Vive La France! A Bad Holocaust “Joke,” A Goldman Short Reco, And A 4-Way Race

Marine Le Pen’s attempts to convince voters that she has modernized the views of her far-right Front National party have come into question after she questioned the French state’s role in the Holocaust.

Le Pen suggested France was not responsible for the wartime round-up of Jews who were sent to Nazi death camps. With just 13 days until the first round of voting in France’s presidential election, her remarks have been met with widespread condemnation.

Her stance is at odds with former president Jacques Chirac and current premier Francois Hollande, who have both apologized for the role played by French police in the rounding up of 13,000 Jews at the Vel d’Hiv cycling track in Paris, ordered by the Nazis in July 1942.

“I don’t think France is responsible for the Vel d’Hiv,” Le Pen told French broadcaster LCI on Sunday, arguing that the Nazi-collaborationist Vichy regime “was not France.”

“I think that generally speaking if there are people responsible, it’s those who were in power at the time. It’s not France,” she added.

Ok, so there’s obviously some nuance in there and a caveat or two, but the point is that just like Pepsi should have thought twice before airing a commercial that suggested police brutality against African Americans can be solved by Kendall Jenner offering a riot cop a cold can of soda, Le Pen probably should have just not talked about the Holocaust 13 days before the election. Especially considering the fact that anything she said on the subject was bound to be met immediately by criticism from her rivals who would invariably use whatever she said as evidence that, to quote CNN, she “has failed to move the Front National’s image away from the anti-Semitic rhetoric employed by her father, the party’s former leader, Jean-Marie Le Pen.”

In other words, one of her advisors probably should have told her: “look, just don’t f*cking talk about the Holocaust until the election is over Marine, ok? Can you do that for us? Ok, thanks.“

Meanwhile, the French elections have evolved (or maybe “devolved” is better) into a four-way race with far-left candidate Jean-Luc Melenchon rising in the polls to catch Republican Francois Fillon (left pane).

Needless to say, that’s creating uncertainty just two weeks before voting begins. “Melenchon’s surprise groundswell of support coupled with Fillon’s resilience adds another layer of risk to France’s most unpredictable election in a generation,” Bloomberg writes on Monday,  adding that “when margins of error are taken into account, that suggests all four candidates are in a position to be among the top two after the first round of voting on April 23, and that the contest remains wide open with a month to go until the May 7 runoff.”

As we noted earlier this morning, EUR two-week vols surged Monday on French elections jitters as two-week tenors now capture the first round due April 23. EUR/USD was up by as much as 4.32 vols to 10.78. That’s the highest in three months, while EUR/JPY on the same tenor was up by more than 6 vols, the widest move in 17 years on a closing basis.

This is a great time to highlight what one of our favorite readers told us just three days ago in an e-mail bemoaning the fact that, amid the turmoil in Washington, we haven’t dedicated enough coverage to the increasingly uncertain outcome in France. Here’s the latest from that reader:

Hello Walter,

A whiff of complacency

Just consider – you were publishing an endless stream of comments on Mr Wilders before the Dutch election and I mentioned at the time how unlikely the electoral success of this extreme party would be – not worth the bother, in other words.

Today, just 17 days before the French election, it is more or less the opposite. Some vague rumbling but nothing much to draw your reader’s attention on the uncertainty of the outcome of this election

If you read my comment of 3 days ago carefully, you will notice I am assuming Mr Fillon (traditional right) and Mr Macron (center-left) reach 22% each and seem to be more or less tied; this is because

• it has become difficult to assume Mr Macron is a ‘shoe-in’ for the second round
• the program of Mr Macron is hardly convincing (a balancing act between left and right and a little bit for everyone), subject to negative comments all over the place
• one cannot be so sure Mr Macron will reach the 25% credited to him until recently

In summary, Mrs Le Pen stays strong with her electoral base, Mr Fillon is relying on his traditional supporters, Mr Melenchon puts in strong and credible personal performances and none of these candidates is supportive (if at all) of the European Union. Mr Macron is alone to do so amidst a noticeable lack of French enthousiasm (and complete ignorance of the advantages of the Union, painted as responsible for ‘austerity’)

Caution should be the order of the day, not complacency …

Well, guilty as charged we suppose, although as we reminded this reader, we’re seeing what amounts to a Constitutional crisis here in the US and with the headlines coming fast and furious and our resources limited by the fact that there’s only 24 hours in a day (last time we checked), there’s only so much we can do.

Still, this reader is correct and the assessment excerpted above looks especially (and characteristically) prescient considering that just this morning, Goldman downgraded French bonds. To wit, from the note:

Reflecting on the residual valuation gap between the US and Europe, however, and consistent with our idea that the global bond premium is being eroded largely by the actions of the ECB and the BoJ, we are of the view that, for a move upwards in Treasury yields to be sustained, core European markets need to participate.

We recommend going tactically short June French futures (OATM7) at 147-72, for an initial target of 144.00, and stops on a close above 150.00. This position allows one to take a directional view on duration in a market that scores as very expensive on our valuation metrics.

In relation to the risk to this trade emanating from the political sphere, a victory by a moderate reformist candidate (e.g., Fillon, Macron) – which is our European Economics team base case – would result in a narrowing of French bond spreads (the ‘fair level’ to Bunds is in the region of 30-40bp, from 70bp currently) but offset by a sell-off in core rates. We would expect French bond spreads (and yields) to come under upward pressure if the first round of the Presidential election were to result in a strong showing of anti-establishment parties (e.g., Le Pen, Melenchon). By contrast, US Treasuries may instead rally on the event, on the back of flight-to-quality flows.

Speaking of OATs, it probably won’t surprise you that yields are rising:

As Bloomberg wrote this morning, the OAT/bund spread was +3bp at 70bp with limited sessions for positioning until the first round of the French election.

We would remind readers that late last month we noted that French CDS was trading below 50bps for the first time since mid-February. Well, that’s reversed a bit since and as you can see from the following, the ISDA basis remains elevated, underscoring redenomination risk.