that an agreement may not be reached at a meeting in Brussels between the European Commission chief and the Greek Prime Minister.

This means that uncertainty over the debt crisis is likely to prevail for a while longer. But the prospect of “Grexit” remains unlikely at this point. For one, it may lead to instability in the currency union, an outcome other members of the EU would be eager to avoid.

Even if this does happen, the impact may be limited. This is reflected by the yield gap between Spanish and German sovereign debt. The gap may have increased, but is only the largest since May 28. This is a direct outcome of ECB stimulus which is containing borrowing costs for the bloc’s indebted nations.

Our Choices

Below we present three stocks which will gain from these trends, each of which also have a good Zacks Rank.

Delhaize Group (DEG - Snapshot Report) is a food retail company based in Belgium. It operates supermarkets in Belgium, Luxembourg, Romania, Serbia, Indonesia, Greece and the U.S.

Delhaize holds a Zacks Rank #2 (Buy). The company has expected earnings growth of 10.2% for the current year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.9.

Koninklijke Philips Electronics N.V. (PHG - Analyst Report) is one of the largest electronics companies of the world with full-year 2014 sales amounting to €21.4 billion.

Apart from a Zacks Rank #2 (Buy), Philips has expected earnings growth of 84.4% for the current year. It has a P/E (F1) of 28.36x compared to the industry average of 33.60x.

AVG Technologies N.V. (AVG - Snapshot Report) provides antivirus and Internet security products. The company produces and develops software for, threat detection, threat prevention and risk analysis.

AVG Technologies holds a Zacks Rank #2 (Buy) and has a P/E (F1) of 15.19x.

Despite uncertainty over the situation in Greece, the economic environment in Europe is expected to improve further. Meanwhile, the ECB will continue with its monetary stimulus which already seems to be delivering results. This is why these stocks would make for a prudent choice.

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By Swarup Gupta

Source: http://www.zacks.com/stock/news/177014/3-european-stocks-to-buy-now