On Sunday evening in “Currency Markets In Turmoil: A Pocket Guide For The Week Ahead,” I flagged some rather alarming commentary from Marine Le Pen, the French incarnation of Donald Trump.
“Let’s make it a bad souvenir,” she said of France’s euro membership.
Well unsurprisingly, markets aren’t liking that. “Caution crept through European bonds and currencies after prospective French presidential candidate Marine Le Pen unveiled a manifesto pledge to take her country out of the euro, underscoring political risk in the world’s biggest single market,” Bloomberg wrote on Monday morning.
Indeed, the spread between French and German 10s blew out to its widest level since 2013:
Le Pen’s rhetoric on Sunday was combative to say the least. She even suggested that if European leaders didn’t “bow” at her feet, she’d called a referendum on EU membership. As you can see from the following chart, the spread between French and German yields has ebbed and flowed with the fortunes of the now beleaguered Francois Fillon:
“The euro could fall ~10% to about 0.98 versus dollar over a few weeks on a Le Pen victory in France, compared to the 6% drop experienced with 2012 Greek elections,” JPMorgan said early Monday. Here are some other bullets from the bank’s note (via Bloomberg):
- France’s potential election of an anti-EMU government would represent an almost unique event
- The obvious issue for the euro is that the French economy is more than 10 times larger than Greece’s (EU2.2t vs ~EU200b), as is its government bond market (EU1.5t vs ~EU175b)
- Investor, corporate and bank exposure subject to convertibility risk on any successful EMU exit referendum is materially larger than what any Greek drama portended
- EUR/USD carries no risk premium for an adverse outcome in France, as evidenced by short-term fair value models
- Still, if Le Pen wins, the path to EMU exit would neither be swift nor inevitable
- A Le Pen victory will unfold as a significant multi-month event rather than as the beginning of the end of the euro
Remember, this year is all about FX vol and the extent to which it bleeds over into rates and then, eventually with a painful lag, into equities. “The spread between euro four-month implied volatility — a tenor that captures a possible second round [in the French elections] on May 7 — and the three-month rose Monday to its highest level since mid-December at 0.48 vol,” Bloomberg noted today. Mario Draghi will go in front of the European Parliament on Monday to testify on ECB stimulus.
Meanwhile, equity markets were quiet globally. Asian shares were mostly higher. The Nikkei rose 0.3% as investors and traders eye a meeting between Japanese PM Shinzo Abe and Donald Trump later this week.
- MSCI Asia Pacific up 0.5% to 143
- Nikkei 225 up 0.3% to 18977
- Hang Seng up 0.9% to 23348
- Shanghai Composite up 0.5% to 3157
- S&P/ASX 200 down 0.1% to 5616
Similarly, European equities meandered around in positive territory. One thing to note is German factory orders, which came much stronger than expected in December. The 5.2% m/m rise was the largest in two and a half years:
In the US, futs are essentially flat.
- US 10-yr yield down 1bp to 2.45%
- Dollar Index up 0.13% to 100.0
- WTI Crude futures unchanged at 53.83
- Brent Futures down 0.2% to $56.69
- Gold spot up 0.2% to $1,223
- Silver spot up 0.3% to $17.57
The good news: Trump should be in a good mood today…