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

Wall Street Breakfast: Globe Goes Green As FBI Clears Clinton

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U.S. futures and the dollar are posting big gains, along with shares across the globe, as bullish sentiment returned to Wall Street following the largest streak of losses on the S&P 500 since 1980. "Based on our review, we have not changed our conclusions that we expressed in July," FBI Director James Comey said in a letter to Congress, standing by an earlier recommendation that no criminal charges were warranted against Hillary Clinton over her email practices.

Economy

Nearly 42M Americans have already voted for president, casting their ballots in record numbers before polls officially open tomorrow for Election Day. Both Clinton and Trump have spent much of the last week campaigning in crucial battleground states, which may ultimately decide the outcome of the election. "The key is Florida and North Carolina," said Mercer University elections expert and professor John Christopher Grant.

Theresa May believes the U.K. government has a "strong" case for overturning the High Court ruling allowing Parliament to vote on the triggering of Article 50. Brexit Secretary David Davis will lay out the details later today. Meanwhile, Brussels is reconsidering how it grants EU market access to overseas financial firms, casting doubt over the use of the bloc's "equivalence" arrangements as a fallback option for London post-Brexit.

Eurozone retail sales annual growth slowed for a second straight month in September, falling 0.2% on a month-on-month basis, according to preliminary data from Eurostat. The drop was mainly caused by a slump in sales of non-food products, with the sharpest declines seen in Germany, Portugal and Slovenia. Compared to the same month last year, retail sales were up 1.1%.

Greek Prime Minister Alexis Tsipras has reshuffled his cabinet in a bid to speed up bailout reforms so debt restructuring negotiations could start at an EU finance minister meeting on Dec. 5. The move could also help the country qualify for inclusion in the ECB's bond buying scheme and regain bond market access by 2018, when its current bailout program expires.

Military buildup: Hundreds of thousands of NATO troops will be put on a higher state of alert amid growing tensions with Russia, according to Jens Stoltenberg, the alliance's secretary-general. Separately, operation "Euphrates Anger" has begun to liberate Raqqa from ISIS. The offensive, which comes two weeks after a campaign to clear ISIS from Mosul, will be supported by U.S. air strikes and involve 30,000 fighters.

China has appointed a new finance minister, Xiao Jie, as concerns grow over the country's rising fiscal deficits and mounting debt, which has jumped to more than 250% of GDP. China is also considering allowing Wall Street banks to run their own investment-banking businesses on the mainland, WSJ reports, dropping a requirement for U.S. banks to operate as minority partners in local joint ventures.

Tens of thousands of people rallied in Seoul on Saturday to demand South Korean President Park Geun-hye step down over an explosive political scandal. While several politicians have individually called for the president's resignation, opposition parties have yet to attempt a serious push for her departure or impeachment in fear of negatively impacting next year's presidential election.

Algeria Energy Minister Nouredine Bouterfa is confident OPEC members will stick to a pact made in September to cut output, saying the group's technical committee was working on applying the deal. Officials met in Vienna last month to work out the details of the Algiers plan, but failed to reach agreement. OPEC's High Level Committee of experts will meet again on Nov. 25. Crude futures +1.7% to $44.80/bbl.

Wall Street bonuses are expected to decline for the third consecutive year, reflecting a period of busted mergers, limited trading activity, lack of new listings and muted hedge fund returns. The payouts are projected to be from 5%-10% lower this year, according to a closely watched report by Johnson Associates. Bonuses fell about the same amount last year from 2014.

Stocks

Overnight earnings roundup: HSBC +3.4% premarket as investors shrugged off an 86% drop in pretax profit following a big loss on the sale of its Brazilian business. Nissan Motor (OTCPK:NSANY) cut its first-half net income forecast as a strong yen offset rising sales, but maintained its full-year dividend plan. Softbank's (OTCPK:SFTBY) second quarter profit rose nearly 7%, boosted by a strong performance in its domestic telecoms division.

Oracle has narrowly overcome opposition to its $9.3B offer for NetSuite (NYSE:N) after threatening to walk away if stakeholders held out for a higher price. Nearly 56% of NetSuite shareholders who were eligible to vote chose to take its offer, laying the groundwork for the deal to close today. The tie-up will add nearly $1B to Oracle's (NASDAQ:ORCL) revenues from cloud software.

Wall Street Breakfast: Renewed Concerns About China As Exports Tumble

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China's February trade performance was far worse than economists had expected, days after top leaders at the National People's Congress sought to reassure investors about the world's second-largest economy. Exports fell 25.4% from a year earlier, the biggest drop since May 2009, while imports slumped 13.8%, leaving a trade surplus of $32.59B. "It's easy to blame Chinese New Year distortions, but there is a much deeper malaise that is becoming apparent in the numbers," said Frederic Neumann, co-head of Asian economic research at HSBC.

Economy

Longer dated Japanese government bond yields declined to new depths overnight, with the 7-, 10-, and 30-year benchmark yields all setting new record lows. Although the JGB market figures are not unusual since the BOJ cut interest rates below zero, the scale of the rally for the 30-year bonds was pronounced, suggesting investors are scrambling for yield against a backdrop of poor economic data and deflationary pressures. U.S. treasuries gained with the Japanese bonds, as stock-market declines drove demand for the relative safety of sovereign debt. 10-year treasury yield -6 bps to 1.84%.

After a long wait for inflation to accelerate, Fed officials face a complex and possibly divisive debate over whether recent evidence of rising prices is strong enough to move ahead with planned rate hikes. In separate statements on Monday, policymakers at the core of that debate staked out starkly different views, with Fed Vice Chairman Stanley Fischer saying economic data now points to the "first stirrings" of inflation, while Fed Governor Lael Brainard countered that the evidence was not yet so clear cut.

Michael Bloomberg has announced that he will not mount an independent bid for the U.S. presidency because of fears that it would increase the chances of Republicans Donald Trump or Ted Cruz ending up in the White House. "That is not a risk I can take in good conscience," he wrote on Bloomberg View. "I love our country too much to play a role in electing a candidate who would weaken our unity and darken our future."

Wall Street bonuses are down for the second straight year, and recent market volatility and cutbacks suggest 2016 will be difficult as well. According to the New York State comptroller, the average bonus paid in the securities industry last year fell 9% to $146,200, while the bonus pool for employees who work in NYC shrank 6% to $25B. Thomas DiNapoli also noted that recent job gains might not be sustainable, given the early weakness in the financial markets and increasing provisions for bad loans to the energy sector.

German industrial production jumped by the most in more than six years in January, in a sign that strong domestic demand may be helping to underpin output even as external trade cools. Production, adjusted for seasonal swings, climbed 3.3% from the prior month after retreating a revised 0.3% in December. German firms had "a very good start" to the year, the economics ministry said, predicting a "moderate recovery" in industrial activity in the first quarter.

Does the market believe in Mario Draghi? The euro is not moving much before Thursday's ECB meeting, but investors may be looking at what happened in Japan. "The BOJ made their rates even more negative and what happened to the yen? It strengthened," said Ewen Cameron Watt, Chief Investment Strategist at BlackRock. Euro flat at $1.1013.

Cyprus has become the fourth eurozone nation to exit an EU-IMF bailout, as finance ministers gave the green light to leave its program without a follow-up fund. The Mediterranean country was forced into a €10B bailout in March 2013, due to a toxic combination of broken banks, a soaring deficit and an inability to access market financing. By contrast with Cyprus, Greece (the only eurozone country left in a rescue program) was caught yesterday in a new row between the EU and IMF regarding the strength of its bailout reform commitments.

European Union leaders have welcomed Turkey's offer to take back all migrants who cross into Europe from its soil by agreeing in principle to Ankara's demands for an extra €3B, visa waivers, and faster EU membership talks. However, other details remain to be worked out. European officials hope to reach an ambitious accord with Turkey at their next scheduled summit, on March 17-18.

Bank of England Governor Mark Carney is backing Prime Minister David Cameron's European Union deal, saying the agreement allows the central bank to do its job. "The settlement addresses the issues the Bank identified as being important, given the likely need for further integration of the euro area, to maintaining its ability to achieve its objectives," Carney told British lawmakers. Despite a positive assessment of the EU settlement, the governor said he would not make any recommendation about how to vote in the country's June 23 membership referendum.

Oil's 2016 roundtrip is nearly complete...WTI crude started the year at about $40 per barrel, and bottomed well below $30 in mid-February. After another 5.5% gain on Monday, the price returned to just a few pennies shy of $38. Brent crude, in the meantime, has touched $40 per barrel for the first time in 2016.

Stocks

Nike has suspended ties with tennis star Maria Sharapova after she tested positive for an illegal heart drug at the Australian Open. Sharapova said she's taken meldonium for over a decade, long before a 2016 ban by the World Anti-Doping Agency, which outlawed the substance as a performance-enhancer. How big is her contract? Sharapova brings in a reported $30M per year in endorsements, much of that from Nike (NYSE:NKE), with whom she has a reported $70M mega-deal.

A mystery investor has built up a stake of close to 5% in Burberry (OTCPK:BURBY), according to the FT, prompting Britain's best-known luxury fashion brand to arm itself against a possible takeover bid by seeking help from its financial advisors. A source close to the company said it had unsuccessfully attempted to reveal the client by asking HSBC, which is listed as the custodian for the position. Burberry shares +5.8% in London.

Nippon Telegraph & Telephone is expected to offer more than ¥400B ($3.5B) to buy Dell's Perot Systems in a move aimed at bolstering the Japanese company's presence abroad, Nikkei reports. NTT Data President Toshio Iwamoto will formally present an offer to Dell executives this week, and is expected to enter into exclusive negotiations on the purchase. While the price may change before a deal is concluded, the acquisition appears likely to go down as NTT's third-largest ever.

In the latest volley in its high-profile fight with Apple (NASDAQ:AAPL), the Justice Department has appealed a decision that protects the tech giant from unlocking an iPhone in a New York drug case. Prosecutors, who say Apple has unlocked at least 70 iPhones in the past, are relying on the same "All Writs Act" in a California court, where a judge ordered the company to unlock a device belonging to one of the San Bernardino shooters. The clash has intensified a long-running debate over how much law enforcement and intelligence officials should be able to monitor digital communications.

Exelon and Pepco are making a last-ditch proposal to save their planned $6.8B merger, outlining three options to prevent the loss of customer benefits. The utility companies are not offering Washington D.C. any more money, but say they would support efforts by regulators and politicians for a plan on how to distribute $78M they offered the city in exchange for its support. EXC-4.7%; POM unchanged premarket.