How will markets react to the French election?

A nice wrap from Chris Weston at IG:

As mentioned in previous reports a Le Pen win in the 23 April first round voting seems high given her current polling, but then she is likely to lose badly to the new favourite Macron in the run-off on 7 May. Even if she did win, electing a PM who is aligned with her views seems unlikely and this aspect may be a headwind when enacting on her more extreme policies. Still, the market will not like the prospect of Le Pen and FN in power and pricing risk becomes highly problimatic.


There was some focus on EFD (Agence Francaise de Development) pulling a $1b 3-year corporate bond offering recently due to “recent market volatility”. But I am not so sure markets have really beome overly volatile for French corps to raise debt.

1)      EU stoxx 50 futures – implied volatility curve

Here, we can see the Eurostoxx 50  futures implied volatility curve. We can see (the orange line is the current curve) that implied volatility in the April contract has spiked to 24%, but it is no higher than it was a month ago (the green line is the volatility curve a month ago) and this actually flattens out (traders selling vol) in future contracts. Hardly a market that see’s absolute choas in the months ahead.


(Source: Bloomberg)

2)      EUR/USD 3m implied volatility

We can see some signs vol is moving higher, with traders buying vol but with no real conviction, but let’s revisit this when it breaks 14%. That will likely be a trigger for EUR bears to start really taking EUR/JPY to task.


3)      France/German 10-year yield spread (Orange line)

EUR CDS (candles)


Ok, we have seen the Frenace/German yield spread widening of late which a number of traders mentioned as to why they have sold EUR’s, but worth pointing out that the Japanese funds sold Y232B of French bonds in December, so perhaps the fixed income market caught wind of that in January. Or maybe it is investors reducing or hedging exposure to French assets ahead of the elections.

We can also look at the EUR CDS market (the cost to insure against potential default on bond holdings) and see this hasn’t really moved convincingly yet. Perhaps we will see it move higher, in which case I would expect EUR to sell off hard, but at the moment there is no real panic.

The wash-up is implied volatility has started to creep higher but not enough to truly worry markets more broadly. These measures will be firmly on the radar though in the weeks ahead.

EUR/JPY – In G10 FX this is the pair to watch if we genuinely feel a Le Pen victory will unfold. Price is rolling over and trending lower here. Probability suggests this pair heads lower in the short-term, although we can see buyers stepping in if we look at price action and for the pair to really trend we need to bid side to really dry up. Stops can be placed just above the January swing, which conveniently marries with the 5-day EMA which is headed firmly lower.


Here’s a good wrap of Le Pen’s main polices from Armstrong Economics. Of course, the main one for markets is the potential for a referendum on future EMU inclusion.

Le Pen’s main points:

  1. Referendum of EU Membership
  2. Restore French franc
  3. End Schengen area
  4. End Refugee migration
  5. Public contracts awarded only to French firms
  6. International trade agreements are to be canceled.
  7. The income tax for low-income earners is to be reduced by 10%
  8. Small business are to be relieved of their wage costs.
  9. The retirement age to be lowered to 60 from 62 years.
  10. Child benefit regardless of income
  11. Reduce gas and electricity costs by 5%
  12. Maintenance of the 35-hour week.
  13. Employers should pay a 10% tax on foreigners’ wages.
  14. Free education will be only for the French
  15. Illegal immigrants are to be deprived of free health care.
  16. Immigrants without papers have no chance of legal residence status.
  17. Asylum can only be applied for in French consulates abroad.
  18. French citizenship not to be based solely upon birth in France
  19. Increase domestic police by 15,000
  20. Build new prisons with space for 40,000 prisoners.
  21. Condemned foreigners are immediately deported
  22. All foreigners who are connected with Islamism under the supervision of the secret services.
  23. All radical mosques are to be closed.
  24. Withdrawal from the joint NATO.
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  1. Some of that really is fair enough don’t you think?

    Particulierement, 12, 14, 15, 16, 18, 21-23

      • She has a much better chance than the bookies, pundits etc suggest.

        Now, where have we encountered this situation in recent times …. mmmmm

  2. Socialist clap trap… retirement should be raised 70, and the 35 hour week is nuts… and half he other ideas are nuts too.

    Admire her guts personally. But ideas need serious work upon. So the next French election is Nationalist socialism versus EU Nationalism… Wow – what a choice!

    Need some right wing pragmatism – but no, they French stuff that one up too…

    • What, exactly, do you think people are going to be doing for fifty years at forty hours a week ? Should they go and sit in a cubicle pushing a button every time a robot completes a job and a light changes from green to red just so they can have “a job” ?

      • Smithy raises a valid point. We already have an uneven spread of employment (ie. underemployment) and that is before driverless cars/trains/etc.

      • ErmingtonPlumbingMEMBER

        Smithy makes a salient point, that like our politicians you choose to ignore RT.
        There is no “Pragmatic Market solution” to Technology, Automation and Globalisation, other than increasing inequality.

        What you call “Right wing Pragmatism” is nothing more than fascism and you know it RT,…no doubt a political outcome you feel you will benifit from.

        “The liberty of a democracy is not safe if the people tolerated the growth of private power to a point where it becomes stronger than the democratic state itself. That in its essence is fascism: ownership of government by an individual, by a group, or any controlling private power.”
        Franklin D. Roosevelt

    • How’s the new Scando 6 hr work day going?
      Productivity up, civil society happy by all accounts

      • They would be more happy and productive if they did an hour a day… but thats not the point is it?

      • No, from your perspective they should be grateful for having a job and working 24 hrs a day.

        You entirely miss my broader point.

  3. Because the pundits have been so right over the last 18 months. Actually the French parliament elections in June might be more important. French farmers will not vote themselves off the CAP teat but there are lot of pitfalls before April.

    Mr Trump now controls the IMF and ECB treatment of Greece could blow up onto the streets. Perfidious Albion could buy a heap of Greek debt cheap and use it to put the ECB in a hard place during Brexit talks. Poles and others in the east are getting wary of going all in the Euro correctly seeing it as a prison. Germany is not addressing its large export surplus at all and the Trump men will use any problems that occur to remind Germany that it needs to change its ways.

    Any large nihilist attacks on French soil will also factor in. Don’t count any chickens yet.

    • I don’t see many of these attackers as real Islamists….. they are more against First World credit being forced on the rest of the world to control them. That is not to say those organising the attacks aren’t really tribal bandits at heart…. they never shut down the oil in their countries do they ?

      Think along the lines of the Red Army brigades and Bader-Meinoff. The system is now that complex that the slightest deviation can’t be allowed. A bloke who survived the Voyager I was working with told me in the 70’s that people would one day be shot for opening the wrong door, I laughed at him but here we are.

      There is no longer any check on executive power, we have no way of stopping anything ( like bombing innocent brown people ) we don’t want. They just ignore all laws and norms from history and baldly challenge us to stop them. It will all come down to violence in the end.

      • ” I don’t see many of these attackers as real Islamists”

        Despite what they themselves tell you?

      • @ ErmingtonPlumbing… much the same as I would define a real Christian, just change the names to protect the innocent. Both religions have been perverted beyond imagination by material considerations in the last 1000 years.

      • Actually nyleta, in the case of islam, the opposite is true, and it’s part of the problem. Islam is unchangeable, immutable, and, as the final word of god, cannot evolve. Muslims are actually proud of this, despite the fact that it means you have a stagnant belief system that, as Judaism 2.0, is rooted firmly in the bronze age. It is as it always has been, a socio-political force dedicated to its own supremacy, by force if necessary (which it has found necessary often), and when not at war with ‘disbelievers’, at war within itself, ie the deranged Sunni/Shia schism.

      • Despite what they themselves tell you?

        If we are to believe the relatively small number of people who call themselves “real Islamists” committing atrocities then we must also believe the vast majority of people calling themselves “real Islamists” who just want to get on with living their lives.

      • FWIW nyleta I mostly agree with what you say – with the strong exception of Wahhabists. Unless you want to argue that they aren’t really islamic, but then again they’re the ones declaring takfir on everyone else before the beheadings start.

        But let’s not beat about the bush – they are the foot soldiers of the Sauds and the US in their various proxy wars.

      • rob barrattMEMBER

        The most interesting thing I’ve watched on Islam in some while is this:
        Nothing to do with terrorism, but a hell of a lot to do with the future. Fertility rates are significantly higher in religious groups (of all persuasions). Make up your own mind as to what sort of economic future the girls in the above video will have.

  4. Promise a UBI and she would probably win.

    None of those points say anything about cutting “skilled” immigration.

    Rather than number 5, foreigners should be banned from working in sub-$100k positions in the NBN and any government funded body.

    Truck driving licences must only be given to citizens of AUS/France. Ditto forklift driving licence.

  5. So. In social and civil rights the EU is far ahead countries such as this or the US but if it blows up then it will be dandy for their population? FFS people tou are daft.