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Traders focus on the next big political trade: France


It has been a year of political uncertainty for financial markets and for investors, as they have truly been forced to come to grips with the reality of the so-called ‘madness of crowds.’ With the much-watched election in the Netherlands barely over, the upcoming French presidential polls are being pondered by traders and fund managers already scarred by Brexit and Trump.

Up until the last week or so, the key question was whether Marine Le Pen, the leader of France’s Front Nationale party, might end up as the next French president. This would have severe implications for the EU, the Euro and the future of the whole European ‘experiment’. Markets and the pound have really not recovered the confidence they lost when the British public went to the polls in June last year.

But true to form, politics is less predictable than economics. The sudden rise in popularity of socialist and eurosceptic Jean-Luc Melenchon is testing the patience of many investors in French assets this week. This has led to the sale of French government bonds, with the spread between the French and German 10 year bonds widening to a seven week high. The EUR has also seen some selling, hitting a one month low against the USD yesterday. For traders of the EUR/USD pair, it is likely to be a turbulent time, with plenty of scope for short term opportunities, although you will need to keep a close eye on French polling data.

The script for many investors until recently went something like this: Le Pen and centrist Emmanuel Macron would win the most votes, with Marcon easily cruising to victory in the run-offs. However, Melenchon has been gaining ground, doing well in televsion debates, and now polling on a par with Francois Fillon. Could he be, like Trump, the oustider who sprints to the finish and takes it all?

“If Melenchon were to reach the second round, he would beat Fillon and is only 6% behind Macron,” according to analysts at Dutch bank Rabobank.

Rabobank says its rates strategy is still to be short of French bonds against German equivalents ahead of the first round poll on 23 April. Bankers see Melenchon as a dangerous left-winger who could do all sorts of damage to the already fragile French economy and to the Eurozone in general. Critics of Melenchon will note that he experienced a similar last minute surge with French votes in 2012, but this time he is closer to the front runners, and cannot be so easily written off.

In a research note, fund managers Monica Defend and Diego Franzin at Pioneer Investments, said this week that they doubted Le Pen would win:

“At the time of writing we attribute a low probability of a Le Pen win. We expect that the solid growth path that the Eurozone has built should help in facing the multiple geopolitical challenges, unless tail risks materialize.”

By tail risks, take a look at Melenchon. He has tail risk written all over him. At Pioneer, Defend and Franzin reckon that investors should not ignore the French equity market. While it might be subject to something of a sell-off in the next couple of weeks, it has a bias towards companies with global reach. A sell-off in the French stock market, they argue, should be seen as a buying opportunity. Indeed, the CAC index is populated with a number of valuable multi-nationals like Airbus Group, Carrefour, L’Oreal and Michelin.

“Melenchon proposes quite a radical political program, including €100 billion worth of stimulus, besides reducing the working week from 35 to 32 hours, overhauling the EU and stepping out of NATO,” says Ipek Ozkardeskaya, senior market analyst at LCG. “An eventual far-left win is as doubted as far-right Le Pen’s victory.”

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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