French Fries: “Everyone Is Petrified”

Everyone is petrified. The challenge for each of the four candidates is to seek new votes without alienating their base. French voters are like fish, like eels — very slippery.

That’s from Edouard Lecerf, head of the political department at polling firm Kantar Sofres, and I’m not sure it’s very comforting ahead of what promises to be a truly dramatic first round of voting in France on Sunday.

As one reader recently pointed out, what we’re seeing in the lead up to the French vote is in many ways the opposite of what we saw as the Dutch elections drew near. That is, “Geert risk” was seen diminishing ahead of Europe’s first trial by electoral fire while the risk of a (way) left or (way) right of center result in France seems to be picking up by the day.

Oddscheckeer

Here’s a quick summary of where things stand following the meteoric rise of Jean-Luc Melenchon over the past couple of weeks:

With almost a third of the electorate still undecided, and the front-runners clustered around 20 percent in the polls for the first round on April 23, the race is the most unpredictable the country has seen in recent history. With two of the four candidates also hostile to the institutions of the European Union, the result of the runoff two weeks later will have far-reaching implications not just for France but for the region as a whole.

According to Elabe’s latest poll, released Monday, support for Macron stands at 24 percent, while Le Pen is at 23 percent. Fillon holds 21 percent, followed by Melenchon at 18 percent. Le Pen has threatened to take France out of the EU, while Melenchon wants to renegotiate the bloc’s treaties, including the one that keeps the country in the euro. Macron would defeat any of his rivals in the runoff, the survey showed, so long as he can get there.

“They all have to try and win a point or two to make it to the second round without doing anything that could have negative repercussions,” Lecerf said. “The idea is to galvanize the troops, give them the idea that victory is possible, and in doing so, bring back those who may have dropped off.”

SocGen was out this morning with their take and the story is the same. Namely that this is looking more and more like a free-for-all even if the nightmare second round scenario looks to be a bit less likely:

The latest polls confirm the first round will be close with a 5% range encompassing support for the four main candidates. Yesterday’s Opinionway/Orpi poll for Les Echos puts Marine Le Pen and Emmanuel Macron 22%, Francois Fillon on 21% and Jean Luc Melenchon on 18. The implied odds from Oddschecker.com show M Fillon recovering to edge ahead of Mme Le Pen, and M Macron drifting, but still far ahead. But if M Melenchon’s charge has most momentum, and been replaced to some small degree by a Fillon bounce, the biggest threat to the Euro (a Le Pen/Melenchon second run-off) is becoming slightly less likely. That’s the only first round outcome that would likely see EUR/USD trade at new lows for this cycle ahead of the second round vote. Indeed, unless we go into round two with a significant poll lead for Mme Le Pen, EUR/USD is likely to be at current or higher levels a week from now.

Speaking of the common currency (which, if Le Pen has her way, France will no longer be using), the euro extended its gains a third day on Tuesday, rising above $1.0650 as investors cut back on their short exposure, foreign-exchange traders told Bloomberg.

“Euro demand was evident in both the spot and options market as interbank names reduced their holdings on fear of a short squeeze in the run-up to the French presidential elections,” they added.

EURUSD

All of that said, the jitters are readily apparent. The cost of owning downside exposure in euro- dollar on the one-month tenor sat close to a record high hit yesterday. And the now ubiquitous on-week risk reversal still betrays the most bearish sentiment for the euro since the Brexit referendum.

Meanwhile, the market’s favorite gauge of French election event risk, the OAT-bund spread, still looks… well… it looks risk-ish

OAtBundApril18

The same goes for French CDS (the 2014 contracts). Do note in the chart below how € IG credit is (still) asleep at the wheel despite the fact that French debt is heavily weighted at the index level…

France

As noted on multiple occasions in these pages over the past two months, you really – really – need to keep an eye on this if you’re long any kind of risk.

That is, you needn’t be an FX trader to understand that this should concern you. If this goes “wrong” (i.e. a second round that sees Le Pen vs. Melenchon), there’s going to be all kinds of hell to pay in risk assets.

With that, we’ll give the last word to a reader who regularly updates us with his take on where things stand in France.

Update on France (never a dull moment on the front of geopolitics… ?)

Caution seems to be the order of the day, after a few dismal polling exercises in the UK and the US

Factors of uncertainty abound

  • some 30% of the voter declare they have not made up their mind..
  • about as large a % appears not so keen to vote at all
  • surging interest in Mr Melenchon – fringe extreme left – but with little enthusiasm from the Communist party leaders who ‘officially’ support this candidate. It appears that in 2012 (previous election), Mr Melenchon also benefited from great polling (around 17%) only to fall back to 11% of the actual vote. A rerun maybe ? but no one is sure

Some hard certainties

  • Ms Le Pen and Mr Fillon have been fairly stable – Ms Le Pen expecting to end in pole position in the first round at 23% and Mr Fillon stuck at 18% which, if true, is not good enough…
  • Mr Macron is still strong at 23%, close to the expected final score of Ms Le Pen but he has been suffering from the ambiguities of his centrist position and has not reach the target 25%

Some curiosities of the French election

  • Mr Melenchon has had great political meetings – he is a great public speaker and the crowds have enjoyed listening to him but will they support with their vote a candidate who has (not so long ago) supported a ‘Bolivarian Alliance’ with … Venezuela (whatever that means) ?
  • The same Melenchon is not vocally supported by his supposed political allies (the Communists) and the trade unions, though not very influential in France on election day, have rather not supported him either
  • The Socialist Party is supposedly represented since day one by a fairly left leaning candidate Mr Hamon (think Mr Corbyn in the UK) but anyone who is anyone at all in the Socialist world has not been supporting this candidate – choosing Mr Macron instead – and anyone who is anyone includes Mr Hollande himself although he never made his choice known
  • Mr Macron spends a lot of time explaining he is not the ‘alternative’ center left candidate, which of course he is…pro-european, sensible on public finances but caring for the poor and downtrodden

In summary, the plot is to bring Mr Melenchon down to earth and to insist on a ‘reasonable’ candidate, Mr Macron

The question is – will the greater numbers of left leaning voters accept this strategy and follow their leadership and vote for Mr Macron ? or will they spread their votes between the 3 left of center candidates – Mr Macron, Mr Hamon and Mr Melenchon…
In the later case, the French may end up with Mr Fillon in the second round after all and the Left may or may not support him against Ms Le Pen…

Iffy….

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