A French Kiss Leaves Global Risk Queasy On Friday

If you were looking for clarity with regard to President Donald Trump’s policies or for any kind of sign that the administration is actually running more smoothly than outward appearances suggest, you most certainly did not get it on Thursday.

Trump’s marathon presser was, by almost all accounts, a disaster. The rambling diatribe felt sort of like the campaign trail Trump only without the energy and the sure-footedness.

From my perspective, Trump’s bizarre press event only serves to underscore the notion that this market is in no way, shape, or form priced for incipient political turmoil both at home and across the proverbial pond.

Speaking of political risk in Europe, it certainly seems as though French election jitters are triggering some risk-off behavior overseas. This hit the wires around 3:20 a.m. EST:

Hamon to Talk With Melenchon About Potential Single Candidacy
French Socialist Party’s presidential candidate Benoit Hamon says he’s already talked with far-left candidate Jean-Luc Melenchon and will talk with him again today, in an interview with France Info radio.
“What we need to discuss is the conditions under which we could come together and who, in the end, could — between Yannick Jadot, Jean-Luc Melenchon and myself — be best suited to embody the Left at the second round of the French presidential race with a program that could be shared,” Hamon says

Shortly thereafter, traders reported selling in French government bonds. OAT 10s dropped as yields spiked 5bps and the spread to bunds widened. You can clearly see the risk-off move gathering steam:

Large volumes were seen in Schatz futures, which Bloomberg notes is “a continuation of recent trend in risk-off moves, with open interest showing large new longs added.” Here’s a bit more color from Bloomberg:

French government bonds dropped as Hamon — currently in fourth place in the polls — said in an interview with France Info radio that he has already begun discussions with far-left candidate Melenchon and will talk with him again later on Friday. Hamon also said he’s in discussions with green party rival Yannick Jadot about an agreement on a single candidacy.

Polls suggest that a unified left bid would allow the candidate to advance to the May 7 runoff vote, offering voters a choice between Le Pen and either Hamon or Melenchon. Beyond the fact that neither of the two men are seen market-friendly, such a showdown might increase the chance of victory for the anti-euro, anti-immigration Le Pen.

This is probably as good a time as any to go back review my previous coverage of Marine Le Pen and the French elections. A good place to start would be last night’s piece on French CDS. Here’s a bit more color on the action we’re seeing early this morning:

France’s CAC 40 index, Italy’s FTSE MIB both drop ~0.9%, underperforming a 0.5% fall in Stoxx 600 amid return of worries over French presidential elections.
- French, Italian banking stocks among biggest fallers
- Socialist Party presidential candidate Benoit Hamon told France Info radio he’s holding further talks with far-left candidate Jean-Luc Melenchon about a potential single candidacy
- OAT 10y yields rise 5bps, wider by 6bps vs Germany
- Risk-off moves swept through markets as French Socialist Party’s Benoit Hamon is set to hold further talks with far-left candidate Jean-Luc Melenchon to discuss a single candidacy for country’s election.
  - A merger could increase the likelihood of Le Pen vs Melenchon/Hamon in second round elections, based on recent polls
  - OATs slide from the open, with France-bund 10y spread widening as much as 6bps; French bonds bounce after 2.5k block trade in futures at 148.07, paring early losses
  - Schatz rallies sharply, German curve bull flattens as stocks drop (French banks lag) and credit spreads widen
    - Gains in German front-end are a continuation of recent trend of hedging euro-zone political risk, with open interest showing large new longs have already been added
    - German 5s30s curve has bull flattened; steepener positions may be vulnerable given their popularity this year
  - Rally in core bonds pushed higher again, lifted by gilts after U.K. retail sales data missed estimates, as increased prices in fuel and food show as significant factors in the slowdown
    - Treasuries following core bonds higher, boosted by shorts being squeezed, says trader, volumes in futures surge after 2.42% level breached

European market wrap (up to date as of pixel time):

FTSE 7274.29 -3.63 -0.05%
DAX 11700.11 -57.13 -0.49%
CAC 4852.87 -46.59 -0.95%
IBEX 35 9496.50 -58.20 -0.61%

Meanwhile, Asian equities were lower across the board as Toshiba continued to implode, Samsung’s chief was arrested and traders fretted about possible yen-boosting safe haven flows tied to the very same type of political turmoil outlined at length above.