My 2 Cents (French Elections)
https://macrobeat.co.uk/my-thoughts/f/my-2-cents-french-elections
Just in time before the first round of the French Presidential elections on Sunday April 10 and I guess without all that is going on in the market from a super hawkish FED, huge Bond moves, War in the Ukraine, Exploding CPI’s, Living crisis in some countries, supply chain issues… food shortages… Energy crisis… you might forgive me, that this Election just didn’t yet spark that much interest… up to most recently, when the polls suddenly started to close in and the comfortable lead that Macron enjoyed over Marie le Pen started to slip away.
Up to this point, I would almost even think the French weren’t as interested (maybe still aren’t ) as anything BUT a Macron win was just unthinkable… and maybe it still is… or is it ?
Let’s just dig a little bit into the most recent history…. As this is not the first Rodeo we have with Le Pen of course…… there were a few changes in her views over the years that still makes her dangerous for Europe and Brussels and the EU system BUT maybe more so as a real distractor and annoyer than a threat of taking France out of Europe and the EUR… BUT she would have a new Social Agenda that would probably break about every fiscal rule in the book in no time BUT as I said.. the pressure and threat is a new one vs of old she just point blank threatened to exit…. So that means there is at least a small softening of her stance in that regard.
She also seems NOT to have had any issues to distance herself to all the election flyers that were handed out showing her shaking hands with Putin… well those flyers were destroyed rather rapidly…. To her benefit, due to Macron not campaigning much or at all due to the Ukraine crisis, there have been hardly any TV debates between the candidates and therefore she might just come across as a valid candidate as some of her rather more exposed views would not really be visible… ALSO… the appearance of Eric Zemmour, who is even further right than le Pen, makes le Pen almost look more moderate…. And that might also be a reason that the polls started to close in….
Let’s briefly talk about the polls and the mechanics before we talk about the market relevant stuff…..
Until most recently, Macron was seen to get 28.0 % in the first round vs 17.5% for Le Pen… and then beating le Pen in the April 24 second round by about 57 to 43 % comfortably…. And hence the market didn’t care much…. The latest polls have narrowed and see Macron with a lead of about 26.5 % vs 21.5 % for Le Pen and that means the run off for the second round might suddenly be down to a 53-47 and 52-48 % as some call it… quite close for comfort and probably her best result yet…..
There are maybe 1 or 2 polls out that have le Pen as a 50.5% lead vs 49.5% Macron… and that is where we jump over into the market.
We have started to see more EUR weakness this week… and in particular EURCHF is the ultimate barometer for European Risk off… and the trend lower in EURCHF vs the trend higher of late in EURJPY is really more down to now this last shift of French Election poll than Safe haven related CHF buying from the War in the Ukraine…. In order to guide us on the FX side… we look at the bond market… and in particular the spread between 10 year French Govt bonds and German 10 year Govt bonds.
This spread has been fairly stable since we dealt with the Greek crisis and Draghi’s “whatever it takes “ moment. The peak of that spread was around +130 to +140 in that 2012 period.. and has then just returned back to normal and into a +20 to +47 type range in the last 10 years…. +47 ish has been the highs whenever we had a bit of wobbles in Europe (2018 Italexit wobble)
Now in the last few days… this spread has continued to move out… currently at +53.. so new highs in regards of the last many years… and of course 53 doesn’t sound like panic… but it shows stress between the 2 largest European Economies and the market is clearly getting a bit stressed out about the Elections.
The risk for the weekend would be that Le Pen would indeed do a lot better… and would suggest that the second round vote would indeed be a lot closer and that would further add pressure on French Bonds…. Upward pressure on the spread…. Pressure on EURUSD…. And its usual Risk drivers like EURJPY and EURCHF… and we would then have an uncomfortable wait until April 24, to see what is to come…. Also not that easy for the upcoming ECB meeting…at least they get the first round of vote out of the way BUT I would think the ECB has for now to look straight through the French risk and deal with it, if the disaster were to happen.
In terms of odds…. The odds are still for a 75% chance of a Macron win despite the tightening up of the polls…. BUT… low turn out could be a real threat for Macron… so he has to somehow make a last ditch effort to be visible…. Also, rumour mill has it… that Putin will make sure that Ukraine stays quiet into the weekend… as Macron’s performance on the world stage is what has given him the most scoring points… as Putin would LOVE Marie le Pen to win the elections as that would just be a HUGE WEDGE right through the middle of Europe and any policy towards Russia be it in the EU or in NATO
To sum it up…… there are short term moves out there in terms of pressure on EUR FX and pressure on French Govt bonds… that just somehow try to price in a small risk of an accident…. If an accident would happen, as in Marie le Pen winning the Election… all hell would break lose in European fixed income as well as the EUR, EURJPY , EURCHF the lot….. the only small advantage as I mentioned would be.. that le Pen is NOT aiming for a divorce with Europe but the EU fiscal side would be just a nightmare and EUR would suffer a lot so would French Bonds.
More next week after the first round of the vote… as there will for sure be a second round on April 24 as there will hardly be an outright winner this weekend.
Good luck
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