- Home
- >
- Fundamental Analysis
- >
- The market indicators to watch in France’s presidential election
The market indicators to watch in France’s presidential election
Rating:
Loading...Volatility across major asset classes is picking up ahead of first round of voting. While the market remains wary of a strong showing by far-right candidate Marine Le Pen or far-left candidate Jean-Luc Mélenchon, investors ultimately expect victory from one of the two centrist candidates.
Here are the key indicators to watch:
Debt costs
The cost of France’s government debt — the yield it pays on its bonds, known as OATs — has generally been close to that of Germany, reflecting their status as being among the safest of sovereign debt to own.
However, recently this relationship has begun to break down: since late 2016 the yield that France pays on its 10-year bonds has risen sharply relative to Germany’s. In February the OAT/Bund relationship touched its highest levels since mid-2012, amid the worst days of the eurozone crisis.
David Owen, chief European financial economist at Jefferies, says investors became “very concerned” about the French election since late last year, when some Japanese investors began to shed their French holdings.
Last week the spread between French and German 10-year yields was back near those highs after polling suggested a swing towards the leftwing candidate Jean-Luc Mélenchon.
The rise in yields means that French sovereign bonds have begun to perform more like those of peripheral eurozone economies such as Italy. The spread between the two countries’ 10-year bonds touched a three-year low late last month.
Yields move inversely to price, meaning investors are devaluing French debt.
The key question for the coming weeks is whether “the first election round result is enough to bring buyers back into the market”, Mr Owen says, or whether spreads remain wide until the second round delivers a conclusive result — and a relief rally.
Derek Halpenny, European head of global markets research at MUFG, forecasts that a Le Pen/Mélenchon second round could see the 10-year spread back at its 2011-12 eurozone
crisis highs “in an instant, and beyond that pretty quickly”.
French bank stocks
While investors have been demanding greater returns to hold its government paper, France’s banks have not followed suit. Yields on some banks’ covered bonds — which are backed by pools of mortgages — dipped below those of OATs in recent weeks.
This trend is more frequently associated with peripheral European countries, and can indicate that investors are steering clear of a politically charged situation.
This positive outlook may have helped support the stock market in the face of political uncertainty. After trending downwards in the early weeks of 2017, leading French banks’ stocks had recovered ground by the end of March, before slipping back a little since then.
They reflect a wider quietude among French equities: the CAC 40 is trading at around its highest for more than a year.
EUR/JPY
Too many other factors are influencing the euro against the dollar. Donald Trump is trying to talk the
dollar down, while eurozone data are getting stronger and the European Central Bank is trying to hose down tapering expectations for its monthly bond purchases.
Further Le Pen/Mélenchon gains would see a general sell-off in the euro — by as much as 6 per cent after the first round, according to Nomura. But even if they fail to break through, investors should not lose sight of the problems of governing for a centrist president.
“When the combined support for Le Pen and Mélenchon is running at over 40 per cent, there are ample reasons to doubt France’s willingness and capacity to reform,” says Nicholas Spiro, of macroeconomic consultancy Lauressa Advisory.
Source: FT
Trader I. Ivanov
Varchev Traders Read more:
If you think, we can improve that section,
please comment. Your oppinion is imortant for us.
