Trump pushes cash out of US, Macron pulls it into Europe

Dissipating concerns over the looming French presidential election have spurred investors to plough more money back into Europe, helping lift bourses to new highs and easing tensions in eurozone sovereign debt markets.

Funds that track European equities took in $280m for the week ending on Wednesday evening, a modest amount after last week’s roaring inflows but the sixth straight week of gains, according to EPFR. That made it the longest positive streak since late 2015. European bond funds also fared well, pulling in $1.4bn — the most since early January.

Investor appetite for European markets has recovered after Emmanuel Macron emerged as the clear favourite in the French presidential election. The centrist eased to victory over the National Front’s Marine Le Pen in the first round at the end of April and is predicted to assume the presidency when final round head-to-head results are announced on Sunday.

The investor inflows have buoyed local stock markets. The CAC 40 index this week rose to its highest since the financial crisis and is up 11.5 per cent for the year, while the Eurostoxx 50 has extended its 2017 gain to 10.3 per cent. In contrast, US equity funds have continued to struggle, with $9bn pulled out amid investor disappointment with the Trump’s administration's tax plan.

“People have been in some ways too optimistic on politics in the US providing positive policy change and too pessimistic about politics in Europe providing disruption,” said David Kelly, chief global strategist for JPMorgan Asset Management. “Simultaneously watching the difficulty the Trump administration is having implementing its agenda alongside the relief as more extreme candidates in Europe fail to get into power is driving flows away from the US and towards Europe.”

The shift in sentiment is also reflected in debt markets. The spread between 10-year French government bonds and German Bunds of the same maturity has fallen to its lowest of the year as investors have been begun snapping up French debt again, pushing yields lower at the same time as Bunds have sold off.

Five-year credit default swaps on French sovereign debt, which tracks the cost of insuring against non-payment of sovereign debt, plummeted after the result of the first round of the election and has remained subdued heading into the weekend election. This indicates traders are feeling more confident about the country.

While US equities continue to trade at or near record highs, lofty valuations mean that many investors and analysts reckon that Europe offers greater upside as long as political banana skins are avoided. The Eurostoxx 50 has risen 10.3 per cent this year, while the S&P 500 has risen just under 7 per cent, an outperformance that some analysts expect to continue. 

“Today no one is in the dog’s house,” said Michael Purves, chief global strategist at Weeden & Co. “You have globally synchronised growth. So, if risk is on globally then where do you find the best value? At the moment, it is not the US.”