The Trump-flation narrative has driven U.S. stocks to valuations last seen in the tech bubble. On a relative value basis, Europe is a bit more appealing.

As a result, hedge funds have been increasing their equity exposure to Europe since early 2017.

The Fed is also in the middle of a rate hiking cycle while the ECB remains 40 basis points south of zero. The easy money is overseas.

Plus there’s a record gap between U.S. and European EPS. U.S. earnings have always been larger than their European counterparts, but never by 53%…  

Given those facts, it’s easy to see why money managers are tilting their portfolios away from U.S. equities and towards European ones.

But this thesis has one huge hangup. Something so big and nasty that it could completely override typical macro fundamental and quantitative analysis.

That something is French elections. And more specifically, that someone is Marine Le Pen.

Marine Le Pen is the next populist threat to the Eurozone. Some of her policies include:

Populism and all of its beggar-thy-neighbor policies are one of the biggest threats to global markets at the moment. That’s why we’ve been tracking the populism trend so closely. Ray Dalio has gone so far as to say that this trend will be even more important than both monetary and fiscal policy in the years ahead.

If Europe can get through the French elections Le Pen-free, then the global reflation narrative will pass a significant test, thus strengthening its adoption.

The Story So Far…

Markets were incredibly nervous going into the first round of elections. Traders bid up volatility across the board to protect against a possible “Frexit”. And rightfully so. A Le Pen win would mean absolute destruction to the common currency followed by gut wrenching equity volatility.