“Priced in” is most assuredly not an accurate way to describe French election risk.
On Wednesday, we’ll get a kind of dress rehearsal in the Netherlands, where the PVV’s performance at the ballot box will serve as a litmus test for the European electorate’s appetite for populist bullsh*t.
If Geert Wilders walks away a happy man, chances are French and Dutch spreads will widen and the euro will take a significant hit as markets interpret support for Wilders’ agenda as indicative of the kind of success Marine Le Pen can expect in the French polls.
Meanwhile, have a look at the following charts and please, don’t just write these off as irrelevant because they’re markets you don’t (or can’t) trade. The following visuals depict the extent to which markets either have a better read on this year’s trio of elections in Europe than they did on the Brexit referendum and the US election, or the extent to which markets have learned nothing from those experiences.
Five weeks away from the first round of the French Presidential elections, our assessment of the current valuations of French credits show that, while the moves are starting to be felt, neither volatility in the run-up to the election nor a Le Pen victory are priced in. We’re also yet to see the risks materialise in French hybrids and high yield.
We think that in light of the recent moves in spreads, high grade French credits have started to price in the risks, but remain far from fully capturing the economic policy uncertainty (Chart 1 and Chart 3).