I’m not sure there are too many political scientists (or, as Nassim Taleb would call them, “pseudo-experts”) out there who seriously believe the French elections are something we only need to be concerned about if Le Pen and Melenchon both make the second round. But there are plenty of traders who would tell you just that.
The fact that we are where we are today in terms of a four-way free-for-all just days before the first round speaks volumes about the fractious state of French society. Yesterday’s terrorist attack just underscored the fragility.
Indeed earlier this week we noted that a victory for either Macron of Fillon could cause more problems in the long run because, as Politico wrote, “France’s administrative caste fears that neither of the two mainstream candidates in the first round of the elections taking place this week would be strong enough, if elected, to overhaul the country’s rigid labor markets, fix its costly pension system, slim down its bloated state and cut business taxes, red tape and public spending.”
“Five more years of paralysis, high unemployment and next-to-no growth, and the country may be ripe for the National Front,” a Treasury official said, driving the point home.
Along these same lines, consider the following out Friday morning from former FX trader Richard Breslow who warns that investors should “be wary of people” who would be predisposed to saying “well, that’s that” in the event we don’t get the Le Pen/ Melenchon “nightmare” second round.
The first round of the French presidential elections poses a truly unique challenge if you’re trying to figure out how to hedge some of the risks. It’s a tough time to decide that finding some inexpensive option on the euro might be just the ticket. And if you are just pricing them up now, it’s probably too late anyway. But however sanguine your base case is for the outcome, the shock risks are real here and now, as well as from what any of the outcomes will imply.
- In fact, Sunday night may indeed prove to be the easy part to navigate. We know the scenarios that send risk higher or lower. And you won’t have to be too selective in your choice of instrument because the knee jerk reaction of assets will likely be broad based. But that will end in fairly short order
- This election isn’t only about France or, indeed, handicapping a euro referendum. There’s also the fate of NATO to consider. And what that might mean for geopolitics going forward. And, yes, many financial assets as well. There’s a good reason the U.S. administration has softened its campaign rhetoric on the topic. Think about the implications for Russia, Finland, the Middle East, Iran and oil prices. To name just a few
- For those who oppose U.S. unilateral global policing, you may need to reconsider what outcome you are rooting for. I could even stretch and make the case that the outcome of this election could have equity investors reconsidering their sector preferences as a result
- And on a more banal level, we’ll have to endure a debate on whether a higher or lower currency is good for French equities or not. The FTSE reaction to the U.K. referendum has played with a lot of people’s heads
- Next week we have an ECB meeting. Base case expectations are for another message of steady as we go. But the market is hyper-sensitive to any read between the lines hint of a coming change. Think about what that’ll do for all those negative-yielding “assets”. This Sunday’s outcome will linger at the presser
- A risk-on outcome will have too many complacent analysts claiming the war is won and populism vanquished. True for a trade. But unless the politicians manage to implement the structural changes needed to alleviate the insecurities of their fellow countrymen, this is going to be a problem in remission only. Serial life or death moments is no way to run a political union
- Be wary next week of people who tell you, “well that’s, that”